[On current market valuations]
Well, valuations make sense with interest rates where they are. I mean, in the end you measure laying out money for an asset in relation to what you are going to get back, and the number one yard stick is U.S. governments.
When you get 2.30 on the ten-year, I think stocks will do considerably better than that. If I have a choice of the two, I’m going to take stocks at that point. On the other hand, if interest rates were on the ten-year were five or six, you know, a whole different valuation standard for stocks. And we’ve talked about that for some time now.
Interest rates are gravity. If we knew interest rates were going to be zero from now until judgment day, you could pay a lot of money for any other asset. You would not want to put your money out at zero. I would have thought back in 19 — I mean, 2009 that rates would not be this low eight years later. It’s been a powerful factor, and the longer it persists, the more people start thinking in terms of something close to the rates they’ve seen for a long time. The one thing I’m sure of is that over time stocks from this level will beat bonds from this level. If I can be short the 30-year bond at 3 percent or something and long the S&P 500 and just have it put away for 30 years, stocks are going to far outperform bonds. The question is which variable is going to change. Everybody expects interest rates to change. But they’ve been expecting that for quite a while.
I don’t try to guess the stock market: I find businesses I like. But if I were to guess: if interest rates — if the ten-year moved up to 5 percent, stocks would be somewhat cheaper.
It’s been so wide I’ve written about it in annual reports. Stocks have been so much more attractive than bonds for a long time now and that’s partly intentional on the part of the fed. I mean, they want assets to increase in value and the way to do it was to reduce that gravity force of higher interest rates.
I think they expect it to increase, but the question is how much. If three years from now interest rates are 100 basis points higher than this, stocks will still be cheap at these prices. If it’s 300 or 400 basis points, they won’t look cheap. Janet Yellen doesn’t know what she would do three years from now. She’s got more of a job than –that’s a simple factor of the stock market. It’s interesting because the fed has said that they would like to see 2% inflation. That’s fairly recent. Paul Volcker would not have slept if he’d ever heard that in the 80s.
If the U.S. government is borrowing at ten years from you at 2.3%, and their own instrument, the fed, is saying ‘we would really like money to become more 2% a year or less,’ they’re not promising you very much in terms of real terms for saving.
[On Berkshire Hathaway’s stake in Flying J]
I do like — I do like the products of virtually all our companies. I suppose if we ever bought a funeral parlor, I wouldn’t be as — generally speaking, I like our products.
I like good economics to go along with them too. Well, if you do it, you do it with your own money and not Berkshire’s. I wouldn’t argue against that. I mean, if you had a lot of money and there’s something you like, if it isn’t profitable, you buy it, but you don’t buy it with Berkshire’s money.
[On Flying J deal] We set up a lot of different structures than what the managing party would like to have, and, you know, with the Blumkins in 1983. It’s the same structure. Their situation in terms of their family and their partnership and everything made this logical, and we have this two-step arrangement.
We’ve got other two-step arrangements. Marmon with the Pritzker family we had a three-step arrangement. We try to fit what the seller would like, and with families and everything, you can have different arrangements.
Jimmy is based in Knoxville, and we bought another company 14 years ago: Clayton homes. Their employment has gone from 5,000 to 16,000, and they’ve seen me exactly once. They might have done better if I hadn’t gone down the one time — Jimmy knows and the families know each other, and so they’ve got a chance to check to see exactly how much we do interfere with operations.
The truth is I wouldn’t know how to build a manufacture home or a truck travel center—we depend on management.
[On Wells Fargo]
Well, I didn’t hear all of what [Senator Elizabeth Warren] had to say. She’s absolutely right that you should – same situation as at Salomon — 8,000 people four or five of them had caused the problem. The job is to remain – remove the stain from almost all of the 8,000 and get it where it properly belongs with the people that either performed the act or condoned them after they were performed. That’s what we did at Salomon.
I think that’s what they’ve been working at Wells. You can’t do that necessarily in a day or a week. Well, I proposed, actually, in the annual report of Berkshire — that would be four or five years ago, sometime after 2008 — the problem is that the bank gets fined and the shareholders are the ones that pay for it, and they didn’t have anything to do with it, basically. And I suggested that probably more extreme actions than Senator Warren in terms of clawing back all the directors fees for five years. I think that you really want — you want as much as possible – you want the people that were responsible to pay, and ideally you would have the people that were innocent not pay. It doesn’t work that way in the American judicial system.
