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Here’s What You Missed At The Berkshire Hathaway Meeting

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Becky Quick, Berkshire Hathaway Meeting
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With Becky Quick, Co-anchor of “Squawk Box” on CNBC

Becky Quick, The Squawk Box, And Warren Buffett

Becky Quick is well-known and lauded for her work as co-anchor of CNBC’s morning program Squawk Box and anchor of On The Money.  Over the years, she’s profiled and interviewed heavy hitters from the finance and business world like Alan Greenspan, Bill Gates, and Warren Buffett among legions of others.  Steve has admired and followed Warren Buffet closely over the years, while Quick’s career has led to a long-term professional and personal rapport with Buffett.  Naturally, Steve steers the conversation with Quick towards Buffett and this year’s 2017 Berkshire Hathaway shareholders meeting in Omaha, which he attended, while Quick served on a panel of three journalists fielding audience questions.

Berkshire Hathaway Meeting 2017

Steve asks about Quick’s impression of this year’s Berkshire Hathaway meeting, wondering whether she noticed any differences from previous years, in particular, whether she noticed any changes in Buffett’s physical appearance or presentation, signs of aging.  Quick replies that she didn’t pick up on any obvious differences, but speculated that she might not be the best person to ask given her long and close relationship with Buffett, which tends to blur the edges of incremental aging so that it only gradually sneaks up on you.  If anything, she was impressed by Buffett’s and business partner Charlie Munger’s stamina throughout the 7-plus-hour day. Steve observes that endless supplies of Cherry Coca-Cola and See’s peanut brittle must’ve helped in that regard.  He further notes that Charlie Munger was more talkative than normal and that, overall, their answers seemed more reflective and more rambling than in years past.  He also thought that Buffett looked a bit frailer than before.  Quick agrees that they both seemed especially relaxed and didn’t stick as closely to business-only this year, weaving more life perspective into their answers.  While some of BH meetings have been marked by controversy, this one seemed to her more straightforward.  At the same time, she felt that they allowed themselves to extend their comments into different tangents this year.

Warren Buffett’s Take On Wells Fargo

Steve remarks that this year might have also been shaped by a contentious issue, namely the fraudulent account incentive plan scandal at Wells Fargo.  As the bank’s biggest stakeholder, owning about 10% of their stock, Berkshire Hathaway has been scrutinized to a degree for what has been perceived as its passive role in responding to the crisis and, more recently, its semi-tacit support of Wells Fargo’s Board of Directors in the face of a move by other large stakeholders to oust most of the Board.  As far as Buffett’s thinking on these issues, Quick first traces the consequences thus far: the bank settled with the federal government by paying a nominal fine, and the CEO and thousands of employees lost their jobs.  She believes that Buffett feels that these were appropriate responses.  Some Berkshire shareholders pushed back, asking what happened to Buffett’s famous conviction that a company damaging its reputation is unforgivable.  By way of an indirect response to critics, Buffett has said that it’s easy for the kind of harmful incentive programs that brought down Wells Fargo’s CEO to take hold in corporations but that, in this case, far too much time went by without any acknowledgment much less crackdown by management or the Board.  Quick adds that Berkshire’s 11% ownership means that Buffett was unable to be an “active shareholder” with a voice on issues like the scandal or the upcoming vote on firing Board members.  Recent news reports that Berkshire recently pared back to just under 10% to avoid regulatory complications, but that they still supported the board.  Steve predicts ongoing trouble for Wells Fargo in terms of rebuilding their reputation but allows that they seem focused on and working towards improving relations with customers, regulators, and investors.

Buffett Dips His Toe Into Technology Stocks

Berkshire Hathaway’s first foray into investing in technology companies was their purchase six years ago of about 9% of outstanding shares of IBM.  Steve notes that Buffett recently sold 30% of his holdings of IBM and asks Quick to explain both the purchase and the selling off.  She begins by mentioning that Buffett has indeed eschewed technology companies by saying he doesn’t understand them, but, in this case, he was convinced by research he and some of his analysts did that IBM enjoyed a “stickiness” in its market, one of Buffett’s favorite qualities in a business model, meaning that its customers have large and costly disincentives to migrate to another vendor.  Evidently, he was also quite taken early on with Watson, IBM’s famous artificial intelligence project.  That enthusiasm started to sour a few years later as progress failed to meet IBM’s internal projections.  The other reason Buffett began to question his ownership of IBM, which eventually led to his selling of a third of his IBM stock, was that he felt it had become overpriced.  Buffett continually evaluates his holdings of different companies, comparing their financial value to stock prices and buying or selling accordingly.  In that sense, his move to sell IBM was, based on his public comments anyway, far from a panicked or even regretful decision, but merely a repositioning of his investment.  If the stock dropped to a price he found attractive, he’d again be a buyer and likewise a seller if the stock rose sufficiently.

