The David Rubenstein Show, Peer to Peer Conversations; 3; Warren Buffett; Season 1

And he said, what do I do with this money, and I said, investing is just about assigning yourself the right story. I didn't want to go to college, though my dad wanted me to go to college. Why did you come back to Omaha? And I came back, I had about $175,000, and I thought that was all I would need to live the rest of my life. Have you ever run into that guy again? No, he needs protection now. When you had your first annual meeting, how many people showed up with that? Well, we had 12, but he had to count my Aunt Katie and my Uncle Fred. Any word of advice you give to somebody who's a young investor who would like to emulate you? Would you fix your tie, please? Well, people wouldn't recognize me if my tie was fixed, but okay. Just leave it this way. Alright. I don't consider myself a journalist. 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 of running a private equity firm. How do you define leadership?

What is it that makes somebody tick? Appreciate it. Thank you. Alright, well, we're at your favorite restaurant in Omaha, Gourats. Why do you like it so much? Is it the food or the price or the combination of both? It's the food and the price and the heritage. I, four generations of the Gourat family were involved there. Palakirat and I went to Grimer School together and so I've known the people over the years. The stakes are great, you know, the prices are right, so. Had lunch here earlier today, it was very good and wasn't that expensive and I quite enjoyed it. A lot cheaper than New York and Washington. A lot. That's why I buy people lunch here and then they can buy me the lunch in New York. It's a good deal. Good arbitrage. You grew up in Omaha but then you moved to Washington when your father became a congressman. How did you start your business career in Washington with various pinball machines or golf businesses?

Yeah, I was like that a couple of businesses going in and the best business we had was the pinball machine business, which was the Wilson coin operated in the machine company and that was named after the high school my partner and I went to, but we had our machines in barber shops and the barbers always wanted to put us in machines with flippers which were just coming in. But those machines cost $350, whereas an old obsolete machine cost $25, so we always told them we'd take it up with Mr. Wilson, this mythical Mr. Wilson. He was one tough guy. I got to tell you. So, when you graduated from high school, you weren't as interested in academics. I assume at that time. I was not interested. When your high school yearbook said he's likely to be a stock broker, but he's very good in math. Why did you go to Wharton and why did you only stay two years there? I didn't want to go to college and though my dad wanted me to go to college and we didn't have SATs then, but he practically would have done the SATs for me. So he, in the truth, I always wanted to please my dad. I mean, he was a hero to me and still is, but so he kept kind of a jolly me along and said, well, why don't we just fill out an application for the hell of it? And so he suggested Wharton and I applied there and they let me in.

And after the first year, I wanted to quit and go into business and my dad said, well, give it one more year. And so I went the second year and I said, I still want to quit. And he said, well, you know, you've got 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's what I did. His Wharton ever called you up and said, well, you were a half graduate, you should give us some money or they'd never bother you. So far, they haven't tried that line, but they may after they watch this. So after that, you wanted to go to business school? Yeah, I'd won some minor scholarship at Nebraska to go to any graduate school I wanted to that they'd give me 500 bucks. And so I applied, my dad suggested Harvard, so I applied. And you didn't get in? I didn't get in. I mean, it took 10 minutes for the guy, a guy near Chicago interviewed me. So I spent about 10 hours going to see him. And he looked at me and he said, forget it. And I've never run into that guy again, or you heard from him since?

No, he needs protection now. So I guess Harvard doesn't come after you for money because they turned you down. But you went to Columbia Business School, and why did you go to Columbia? Well, I was at the University of Omaha, what was then called the University of Omaha's library in August, and I was leafing through catalogs. And I just happened to see that Columbia had Graham and Dodd as teachers. And I'd read their book, but I had no idea that they were teaching. So I wrote Dean Dodd, and I said, dear Dean Dodd, I thought you guys were dead. And I said, but not by far your life, I'd really like to come to Columbia if you can get me in. So you did, I assume, pretty well at Columbia Business School? I did okay there, yeah. You worked for Mr. Graham and his partnership, and how did that work? Well, it was terrific in the sense I was working for my hero. But Ben was going to retire in a couple of years. And 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. So what you were good at was picking stocks, according to his formula, which was to look

