Buffett Squawks - 03/01/10

In a thoughtful three hours, Becky, Joe and Q conducted a wide-ranging interview with the Oracle of Omaha on CNBC's "Squawk Box." I watched the show high above the Atlantic Ocean on a JetBlue (JBLU) flight this morning in route to New York City.

During the course of "Squawk Box" (conducted at Piccolo Pete's Restaurant in Omaha), Buffett expressed a number of important views and observations (not in order of importance):

• While we have gotten beyond an economic Pearl Harbor, one should always be prepared for extraordinary times.

 

• Berkshire Hathaway (BRK.A / BRK.B) is solidly positioned for outlier financial and economic outcomes.

 

• The world's economies will recover at a modest pace, but he offered a generally cautious view of the domestic economy.

 

• Within a year, housing will have stabilized as household formations catch up to the excess in home supply for sale.

 

• The depth in home and stock prices has produced an American consumer that has lost some of his aspirational buying habits.

 

• U.S. unemployment remains a drag to growth and will for a while longer. Only when the slope of demand improves will companies begin to hire.

 

• If Buffett retires tomorrow, Berkshire will likely "farm out" the investment responsibilities to three outside managers. A representative of the Buffett family will likely be a nonexecutive Chairman of Berkshire. The Board of Directors is prepared to appoint a CEO if Buffett retires, and the pool has grown as the company has made acquisitions.

 

• If Geico CEO of Capital Operations Lou Simpson retires tomorrow, Buffett would take over the investment responsibility at Geico.

 

• Berkshire has been unaffected by the Standard & Poor's and Moody's downgrades in its debt from AAA to AA.

 

• This year's annual letter to Berkshire Hathaway shareholders was intended as a manual to provide the company's new shareholders with a good understanding and education of Berkshire, its business components and its strategy.

 

• While the bottling business is capital intensive and has some execution challenges, Buffett endorsed Coca-Cola's (KO) acquisition of its bottling operations.

 

• Berkshire Vice Chairman Charlie Munger has the best 30-second mind extant. Microsoft's (MSFT) Bill Gates' knowledge is all-consuming and remarkably broad. Berkshire's manager of the reinsurance business, Ajit Jain, knows probabilities like no other.

 

• Buffett's holding period remains "forever." His enthusiasm for stocks is in direct relationship with the value that has been created on share price declines. So it follows that both stocks and bonds are less attractive than a year ago.

 

• The cost of health insurance in the U.S. is like a tapeworm eating at our economic body. The cost of the health system is a drag on growth and, unless changed, will reduce our standard of living and reduce our competitiveness. National health care legislation should be singularly focused on costs.

 

• Today's huge deficits, while a necessary Keynesian response to economic weakness and a financial crisis, will have important and negative long-term consequences.

 

• Buffett would have preferred to have offered all cash for the Burlington Northern Santa Fe (BNI) acquisition, but putting $22 billion into the Burlington deal made sense and offered Berkshire a good but not great opportunity.

 

• Chapters 8 and 20 of Intelligent Investor provide the best lessons for the individual investor. In Chapter 12 of General Theory, Keynes might have had the "animal spirits" and the acquisition of Kraft (KFT) in mind.

 

• Under the circumstances that existed a year ago and based on the form of the investment made (which was done on favorable terms to Berkshire), Buffett is pleased with his investment in Goldman Sachs (GS). Lloyd Blankfein is a superior investment manager and is too maligned by many observers (especially of a media kind).

 

• Stocks are sold out of Berkshire's portfolio (Moody's (MCO), Procter & Gamble (PG), ConocoPhillips (COP), ExxonMobil (XOM), etc.) when:
  1. they are fully priced;
  2. there are better alternative investment opportunities available; or
  3. the company wants to maintain a cushion of liquidity (just in case).

 

• A "heads they win, tails they win" executive compensation at leading financial institutions is wrong and should be changed, especially if large errors in trading expose our society to systemic risks.

 

• An expansive and comprehensive mortgage policy must be developed after the "rogue" government-sponsored enterprises (Fannie Mae (FNM) and Freddie Mac (FRE)) have blown up. The GSE's disproportionate role in residential mortgages must be addressed posthaste.

 

• There is a large incentive for the E.U. to assist in solving Greece's current debt crisis. It will be temporarily resolved as the consequences of not finding a solution are far greater than exists today.

 

• State and municipality economic problems continue apace, providing a further drag to domestic economic recovery.

 

• No Pepsi (PEP), Coke, for Warren Buffett!

My view on Warren Buffett remains unchanged. He is an investing legend. No, he is the single most accomplished investor in modern financial history. Buffett's straightforwardness and logic of argument are constant reminders that simple works better than complicated and complex is often the enemy of the rational investor. Importantly, Buffett sticks to his knitting. He knows what he doesn't know. His willingness to delegate responsibility and executive autonomy is a key feature to Berkshire's success over the past half century and should serve as a template to every senior manager in industry and in finance who has too much pride in his / her own decision-making authorship.

My view on Berkshire's shares also remains unchanged. Given Buffett's age, the Oracle (by definition) moves closer and closer to relinquishing the reins of Berkshire. When he retires, no one should or will be accorded the respect and wide berth that Buffett has earned throughout his lifetime. Moreover, the Burlington Northern acquisition completes Buffett's canvas, at least for the foreseeable future. As a result of these factors (and others), my view is that Berkshire's large investment holdings will slowly lose their "Berkshire premium" as, in the fullness of time, the shares move closer toward being valued at a discount typically accorded the average closed-end equity fund.

From my perch, this morning's "Squawk Box" was most rewarding to viewers and represented one of the finest three hours ever for the CNBC show. Becky, Joe and Q peppered the Oracle with intelligent questions and let Warren Buffett recite his gospel.

Well done!

Position: Long PG and PEP