On Not Buying Amazon Early Enough And The Price Of Tech Stocks

On the question of other technology stocks, Buffett has sung the praises of Jeff Bezos, in particular, calling him—to paraphrase—“probably the best manager in the corporate world at this point.”  He views Bezos’ masterful execution of an ambitious business plan as a bravura performance.  While he may not publicly regret his purchase of IBM, Buffett has admitted that he does very much regret not buying Amazon early on.   Nevertheless, he’s stuck to his guns and refused to buy at what he considers an unattractive price given its earnings and growth potential.   This goes for a number of other gold-plated names in technology including Microsoft, Google, and Facebook, all of which he thinks are overpriced and/or disadvantaged over the long term in some way.  We recently learned that he has taken out a big stake in Apple, an interesting development for Buffett followers.  Again, he used the word “sticky” to positively describe its relationships with its customers.  Based on Buffett’s and Munger’s comments, as well as the move to buy Apple, it appears that they are no longer averse to the technology sector but now see it as just another field of investment possibility in which they are seeking out good deals in a competitive sphere awash in cheap money.  Their general outlook seems to be that low-borrowing costs are driving up equity prices and making businesses more expensive, a situation that demands extra caution.

Berkshire’s Private Equity Business Still Robust

Steve and Quick wrap up their conversation by discussing another aspect of Berkshire Hathaway’s business model: its outright purchase of businesses, mostly family-owned public companies which they take private.  This has been the meat and potatoes part of Berkshire’s business from the beginning, and they’re still at it, though the size of the companies they are most interested in has grown from tens of millions to the low billions.  While they may still buy a company like Burlington Northern with a market cap of only $20 million, to make an impact on Berkshire Hathaway’s bottom line they need to be valued at $5 billion or more. The ideal match is a company with leadership that loves the business and wants to continue running it, but no longer wants to deal with shareholder and market-driven emphasis on quarterly performance targets.  Unlike many private equity companies that take public companies private and then flip them to another buyer, businesses that Berkshire Hathaway buy have a long-term home with their new owner.


Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

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Steve Pomeranz: Becky Quick is co-anchor of Squawk Box which is on CNBC from 6:00 AM to 9:00 AM Eastern time and she’s also known for her really insightful interviews and profiles of Warren Buffett, Bill Gates, Allen Greenspan, and so many others.  I’m a big fan of Becky’s.  And I have been for a while, and I try to every year try to connect after the big Berkshire annual shareholders meeting in Omaha which I attended a few weeks ago.  And she’s with me online right now. Hey, Becky, welcome back.

Becky Quick:
Hey, Steve, it’s so great to be talking with you.

Steve Pomeranz: Thanks, I’ve been on radio now for over 15 years, and I can hear and see things that the average listener may not.  I want to tell you—and this is very sincere—I think you guys on Squawk Box have really developed the best rapport in the business.  How long have you been working with David Faber, and Andrew Ross Sorkin, and Joe Kernen, and Jim Cramer?

Becky Quick: Steve, you are so kind to say that.  But when you ask about how long we’ve been together, I think that is what really the secret is…let’s see, I’ve been on Squawk Box, I’ve been at CNBC for, I guess, 16 years this year.  I’ve been on Squawk Box for about 13 years, so with all of those guys that whole time.  And I think that’s what makes the difference, is the longer you get to know people, the better you get to know them, the more you can anticipate which direction they’re going.  And I think that’s what it is, is just the chemistry of all us having been friends and worked together for so long.

Steve Pomeranz: It’s so natural, it’s like it’s almost choreographed.  It’s fun to watch.

Becky Quick: Choreographed chaos, maybe.

Steve Pomeranz: [LAUGH] Yeah, well, maybe, I know that is true—which makes it more interesting.  I mean, every day is so different, right?

Becky Quick: Well, that’s what’s so fun about coming to work. I mean, when you get to listen to the business headlines every morning, we never know what’s coming, and that’s the most fun for me.  I love days when there’s breaking news and it kind of blows the show-up.