I think that if you have a very large company — Berkshire is large — you have a hotline. I think the CEO has to be very attentive to what comes in on the hotline.
Now, most of its silly stuff, but there’s real stuff too. And you get anonymous letters. You’ve got to follow through on the ones that actually sound like they have real meaning, and clearly you couldn’t have activity as broad as it was at Wells without the hotline here Somebody messed up on the job as to find out who messed up and ideally to make the penalties be such that it discourages other people in the future from doing similar things.
I say when you got a problem — and you are going to have problems — I mean, if you had a very big — You can’t have 280,000 people working without something, and most things are minor, but you get something systemic, you have a big problem. Once you find out about it, you have to get — get it right, get it fast, get it out, get it over. Getting it right is hard: I mean, because you turn over rocks, and sometimes you find dome things, and it’s very seldom there’s just one big thing going wrong in a big institution if something like that is going on you’ve got get it right, and the one thing you don’t want to do is be wrong about it.
Yeah, like I said it happened to me at Salomon. Salomon had my faith: It doesn’t mean every person at Salomon had my faith after I got there. I had some surprises I mean, I was worried about surprises every day. But the truth was that 99% of the people were perfectly decent people, they were just like the people working at Goldman or some other place, and somebody had gone off — totally gone off the — gone haywire and other people didn’t report it.
When you find a problem, you have to jump on it. I mean, that is – that’s just basic.
I was in Las Vegas last week talking to about 400 wells people and Tim was head of this. It was there top group from around the country. I did the same thing about five or six years ago for wells in Chicago. I did it for B of A maybe seven or eight years ago. I mean every now and then they ask me to come around just so that people can see who owns a lot of shares. So I must have talked for at least an hour last week.
I mean, [Sloan] knows that I testified many years ago in connection with Salomon. Both to the House and the Senate, and I told him something of my experience, but it’s all on tape, in terms of being able to see it anyway.
I gave him — I told him what I would do.
[On his favorite bank]
What’s my favorite bank?
I’m not so — what’s your favorite child? Bank of America has done a sensational job under Brian Moynihan.
Brian had all kinds of problems when he came in. They were not of his own doing. But he had a ton of problems and
He had a lot of rocks to turn over, and it cost a lot of money. And he just set out step by step to bring the bank back. He’s gone from 280,000 people down to 210,000 people. He gone from a run rate of expenses in the $70 billions down to $54 billion.
He has really done a job, and we will be holders of B of A stock for a long, long, long time.
[Passive management] will absolutely kill every one of the fund to funds and bear in mind, each one of the fund to funds add a strong financial incentive to pick the best funds they could find, ten years ago, meant real money to them so it was overwhelming and passive investment, I’ve written about it, passive investment and aggregate will be active investment because of fees. And they didn’t have to pay 2% or 3% a year to somebody to get those, average results were going to be very good. And they were good, they have been good all my life and these ten years they have been good. You’ve done perfectly okay with passive investment.
I get letters all the time from people who say I would like to do it, I’ll put up $100 or something, become famous they love the idea of me giving them a lot of publicity — if anybody wants to put up a significant percentage of their net worth – If they want to put up a significant percentage of their net worth, their family’s net worth and want to make a bet on ten years, on active versus passive, maybe my estate has to be the one to settle with them. At 87, anything involving ten years is kind of a triumph of hope over statistics, but nevertheless, the ones that have written me, they really want to Get their name in the paper.
They can pick a group, got to pick a group, you know, I’m picking a group of 500 in the S&P 500, and they can pick the date of the start. The date of the start has nothing to do with it. The truth is, the market behaved fairly typically in terms of aggregate return for the decade. This is not some extraordinary period in the least. Nothing unusual about this the thing that was unusual is the size of the fees that ate them alive, basically. The managers of the funds did very well during this period and the managers of the underlying funds did very well and investors got killed compared to something they could have done.