Some Notes From One Of My Favorite Warren Buffett Interviews
"I admire Bernanke and I admire Greenspan," said Buffett. "That doesn’t mean I think they were always right.”
On August 22, 2008, Warren Buffett joined CNBC’s Squawk Box for a three-hour interview from Omaha.
It remains an intriguing artifact of Berkshire Hathaway history for a few reasons:
This was one of Buffett’s first long-form chats with Becky Quick
The world was just weeks away from the financial you-know-what hitting the fan
Buffett’s remarks were just really, really interesting
You know me, I could listen to what Warren Buffett has to say any day. But there’s something undeniably compelling about going back and studying his commentary on the eve of financial panic and crisis. Did the Oracle of Omaha see it coming?
And, despite the early hour with Squawk Box starting at 5 a.m. due to time zone differences, Buffett was in rare form that day discussing the teetering economy and much more. Some of the back-and-forth plowed familiar ground — like his unwavering faith in the American Tailwind and optimism for the future — but Buffett also delved into some topics that he doesn’t often discuss.
Like: Why doesn’t Buffett ever criticize the Federal Reserve? Did he see the mortgage meltdown coming when he sold out of Freddie Mac? Why did he change his mind on the railroad industry? What can a person do about inflation?
The Federal Reserve
Everyone has something to say about the Federal Reserve — and most of it is not terribly complimentary. You may have noticed, though, that Warren Buffett goes out of his way to never say a cross word about the men and women in charge of the Fed.
Buffett famously never criticizes by name. But, when it comes to the Fed, he doesn’t criticize at all. Why is that?
✨ “I’m inclined to give anybody that takes on a tough job like that a pretty good rating. They get the toughest problems of the world thrown at them. And, in my job, I wait for easy pitches. Somebody can say Microsoft at $27 or General Motors at $10 — and I don’t have to swing. There’s no called strikes in my business, so I could wait a year and get one pitch I like and swing. So I wait for the easy ones. In the Federal Reserve’s position, you have to take on the toughest problems. There are no obvious answers. There are trade-offs. When somebody that’s very bright, very public-spirited, takes on the job, I’m disinclined to ever criticize.”
✨ “They’ve got a tough problem with these dual goals of essentially stimulating growth and, at the same time, containing inflation. They are in direct conflict. The temptation is, since the lack of growth is apparent today and inflation tends to kick in later on, to ignore the inflation aspects. It’s a very tough balancing act and it can’t be done perfectly. Like I say, I couldn’t do it perfectly and I don’t think anyone can — but I admire the people that take on the job. I admire [Ben] Bernanke and I admire [Alan] Greenspan. That doesn’t mean I think they were always right.”
✨ “I think they are thought to have more power than they really do have. Ben Bernanke does not have a magic wand that’s going to enable people who have borrowed too much on their homes or people who have lent unwisely or the banks that are too leveraged [to get out of trouble unscathed]. That doesn’t go away easily.”
Derivatives
Buffett once called derivatives “financial weapons of mass destruction” and warned that they combined ignorance and borrowed money to a dangerous degree. (That doesn’t mean Buffett would never deal in derivatives, but he clearly sees them as more trouble than they’re worth for the wider market and the average investor.)
✨ “Bear Stearns had — I read, anyway — 750,000 derivative contracts. I could clone Albert Einstein many, many times and have him work twelve-hour days for me and he would not be able to keep track of what’s going on in an institution like that.”
✨ “When we bought Gen Re , they had 23,000+ [derivative] contracts. There was no way in the world I can get my head around that. If I had spent full time and had all kinds of assistants and everything, I [still] never would have known what was in those contracts. That is a system guaranteed to cause trouble, so I got out of the business. It took me four years under benign market conditions and we lost $400-some-million in the process. They are dangerous things.”
As the world was about to soon find out…
The Fall of Fannie and Freddie
✨ “I said one time that you only find out who’s been swimming naked when the tide goes out. Well, we found out that Wall Street has been kind of a nudist beach.”
✨ “Fannie Mae said, ‘We’re going to increase earnings at 15% a year.’ Any large financial institution that tells you that sort of thing is giving you a line of baloney. They may do it for a while — but when they can’t do it with operations, they do it with accounting and they cheat. And that’s what happened at both those places on a huge, huge scale.”
✨ “We were the largest shareholders of Freddie Mac in the United States around 2000 or 2001. It became so apparent to me that they were intent on trying to report quarterly gains to please Wall Street. If you’ve got the government behind you and you can borrow money in unlimited amounts, you can report [any] earnings for any given quarter that you want to. The chickens don’t come home to roost until later. And [Freddie Mac’s] management was intent on that. They started doing things on the asset side they shouldn’t have done and they made promises they shouldn’t have made — and so we got out.”
