Buffett CNBC Interview

Warren Buffett Answers Your Emails on Squawk Box: Transcript (Part 1)

and last week we had some deleveraging of the municipal bond market, which is not a market you would normally expect to get hit by that sort of thing. But we've had it--they really haven't deleveraged as much as they wanted, things like leveraged loans at the banks. They've been trying to sell them, and they haven't found the levels yet at which they'll move. But that's--you got a very leveraged world, and it's getting somewhat deleveraged.

And unfortunately for the people that are deleveraging, it was leveraged at crazy valuations in many cases. So people that are out--have been out on a limb financially are having the limb sawed off.
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Some they're calling at 75 cents on the dollar. But--and we'll buy some, at some point. But there's a--there's a lot of merchandise out there that people are getting margin calls on, and they're not the small guy getting a margin call on stocks. These are big guys getting calls on billions and billions of dollars of fixed income positions.
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Well, we heard from them, but we tossed our hat in the ring, and they tossed the hat back. But fortunately--it's been fortunate for us, because we've been writing business that they insured, and we're getting a far better rate than we offered to take it over from them. So here--we've written 206 transactions in the last three weeks, and we have been paid an average of 3 1/2 percent to take on business that they wrote at 1 percent. But we don't pay until they go broke. So in effect, the municipality has to quit paying, and over here I've got the bond insurers. And it's just--it's the three you named plus a few others. And they have to go broke, and then we pay. So we're getting paid 3 1/2 percent to be in a secondary position when we offered to do it for 1 1/2 percent in a primary position.
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Oh, no. We're not--no. These are all A-rated or better municipals insured--202 of the 206 are insured. And we've received $69 million of premiums for two billion of a par amount. The original insurer received about 20 million. And they're still primarily on the hook. So our price was all wrong.
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We--we'll give an offer good for a minute or something. We--there's no--we are not offering puts to the rest of the world for nothing. And a bid is a put as long as it's outstanding, and puts you're supposed to get paid for in this world. So we put them out for, you know, basically a minute or two. We want the fellow on the other end to be able and prepared to act, and we do not want him to use our price to out and shop with somebody else.
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I didn't see it--in '73 and '74, I didn't see how bad things were going to get. I kept buying more as I got worse, but I--if I'd seen in '73 what was going to happen in '74, I wouldn't have bought anything in '73. You can't predict. We don't try and time anything or predict. We just look for where there are good values, and if we find them, we buy them, and if we don't, we don't buy anything.
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But if they're looking [Obama or Clinton], one of them will probably be looking for a job here in a few weeks. I would be glad to hire either one of them. !
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BUFFETT: Yeah. I--overall in terms of that--I think everybody should read Jack Bogle's book. Low--what you really want to do is you want to own an American industry which is going to do fine over time, but you want to make sure you don't put all your money in at once because you might pick just the wrong point.

QUICK: Mm-hmm.

BUFFETT: But if you buy in over time into a wonderful business, which is American industry, and you make sure you don't go in at just the wrong times, when people get excited, and you get to keep your costs low, you're going--you're going to beat 90 percent of the people because they're going to run up unnecessary costs.
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BUFFETT: Well, you know, the ways you get into trouble in markets is doing things you don't understand, and then doing them with a lot of borrowed money. And derivatives combine those things. And--but the really important illustration that has never gotten picked up on much was that a couple of years ago Freddie and Fannie got into big trouble, billions and billions and billions of dollars of--that they had to restate. Now, Freddie and Fannie had auditors like everybody else, but they also had a government agency called OFHEO that had 200 people in it whose sole job was to oversee Freddie and Fannie. Two hundred people going to work every day, and those people did not pick up at all on all of these problems that Freddie and Fannie had. I mean, they were looking at complex financial instruments, you know, all kinds of swaptions and all that sort of thing. The auditors didn't pick up on it, but more important, 200 full-time--they didn't have to think about General Motors, they didn't have to think about AT&T. They had two companies to think about. And they issued a report later on telling about the failing of all--everybody else.

QUICK: Mm-hmm.

BUFFETT: But it shows you--when things get that complex, you're going to have a lot of problems. And CDO squared--I figured out, on a CDO squared you had to read 750,000 pages to understand the instruments that were underneath it.

QUICK: Oh, my gosh.

BUFFETT: Yeah. Well, you start with the RMB, that's the residential mortgage-backed securities, and that would have 30 tranches. And then you'd take--and that would be a 300-page document--you'd take a tranche from each one of that and create a CDO, 50 of those times three--300, you know, it becomes 15,000. Then you take a CDO squared with 50 more, and now you're up to 750,000 pages.

QUICK: You have to read through it.

BUFFETT: And the mind can't comprehend that. What people did comprehend was that the fees were terrific in selling them to the people.
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I'm only 99 percent Berkshire myself, so I never go 100 percent. Well, I think if you buy equities across the board, which means an index fund, and if you do it over time so that you don't put all your money at the wrong time, and it's a low cost index fund, that's probably the best investment that most people could make. Mm-hmm.
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Well, it wasn't a mistake at the price we bought it. But in terms of the--the intrinsic business value of Moody's decreased last year. I mean, Wells Fargo stock was down last year. I don't think the intrinsic business value shrunk. In fact, I said I thought it probably increased a touch. And there's a lot of companies whose stock went down where the intrinsic business value did not go down, or maybe went up. But I--our holding a Moody's, which is a significant holding, they're--I don't think there's any question that the intrinsic business value of a Moody's shrunk last year, just as McGraw-Hill owns S&P and the S&P component of McGraw-Hill, it--they have less of a moat around them and they're going to be affected for a long time by the experience of the last couple years.
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Yeah, it's me that makes the decision. And I would say this: with drug companies, I feel I know less specifically about a given company's future than I might if I were buying a candy company or whatever it might be, because it's very difficult to say who will have the winners five or six years from now. I think--I think if you buy drug companies that you probably want to buy those with--that--you probably want to buy them somewhat across the board. You know, it would be hard for me to make a bet on any specific company based on something that was in the pipeline that might come out in two or three years. You know the ones that are coming off protection, so you'll see--in a Sanofi, you'll see certain things that are going to cause the earnings to go down, and what's going--what will cause the earnings to go up is in the pipeline, you're sort of guessing at. If you have a group of them, I think you'll probably do OK if you buy in at sort of a multiple for the group. And actually, the drug companies have gotten in some cases quite a bit cheaper in recent years.

KERNEN: So we shouldn't be surprised to see you--then it wasn't that you were picking nondomestic drug companies, you might end up with a stake in one of the domestics at some point.

BUFFETT: Yeah, very easily. And, of course, the domestics have a lot of earnings coming from abroad, too. I do like earnings coming from abroad better than earnings coming from the United States. So if they're doing business--but most of them are doing business all over the world, so there's not a huge difference in that. We own some Johnson & Johnson and, you know, half the earnings, roughly, will come from abroad. And we think we probably have some currency play. We've already had some, but it hasn't been reflected that much in the stock. But there will be a J&J, a Sanofi, you name it, they will earn a lot of money abroad and they'll come up with some drugs that surprise you and they'll have plenty of them that are earning a lot of money now that'll--won't be earning any money for them or anything to speak of 10 years from now.
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Yeah. You can get rail volume--you can--you can go to the Internet and every week get car loadings as to each railroad. And so I click on there every week and look at--look at car loadings. Car loadings were down last year,
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I would tell people if they worry what the market does on any given day, they shouldn't be buying stocks.