for companies that were undervalued. Now we call it value investing. Did you realize that he had some principles that were very unique? And is that why you followed his guidance? Well, by the time I went to work for him, I probably could have recited the book. The words in his book better than he could. I read his book's multiple times. And so it was more a question of being inspired by him than it was by learning something new from him. Why did you come back to Omaha? I wanted to come back to Omaha. I made many friends in New York, a lot of friends in New York. But we had two kids by that time, and I lived in white planes. I'd take the train and I'd take the train back. And it didn't strike me as much of a life compared to being here in Omaha. And both sets of grandparents were alive at that time, and it just, and uncles and aunts and Omaha was a more pleasant place to live. All right. So you buy a house here? I rent a house. You rented it? I rent a house at $175 a month. OK. And when did you buy your house that you're still in?

In 1958. My third child was on the way. So you started a partnership here, and how did you raise money? Well, they've been actually when I came back, I had about $175,000. And I thought that was all I would need to live the rest of my life. I could take care of everything. So I really planned to go to school. I thought about going to law school. Just think how successful you could have been as a lawyer. That's true. I've regretted it ever since. I know. So your first partnership when you had people cobbled together some money. How much money did you actually cobble together? Well, we met one night in May, 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. But then ultimately, you ended that partnership, I thought. Well, what happened was that between May of 1956 and January 1st of 1962, I started 10 more partnerships. I made a mistake. I had no secretary, no accountant or anything. So every time I'd buy a stock, I'd break it into 11 tickets.

I'd write 11 checks. I kept 11 sets of books, 5 out of 11 tax returns. And I did it all myself. And I took delivery of all the stocks, as I was worried it was other people's money. So I'd go down the bank and have these things delivered, drafted it. Finally, I got wise. And on January 1st, 1962, I put all 11 of the previous partnerships together in something called Buffett Partnership. I ran that till the end of 1969, at which time I dissolved it. You dissolved that one, but then in 1969, you started a new partnership? No, in 1969, by that time we had about $105 million in the partnership. And about 70 million or so of that was in cash to be distributed. And the balance was in three stocks, mostly Berkshire Hathaway, that I distributed, pro-ratted, everybody. OK. And then you started buying more stocks through the vehicle Berkshire Hathaway? And stocks and business was yelling. What would you say is the reason for your ability to do this, is that you studied the companies more than anybody else.

You stuck to your principles. You're smarter than other people. People were just caught up with fads. You didn't get caught up with fads. What would you say is the reason for the success? Well, the first two are quite an extent. We bought businesses that we thought were decent businesses at sensible prices. And we had good people around them. But we also bought marketable securities in Berkshire. Over time, the emphasis shifted from marketable securities over to buying businesses. What was the theory behind buying a railroad? Because people thought they were kind of fossils as businesses. The railroad business had a bad centering. They're kind of like the Chicago Company. Everybody has a bad centering out of that. Over the years, you've bought a number of companies and had stakes in companies. One of the ones that I know very well is Washington Post. How did that come about? Well, in 1973, the Washington Post Company had gone public in 1971, right about the Pentagon Papers' time.

But in 1973, the Nixon administration was through B.B. Robozzo, who was a pal in Nixon's. They were challenging the licenses of two of the Florida television stations, the Post-owned. So the stock went from 37 down to 16. Now at 16, there were about 5 million shares outstanding. So a whole Washington Post Company was selling for $80 million. And that included the newspaper for Big TV stations. Newsweek and some other assets and no debt to speak up. So the Washington Post Company, which was intrinsically worth $400 million, was selling for about $80 million in the market. We bought most of our stock at about the equivalent of $100 million in the market. And it was ridiculous. I mean, you had a business that unquestionably was worth four or five times what it was selling for. And Nixon wasn't going to put them out of business. When you're doing these analyses then and now, do you have computers that help you? Or how did you actually read all of them? You just get pretty materials? Or how did you, in those days, get the materials to read about the Washington Post? And how do you do it today?