Don’t Bet Against America
✨ “American ingenuity will tend to surprise on the upside much of the time.”
Becky Quick and her CNBC crew were in Omaha for the premiere of I.O.U.S.A., a documentary about America’s mounting debt bill. And, although Buffett appeared in the documentary, he dubbed himself the “Pollyanna” of the group because he still saw a bright future for the United States (in terms of the national debt).
At a press conference the night before this interview, Buffett struck a defiantly optimistic tone. “We’ve added 25 million jobs or something like that since 1982,” he said, “when we thought we were kind of losing the battle for production in the world to the Japanese and the Germans. We’re going to export $1.7 trillion worth of goods and services this year (2008). It was $44 billion — one-fortieth of that — in 1970. We make a lot of things the world likes.”
“This country has unleashed human potential like no other country has in the world,” he added. “It’s been a terrible mistake to bet against the United States ever since 1776 — and I think it will continue to be a mistake.”
Inflation & Other Concerns
✨ “The future has not had much of a constituency in this country in recent years. It’s because the electoral cycle is shorter than the policy cycle on many issues and it’s hard to get worried about what’s going to happen 10 or 20 or 30 years out.”
✨ “No government likes to pay back its debt in [un-inflated] dollars that are equivalent to the kind they took in.”
So what should a person do to protect himself or herself from inflation?
✨ “Develop your own talent. If you’re the best doctor in town, if you’re the best teacher in town, if you’re the best salesman in town, you’ll do well no matter what the currency does. You will get your share. So investing in yourself is always the best thing.”
The second best way to survive inflation? “Own products or stocks that don’t require much capital investment,” said Buffett, “because you don’t want to have a lot of required capital investment during inflation. [It’s much better to own things that] are sort of a royalty on whatever the current price level is in the country.”
Investment Banks
Investment banks were already in the crosshairs of an agitated public even before the calamitous collapse of Lehman Brothers just a few weeks after this interview. And, while Buffett laid plenty of blame at their feet, he nevertheless cautioned against reckless panic and suspicion.
✨ “There is no investment bank that can pay all its liabilities tomorrow if people present those liabilities and say we don’t want to have anything to do with you. The game is over. I think Jamie Dimon said, ‘Anybody who spreads rumors about financial institutions ought to be put in jail.’ You can cause trouble [doing that]. If I were to say XYZ is in trouble, they are in trouble. You create your own fire in this case.”
✨ “I ran Salomon in 1991 for a little while and we could have been put out of business. As it was, our balance sheet was shrinking every day. There was a lot of pressure. But one big story in the paper that says, ‘Salomon is going out of business tomorrow!’ or something of the sort would have meant we would have gone out of business. Everybody would have pulled their lines from us.”
Riding the Rails
For years, Buffett viewed the railroads as a dead-end investment — suitable only as an occasional cigar butt to flip for a quick profit. But, in 2007, Berkshire Hathaway made waves by purchasing more than 10% of BNSF Railway — plus smaller positions in the Union Pacific and Norfolk Southern railroads.
And, of course, Berkshire later went one giant leap further in 2009 by agreeing to acquire BNSF and operate it as a fully-owned subsidiary.
What caused this abrupt shift in Buffett’s thinking?
✨ “In the case of the rail industry, over a 25-year period the amount of actual rail in the United States declined by 20-odd percent while the ton miles increased 60-some percent. That changed the pricing dynamics.”
✨ “I should have done it much earlier. I really missed [the turnaround] entirely. You could just sit there and watch ton miles go up and rail go down. At some point, the pricing power shifts. It was ridiculous what the whole rail industry was selling for 10 years ago — and it was also ridiculous that I didn’t spot it.”
Stay Curious
The week before this interview, Buffett and Bill Gates had traveled up to Canada to learn more about the Canadian Natural Resources tar sands in northern Alberta. The sands contained a dense form of petroleum called bitumen — and the two men wanted a firsthand look at the extraction process and its costs.
But, Buffett told CNBC, that doesn’t mean he was in any rush to start investing in this area. The trip was just part of the process of adding another level to his mental filing cabinet so he could make quick and informed decisions in the future.
✨ “I’m always interested in understanding the math of things and understanding as much as I can about all aspects of business. What I learn today may be useful to me two years from now. If I understand the tar sands today and oil prices change or whatever may happen, I’ve got that filed away and I can use it at some later date. The wonderful thing about investments is that your knowledge is cumulative. So if you learn about coal or you learn about retailing or something, it will be useful at some point.”
In short, learn things before you need that particular bit of knowledge. It makes for much better decisions in the long run.