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tv   The David Rubenstein Show Peer to Peer Conversations  Bloomberg  December 18, 2016 2:30pm-3:01pm EST

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♪ mr. buffet: i said, what do i do with this money, and it is money is just investing the right story. my dad did not want to go to college. i had about $175,000, and i thought that was all i would need for the rest of my life. david: did you ever run into that guy again? how many people showed up the dirt i had my friends. david: any word of advice to give to your friends who are going investors? >> people would not recognize me if my tie [indiscernible] i will just leave it this way. all right.
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i don't consider myself a journalist, and nobody else would consider myself a journalist. i began to take on the life of being an interviewer even though i have a day job. how do you define leadership? what is it that makes somebody take. -- tick? i appreciate it. all right, well -- we are at your favorite restaurant in omaha. why do you like it so much? is of the food or the price or the combination of both? mr. buffet: the food and the heritage. four generations of this family was here. we went to school together. the stakes are great, prices are right. i had lunch here earlier, not
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that expensive, i enjoyed it. i by people lunch here, they can buy me after the deal. david: you grew up in omaha, then you moved to washington when your father became a congressman. how did you start your career with various pinball machines are golf businesses? mr. buffet: i was like that, and the best we had was the wilson coin operator machine, named after the person i went to high school with. we had our machines in barbershops, and the barbers wanted the machines with flippers, but those machines cost $350. whereas an old, obsolete machine only cost $25. we always said we would take it up with mr. wilson. he was one tough guy, i have got to tell you. david: when you graduated from high school, you were not as
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interested in academics? mr. buffett: i was not interested. david: your high school yearbook said you are likely to be a stockbroker even the you were not good at math. why did you only stay to years in college? mr. buffett: i did not want to go to college, although my dad wanted me to go to college. we did not have sat's then. but he practically would have done the sats for me. in the truth, i always wanted to please my dad, he was my hero. he still is. he kept kind of jogging me along and said, why don't we just fill out an application for the hell of it. he suggested wharton, and i applied there, and i got in. after the first year i wanted to quit and go into business, and my dad said, give it one more year. so i went the second year, and i said, i still want to quit. he said, well, you have almost enough credits. if you go to nebraska, which i was quite willing to do, for one year, you can get out in three years. so that is what i did. david: has wharton ever said you -- called you up and say, you are a half graduate, you should give us some money? or have they not bother you? mr. buffet: they have not tried
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that. david: after that you wanted to go to business school? mr. buffett: i won a minor scholarship in nebraska to go to any graduate school that i want to do, they give me $100. i applied to harvard. i applied. david: you did not get in? mr. buffett: i did not get in. it took 10 minutes -- i had an interview in chicago. he looked at me and said, forget it. david: did you ever run into that guy again? heard from him since? mr. buffett: no. he needs protection now. [laughter] david: so i guess harvard does not come off to you for money because they turned you down. he went to business school in columbia. why did you go to columbia? mr. buffett: i was at the university of omaha library in august, and i was leafing through catalogs, and i just happened to see the columbia teachers. i had read their book but had no idea they were teaching. so i wrote dean dodge and said, dear dean god, i thought you guys were dead.
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now that i know you are alive, i would really love to come to columbia if you can get me in. david: so what you did, i assume, pretty well at columbia business school? mr. buffett: i did ok there. david: you worked for mr. graham. how did that work. mr. buffet: it was terrific. in the sense that i was working for my hero. then he was going to retire for a couple years so i was only back there about a year and a half. but every day i was excited about being able to work for him. david: what you are good at was picking stocks, according to his formula, looking for companies undervalued, now we collect value investing. did you realize you had some principles that were fairly unique, and that is why you followed his guidance? mr. buffet: i probably could have recited the words in his book. i read his books multiple times. it was more a question of being inspired by him than learning something new from him. david: why did you come back to omaha? mr. buffet: i wanted to come back to omaha. i had many friends in new york, but we had two kids by that
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time, and i lived in white plains, i take the train. i take the train back. it did not strike me as much of a life compared to being here in omaha. both sets of grandparents were alive at that time. and it just, uncles and aunts -- omaha was a more pleasant place to live. david: all right, so you buy a house here -- mr. buffet: i rent a house. david: you rented a house? mr. buffett: i rented a house. i rented a house for $175. i rented a house for $175. david: and when did you buy the house you are in? mr. buffett: 1958. when my third child was on the way. david: so you start a partnership here. how did you raise money? mr. buffett: when i came back i had about $175,000. and i thought that was all i would need for the rest of my life, i could take care of everything. i really planned on going to school, thought about law school. david: think about how successful you could have been as a lawyer. mr. buffett: that is true. i know, i have regretted it ever since. david: your first partnership and you had people kabul money together, how much money did you actually cobble together? mr. buffett: we met one night
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early in may of 1956, and there were seven people there, aside from myself. and they put in $105,000 and i put in $100, so we started with $105,100. and i gave them a little piece of paper called the ground rules. david: but you ended the partnership. mr. buffett: between may of 1956 and january 1, 1962, i started 10 more partnerships. i made a mistake, i had no more -- no secretary or accountant or anything. i kept 11 checks of books, filed 11 tax returns. and i did it all myself. i took the liberty of all the stocks. i was worried, it was other people's money. so i would go down to the bank, have these things delivered. finally i got wise, and on january 1, 1962 i put all 11 of the previous partnerships together in something called the buffett ownership and ran that until the end of 1969, at which time i dissolved it. david: then in 1969 you started a new partnership?