Well, pretty much the same way, except there's fewer opportunities now. But I met Bob Woodward back. And he'd just come out with all the presidents of Anno. And all of a sudden, all 30 years of age, he was getting quite wealthy. And we had breakfast or lunch over at the Madison Hotel. And he said, what do I do with this money? And I said, investing is just about assigning yourself the right story. I said, imagine Ben Bradley this morning said to you, what is the Washington Post company worth? What would you do if you had to write the story in a month? You'd go out and interview TV brokers and newspaper brokers and owners and you'd try and value each asset. I said, that's what I do. I assign myself the right story. And it's nothing more than that. Now, there's some stories I can't write if you ask me to write a story on, what is some glamorous but non-profit making business worth? I don't know how to write that story. But if you ask me to write a story on what is Potomac Electric Power, or there's something like that, I can write the story. And that's what I'm doing every day. I'm assigning myself a story and then I go out and look at it. So you get the annual reports and then you read them.

Just like other people might read novels, you read annual reports. That's right. And then do you do the calculations of what things are worth in your head or do you have computers that help you? No, if you need to carry something out to four decimal places, forget it. Today, do you use a computer today, even? I use it to my bridge. And I use it to go to search a lot, yeah. So you as a computer in your office use for that? I don't have one in the office, but I have one at home. And like for a smartphone, if somebody wants to get a hold of you, can they get a hold of you on a smartphone or a mobile telephone? No, a smartphone is too smart for me. And a computer you use rarely? Well, I use it quite a bit. One of the trick questions that Bill Gates and I give when we're talking to odds is who's on the computer more, excluding email. And the answer is I probably am, because I probably play 12 hours a week of bridge on it. And then I use it a lot for search. But who do you play bridge with? Is it anonymous people and bridges? No, my name is T-bone. And I play with a woman in San Francisco who goes by the name of Sirline.

And she's a two-time world champ and I'm two-time world chump. So we've been playing together for decades. And are you at the world class level after all these years? No, no, I, she, you couldn't have a better teacher than she is, but the student had limitations. Now you mentioned Bill Gates. How did you actually come to know Bill Gates? It came about because Meg Greenfield, who was the editor of the editorial page, the post called me in the late 1980s and she said, Warren, I've always loved the Pacific Northwest, she'd grown up there. And she said, I want to know whether I have enough money to be able to afford to buy a house, kind of a vacation type house on Bainbridge Island near Seattle. And I said, Meg, anybody that calls and asks me whether they've got enough money, does have enough money. So I said, oh, call the don't have it. So she bought the house. So she even invited me in K-gram and a few people out to the house. And she knew the elder Gates, so she called Mary Gates. And then Mary went to work on Bill to try and get him to come and Bill said,

I'm not going to get down there to meet some stock broker or something. And Mary was a very firm type and said, you're coming and he said, I'm not coming. By the way, they started negotiating hours and she said four hours and he said, one hour and this went back and forth and he came down and when we met, we talked for about 11 hours straight without being in her house. So that was the beginning of the relationship. Yeah, we hit it off. But you never bought any fish shares or you just never bought a hundred shares just to keep track of what this young kid was doing, okay? And he's now on your board, is that right? That's correct. So the relationship has become very close and you get involved with him in many philanthropic things as well. Yeah, we have a lot of fun talking. So let me just ask about the philanthropic things that you've done with Bill and with Melinda. How did that idea of giving away your money to somebody else's foundation come to you? Well, I originally had planned that my first wife would handle the disposition of all everything that we had and we came to that conclusion when we were in our 20s and we started something called the Buffett Foundation over 50 years ago.