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mr. buffett: no, by that time we had $105 million in the partnership, and about $70 million or so of that was in cash that needed to be distributed, and the balance was in three stocks, mostly berkshire hathaway. i distributed it pro rata to everybody. david: and then you started buying more stocks through the vehicle berkshire hathaway? mr. buffett: yes. stocks and businesses. david: what would you say was your reason for your ability to do this? was it you study companies more, stuck with principles, smarter than other people, you did not get caught up in fans? what would you say is the reason for your success? mr. buffett: we bought businesses that were decent at sensible prices, and we had good people to run them, but we also bought marketable securities in berkshire. over time, the emphasis shifted from marketable securities to buying businesses. david: what was the theory behind buying a railroad, people thought they were kind of fossils as businesses?
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mr. buffett: they had a bad century, like the chicago cubs. everybody has a bad century now and then. ♪ announcer: the david rubenstein show, peer to peer conversations, is brought to you by state street global advisors. there is opportunity in complexity.
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david: over the years, you have bought companies, many companies like one of the ones i know well is the "washington post." how did that come about? mr. buffett: in 1973, the washington post company had gone public in 1971, right about the time of the pentagon papers. but in 1973 the nixon administration was challenging the licenses of two of the four florida television stations the post owned. so the stock went from 37 down to 16. at 16, there were about 5 million shares.
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the whole company was selling for $80 million. that included for tv station, newsweek, no debt to speak of. so the washington post company was worth intrinsically worth $400 million or $500 million was selling for $80 million. and it was ridiculous. i mean, you had a business unquestionably worth five times what it was selling for, and mr. nixon was not going to put them out of business. david: when you are doing these analyses, then and now, do you have computers that help you? how did you actually -- do you print materials, or did you, how in those days did you read about the washington post, and how do you do it today? mr. buffet: pretty much the same way except there is fewer opportunities now. i met bob woodward, and he came up with all the president's men. all of a sudden, at 30 years of age, he was getting quite wealthy. we had lunch at the madison hotel, and he said, what do i do with the money?
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i said, investing is just about assigning yourself the right story. i said, imagine if ben bradley said to you, what is the washington post company worth? what would you do if you have to write the story in a month? you would go out and interview newspaper brokers and tv brokers and assign value to each asset. i said, that is what i do, i assign myself the right story. it is nothing more than that. now there is some stories i can't write. if you ask me to write a story on some glamorous, nonprofit making business worth, i do not know how to write the story. but if you ask me what potomac electric power is worth, i can write the story. and that is what i am doing every day. i am assigning myself a story, then i go out. david: so you get the annual reports and read them the way some people might read novels, you read annual reports, and then you do the calculations of what these are worth in your head, or do you have computers to help you? mr. buffet: [indiscernible] david: do you use a computer today? mr. buffett: i use it to play bridge.
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and i use it to go to search a lot. david: you have a computer in your office? mr. buffet: i do not have one in the office, but i do at home. david: for a smart phone, can somebody get a hold of you on a smart phone or or mobile telephone? mr. buffett: no, a smart phone is too smart for me. david: and a computer, you use rarely. mr. buffet: well, i use it -- one of the trick questions bill gates and i get when we are talking odds and say, who is on the computer more, excluding e-mail. and the answer, it is probably me. i spend 12 hours a week playing bridge on it. and then i use a lot for research. david: who do you play bridge with, anonymous people on bridge? mr. buffet: my name is t-bone. and there is a woman i play with who goes as sirloin. she is a two time world champ, and i am a two time world chump. we have been playing together for decades. david: are you at a world-class level after all these years? mr. buffett: no. no. i, -- you could have a better
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teacher than she is, but the student has limitations. david: you mentioned bill gates, how did you actually come to know bill gates? mr. buffet: it came about because meg greenfield who was the editor of the editorial page of the post called me in the late 1980's, and she said "mr. buffet, i have always loved the pacific northwest -- she had grown up there -- but would like to know if i would have enough money to purchase a house, a vacation type house on bainbridge island near seattle." i said, meg, anyone who asks me if they have enough money, does. so she bought the house, and she invited me and others to the house. and she knew the elder gates. she called mary gates. and then mary went to work on bill to try to get him to come. he said, i don't want to come down there to meet some stockbroker. but mary was a very firm type. she said you are coming in. finally they started negotiating hours, she said four hours, and he said one hour. this went back and forth. when we met, we talked for about
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11 hours straight. david: so that was the beginning of the relationship. mr. buffett: we hit it off. david: but you did not buy any of his shares? mr. buffett: i bought 100 shares just to keep track of what this young kid was doing. david: ok. and he is now on your board? mr. buffett: yes. david: so the relationship has become very close, you get involved in a lot of topic things as well. mr. buffett: yes. we have a lot of fun talking. david: let me ask about the philanthropic things you have done with bill and with melinda. how did the idea of giving your money to somebody else's foundation come to you? mr. buffet: well, i originally planned that my first wife would handle the disposition of, well, everything. we came to that conclusion in our 20's. we started something called the buffett foundation over 50 years ago. but i did not give away a lot of money during those intermediate years because i thought it was compounding at a rate i could give away billions instead of millions if i waited a while.
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she died in 2004, so that plan disappeared. and then i was faced with the question of, how do i give away this money in a way that goes to the people i want without me doing all the work? david: so you call the bill or melinda one day and said, i will give you the bulk of my fortune? mr. buffett: not as elegant as that, actually. i have been asked that, i don't remember. some point i did call them up, it was over the phone. david: you did not ask them to call it the bill and melinda gates and mr. buffet buffett foundation? you don't want your name on it? mr. buffett: that would not do any good. mr. buffett: that would not do any good. david: you are on the board of the bill and melinda gates foundation now. mr. buffett: true, but they run it. david: what would you say are some of the deals are highlights you are proud of? one of them was the gas parts, $37 billion. mr. buffett: yes. between $32 billion and $33 billion of cash, and then we
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assumed about $4 billion of debt. david: so how much -- you spend $37 billion, did you spend a year studying the company? mr. buffett: no. david: how much time did you spend with the coo? david: i met the ceo i think on july 1 of last year. and he happened to be calling on certain shareholders. and one of the fellows in our office had had a position of the stock for some time. it was an accident i met him. if i had been out playing golf it never would have happened. but i like him, i heard him talk for 30 minutes. and i then said to the fellow in office, i will call tomorrow and say, if you would like to receive a cash bid from berkshire hathaway, we would supply one. if you would like not, forget we ever called. david: do you ever hire investment bankers to analyze a company? mr. buffet: not to help analyze the company. sometimes they are involved in the deal. we are perfectly willing to pay. david: one time you told me about a story how an investment
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banker was hired by somebody you were going to try to buy. mr. buffet: what happened is i said we would pay $35 a share for a company in american energy. they hired an investment banker. they spent about a week. they kept, they wanted to send a big bill at the end, but they said you have got to increase your price to make us look good. i said, i am not worried about whether you look good. so they hung around for about a week. finally they called up and pleaded, can you increase your price somewhat so that we can send the bill and get paid appropriately for our non-services? and so i said, ok, tell them we will pay $35.05, you can get the last nickel out of me. david: you don't ever -- do you ever do unfriendly deals? mr. buffett: no. berkshire hathaway was originally an unfriendly deal. but no, we are just not interested. not that unfriendly deals are necessarily bad. there is management that should be replaced.
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david: people must call you every day and say, i have a deal for you. it is perfect. how often do any of these deals ever pan out? mr. buffett: they do not call every day. we have made our criteria fairly clear. so there are relatively few who call. and when somebody calls, i can usually tell within two or three minutes whether the deal is likely to happen or not. there is just half a dozen filters, and it either makes it through the filters or it does not. david: one time i was told you got a letter from israel, someone saying, i would like you to look at my company. what are the odds that they would send you the prospect us and you would say you will buy it? you did buy it. mr. buffett: we bought 80% of it at that time for $4 billion. and we later bought the remaining 20%. david: before you bought it, did you go to israel to look at the company? mr. buffet: no, i did not go to israel. i hope it is there. david: and you are happy with what you bought. mr. buffett: yes. david: and you also bought one of the biggest railroads in the world. what was the theory behind
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buying a railroad, because people thought of them as fossils in business? mr. buffett: the railroad business had a bad century. kind of like the chicago cubs, everybody has a bad century now and then. but finally, the railroad industry got modernized and it is a good business. the railroad business is not a great business, but it is a good business. in the fall of 2009, we already owned a fair amount of burlington northern santa fe, and the price look like we could do it at a sensible price. so that was a thursday. and on friday i said we would pay $100 per share if the directors were interested. he checked over the weekend, and the following sunday we had a contract signed. david: somebody from the white house called and said, would you mind having a tax named after you? mr. buffet: of all of the diseases in life, i will take a tax.