But it didn't give a lot of way, a lot of money during those intermediate years because I felt I was at compounding at a rate that I could give away billions to set a million if I waited a little while. She died in 2004 so that that plan disappeared and then I was faced with the question of how do I give away this money in a way that those are the people I want without me doing all the work. So you called Bill or Melinda one day and said, guess what, I'm going to give you the bulk of my fortune, what was their reaction? It wasn't quite as elegant as that actually. I've been asked that, I don't remember that clearly, but I just, some point I didn't call them up, it was not over the phone I think. And you didn't ask them to say what called the Bill and Melinda Gates and Warren Buffett Foundation, you didn't want your name on it? No, I did not think that would do any good. So you were on the board of the Bill and Melinda Gates Foundation now? That is true, but they run it. I'm going to give them a stock check. What would you say are that some of the highlights,

the deals that you're most proud of, let's take one that you did recently, the biggest deal you've ever done was precision casparts, about $37 billion in purchase. Yeah, it was between $32 and $33 billion of cash, and then we assumed about $4 billion at that. Okay, so for to spend $37 billion, you spent a year studying the company? No. How much time did you spend with the CEO? I met the CEO, I think on July 1st last year, and he happened to be calling on certain shareholders, and one of the fellows in our office had had a position at the stock for some times. So it was an accident I met him. If I'd been out playing golf or something, I'd never what had happened. But I went in and I liked him. I heard and talked for 30 minutes, and I then said to the fellow in our office, I said, call him tomorrow and say if he would like to receive a cash bid from Berkshire Hathaway, we would supply one of it. If he wouldn't like to receive one, you know, forget we ever called. That was it, you hired any investment bankers to help you with the analysis? No.

Do you ever hire investment bankers to help you analyze a company? Not to help analyze a company, sometimes they're involved in the deal and we're perfectly willing to pay up that commission. One time you told me a story about how an investment banker was hired by somebody you were going to try to buy. What happened on that was I said we'd pay $35 a share for a company than an American energy and they hired an investment banker and the investment banker came out and sped about a week and they kept, they wanted to send a big bill at the end and they said, well, you've got to increase your price to make us look good. I said, I'm not really worried about whether you look good. So they hung around all over about a week and finally they called up and sort of pleaded and said, you know, can't you increase your price somewhat so that we can send a bill and get paid appropriately for our non-services and so I said, okay, you can tell them we'll pay $35 and five cents and you can say you got the last nickel out of me. So that's what we paid, $35 or $5. And you normally, you make a price and you don't, and you ever do any unfriendly deals? No, no.

Although you can say Berkshire Halfway originally was an unfriendly deal. But no, we're just not interested. Not that unfriendly deals are necessarily bad. I mean, there are managements that should be replaced. Now, people must call you every day and say, I have a deal for you, it's perfect. And how often do any of these deals ever pan out? They don't call every day and we've made our criteria fairly clear. So there's relatively few that call. And when somebody calls, I can usually tell within two or three minutes whether a deal's likely to happen or not. So there's just a half a dozen fillers and it either makes it for the fillers or it doesn't. One time I was told that you got a letter from somebody from Israel saying I'd like you to look at my company. Now, what's the likelihood that somebody from Israel sends a company a prospectus to you over the transom and you say you're going to buy it and you did buy it. Yeah, we did buy it. We gave, we bought 80% of it at that time for four billion and then we later bought the remaining 20%. Well, before you bought it, did you go to Israel to look at the company? No, I did not go to Israel. I hope it's there.

And you were happy with what you bought. Absolutely. And you also bought one of the biggest railroads in the world. That's correct. And that's worked out okay. That's worked out okay. What was the theory behind buying a railroad because people thought they were kind of fossils as businesses? The railroad business had a bad century. They're kind of like the Chicago Cuts. Everybody has a bad century now in that. But finally, the railroad industry got rationalized and quite an extent modernized. And the railroad business is a good business. It's not a great business, but it's a good business. And in the fall of 2009, we already owned a fair amount of BNSF, Burlington, Northern Santa Fe. And the price, it looked 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. And then he'd chucked with the directors over the weekend and the following Sunday, we had a contract sign. Somebody from the White House called and said, would you mind having a tax named after you? And I said, well, if all the diseases have been taken away, why shouldn't I?