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david: in your view the best place to invest is still the united states? mr. buffet: it has to be the best -- it is the best i know of, and it has been wonderful. nobody has sold america short since 1776.
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and enjoyed what happened subsequently. david: but we were having roughly 2% or less slower growth in the last few years. do you think it is possible to ever grow 5% in this economy? mr. buffett: there will be some years. but 2% growth, if you have less than 1% population growth, means in one generation, 25 years, call it, we will add maybe $18,000 or $19,000 gdp per capita, so we are just beginning. 1%, my life has been a product of compound interest. maybe better at higher rates, but if you have an already prosperous economy, and we have the most prosperous economy the world has ever seen, and you keep compounding it. over time, people will be living far better 20 years from now than they are now. david: you have set your secretary pays a higher tax rate than you do. mr. buffett: accounting payroll taxes. yes. david: you favor changing that? mr. buffett: some years ago, somebody from the white house, not the president, called and
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said they read my views on taxation, and said, would you mind having a tax named after you? i said, of all the diseases have been taken, why should i -- i will take a tax. so they referred to this, but i really do feel that anybody who is making millions of dollars a year should have a combined payroll and income tax of at least 30%. and in my office, everybody in the office does have that except me. david: have you think you became a democrat when your father was a republican and you were living in a conservative state? mr. buffett: civil rights more than anything else. i do not think about it when i was 12 years old or 14 years old. i went to alix steel, and there was a school for blacks a few hundred yards away, it never dawned on me how different life was for other people. then i got to see more of the world, i just decided there were a lot of things that were
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unfair, and the democrats seemed to be doing a little bit more about it. david: in berkshire hathaway today, you have an annual meeting that attracts roughly 40,000 people. mr. buffett: correct. david: when you had your first annual meeting, how many people showed up at that? mr. buffett: we had 12, but you had to count my and katie and my uncle fred and a couple of family and managers. we had about two outsiders. david: we started berkshire hathaway, did you ever in your wildest imagination think you could become one of the biggest in the world? was that ever in your plans? mr. buffett: no. i have always just put one foot in front of the other. david: what would you like to have as your legacy? mr. buffett: i would like to be the oldest man that ever lived actually. i like teaching. i have been a decent teacher, and i have a lot of university students come out every year. david: and today is there anything on your bucket list you would like to do that you have not done? mr. buffet: i have done it. if there is anything i want to
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do, i do it. money has no utility to me, time has no utility to me. but money in terms of more trips or houses or having a boat or whatever has no utility to me whatsoever. a lot of it is for other people. david: what motivates you to run a company when most people your age are playing shuffleboard or they are relaxing or written to be something else? mr. buffett: they spend all week planning their haircut. i get to do every day doing what i love with people i love, that is the best. it does not get any greater than that. david: so the greatest pleasure in your life is looking at new companies, making investments, giving away money, what gives you the most pleasure? your grandchildren? mr. buffett: all of the above. but the truth is that i regard berkshire hathaway sort of the way a painter regards to painting. that canvas is unlimited. there is no finish line at berkshire. it is a game that you can continue to play. david: any words of advice to a young investor that would like to emulate you? what you would recommend that
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they do to build something close to what you have done? mr. buffet: i think you should look for the job that you would want to hold if you did not need a job. you are probably only going to live once. and you don't want to go to sleep only to arrive. whether you make x or 120% of x is really not as important -- in most cases, you marry the right person and you find something that you would do if you did not need the money. i have had the job for, you know, 50 or more years. and i was lucky in that i sort of found early on what turned me on that way. don't settle for something if you can -- don't worry about making the most money this week or next month. when i went to offer to work for ben graham, i said i would work for nothing. i meant it. just the idea of being turned on. look for the job that turns you on, find a passion. ♪
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ashlee: "hello, world." it's time for a thought experiment. let's imagine the cold war went another way. after the nazis surrendered, the soviet union flexed its muscles and asserted its imperial might from tokyo to tacoma. memorials to the fatherland popped up around the globe. this would be the washington monument. this could have been your morning commute.

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