I'll take a tax. Your view still is the best place in the world to invest as the United States? Well, certainly. It has to be the best. It's the best I know of. So it's been wonderful. I mean, nobody has sold America shorts in 1776 and enjoyed what happened subsequently. But we were having roughly 2% or less lower growth in the last couple of years. Do you think that it's possible to ever grow 3 and 4 and 5% again in this economy? There will be some years. But 2% growth, if you have a little less than 1% population growth, means in one generation, 25 years, call it, that we will add maybe $18 or $19,000 of GDP per capita, family of 475,000. So we're just beginning that 1%, you know, my life has been a product of compound interest

that it's maybe better to do it at higher rates. But if you have an already prosperous economy and we've got the most prosperous economy the world's ever seen, and you keep compounding it over time, people will be living far better 20 years from now than they are now. You have said your secretary pays a higher tax rate than you do in counting payroll taxes, yes. All right, and so you favor of changing that? Some years ago, somebody from the White House, not the president, called and said that they've read my views on taxation, and they said, would you mind having a tax named after you? And I said, well, if all the diseases have been taken, why shouldn't I? I'll take a tax, and so they've referred to this. But I really do feel that anybody that's making millions of dollars a year should have a combined payroll and income tax that is at least 30%. And in my office, everybody in the office does have that, except me. How do you think you became a Democrat when your father was a big Republican, and you're living in a very conservative state?

How do you think that evolved? Civil rights more than anything else. I mean, I didn't think about it when I was 12 years old or 14 years old, and I went to Alice Steel, and it was a school for blacks just a few hundred yards away. And it just never dawned on me how different life was for other people. And then, as I got to see more of the world, I just decided that there were a lot of things that were unfair, and the Democrats seemed to be doing a little bit more about it. In Berkshire Hathaway, today you have an annual meeting that attracts roughly 40,000 people. When you had your first annual meeting, how many people showed up at that? Well, we had 12, but you had to count my Aunt Katie and my uncle Fred and a couple of managers. We usually had about two outsiders. And when you started Berkshire Hathaway, did you ever, in your wildest imagination, think that you could build a company that became one of the biggest in the world? Was that ever in your plans? No, no. I've always just kind of put one foot in front of the other. What is it that you would like to have as your legacy

as you think about it? Well, I like to be the oldest man that ever lived, actually. But, no, I like teaching, and so if I've been a decent teacher, and I have a lot of university students come out every year. And today, is there anything on your bucket list that you would like to do that you haven't done? I'd have done it. There's anything I wanted to do, I'd do it. Money has no utility to me. Time has utility to me, but money in terms of going, making trips or doing only more houses or having a boat or something. It has no utility to me whatsoever. It has a lot of utility to other people, which is the reason for the giving pledge. What motivates you to still run a company when most people your age are playing shuffleboard or they're relaxing or doing something? Yeah, they spend all week planning their haircut. I get to do every day what I love with people that I love. I mean, it doesn't get any better than that. And so the greatest pleasure in your life other than doing interviews like this is what? Looking at new companies, making investments, giving away the money, what gives you the most pleasure?

Your grandchildren? All of them, but the truth is that I regard Berkshire Hathaway sort of like a painter regards a painting. The difference being that the campus is unlimited. So there's no finish line at Berkshire. And it's a game that you can continue to play. Any word of advice you give to somebody who's a young investor who would like to emulate you, what you would recommend that they do to kind of build something close to what you've done? I think you should look for the job that you would want to hold if you didn't need a job. I mean, you're probably only going to live once. Surely, McLean may differ with that or a few people. But you don't want to go sleepwalking through life. And you're really, whether you make X or 120% of X, really isn't remotely as important as to whether, in most cases, you marry the right person and you also find something that you would do if you didn't need the money. And I've had that job for, you know, 50 or more years. And I was lucky and then I sort of found early on what turned me on that way.

But don't settle for something if you can possibly, but don't worry about making the most money this week or next month. I mean, when I offered to work for Ben Graham, I said, I'll work for nothing. And I meant it, you know, I mean, just the idea being turned on. So look for the job that turns you on. Find a passion. All right.