Steve Pomeranz: Yeah, yeah.  And there’s times where there’s awkward moments too.

Becky Quick: [LAUGH] Yes, in fact, we’ve labeled them “squawkward” moments.  We have the guys in the back, the audio guys have “this ‘skquawkward’ moment was brought to you by” Joe Kernen, usually or Andrew or me, they tag one of us for it just about every time.

Steve Pomeranz: Well, you interviewed Warren Buffett while you were at the Berkshire meeting in Omaha.  And you were also on that three-person panel of journalists and asking questions at the meeting itself.  Before I get into the discussion about what Buffett said, I want to get your overall take on this year’s session, maybe, versus previous years’ sessions. And I kind of want to know whether you discerned any difference in Warren Buffett’s kind of physical appearance or condition.  Did you notice anything about that?

Becky Quick: I didn’t, but I’ve known him very well for a long period of time.  So I’ve looked back at clips of us on Squawk Box and realized we’ve aged without me even recognizing it. [LAUGH] So I think that stuff sneaks up on you.  Obviously, we’re all getting older, but I’m amazed by what Charlie and Warren both can continue to do.  Their stamina with getting up there and taking unscripted questions for six and a half, seven hours.  And I thought what was really funny this year is, we’re up there from about 9:00 in the morning, 9:30 when the movie ends until noon, and we’re supposed to break at noon and go to lunch for an hour, and this year, Warren’s kind of in charge of running the show, and this year I noticed it was 12: 05, and 12:10, and 12:12, and I was thinking what is going on?  Because I don’t know about those guys, but I definitely needed a bathroom break.  And so I was kind of nervously watching the clock and was so relieved when finally at 12:14 he said, yeah, we’re overdue and let everybody go. So, they had more stamina than I did.

Steve Pomeranz:
The real issue there is they had more stamina because he’s drinking like a Coke every 20 minutes.

Becky Quick: [LAUGH] Yeah, a Coke or a Cherry Coke through the entire day.  The two of them are both munching on peanut brittle.

Steve Pomeranz: I know, exactly, of course, it’s all Sees Candy, it has to be.

Becky Quick:
Right.

Steve Pomeranz: But, I mean, these guys are pumped up on sugar,  which brings to me to this point, that in previous years, to me, the funniest moments are when Warren turns to Charlie Munger and says, “you have anything to add?” And Munger goes, “nope.”

Becky Quick: Yeah, I have nothing further to add.

Steve Pomeranz: Nothing further to say.  But this-

Becky Quick: His famous line.

Steve Pomeranz: But this year, Charlie Munger was really talkative, and I thought that was a big difference.  I thought Warren seemed a little frailer to me, I don’t know.

Becky Quick: I didn’t notice it as much.  Sometimes, his voice gets a little raspy, and I think that’s just from him talking forever because it’s not just the meeting itself.  But, it’s all the events leading up to it on Thursday and Friday, Saturday, and Sunday, and Monday.  S that may be part of it. But I did notice what you said about how they both seemed a little reflective and relaxed this time, in terms of not just necessarily sticking to business.  There have been years where there’s been a lot of controversy, and things seem like they’re a little more straightforward.  There’s always a little bit of life perspective that’s woven into it. But this time, there definitely felt like there was more of that. There was almost a relaxed flip pace where they would think about things and kind of spin off in different tangents on every question that was asked.

Steve Pomeranz: That’s exactly what I noticed.  There was a little bit more rambling, a little bit more reflectiveness. You talk about years past, where there were some contentious issues.  So, one contentious issue this year was Wells Fargo and their incentive plan which just went totally over the cliff.  And what were Warren’s opinions and thoughts about Wells Fargo?

Becky Quick: Well, for those who haven’t been paying attention, I guess, the Wells Fargo incident was pretty stunning. It happened last year.  The CEO has since been forced to resign and step down as a result of it, but they were pushing their employees at the branches to open up accounts.  And pushing them to such an extent and tying their compensation to it, that there were all kinds of fraudulent accounts that had been opened. And Wells Fargo settled last year with the government and paid a fine, a nominal fine for it.  But the outrage from people, that there have been all these fake accounts opened or accounts that have been open for people that they have never authorized to be opened, really led to some severe backlash because, apparently, the problem has been building for five or six years.  And a lot of people, we’re taking—the three questioners on the stage, the journalists who are up there, Carol Loomis, Andrew Ross Sorkin and myself—are taking questions for a couple of months from shareholders.  And a question I got asked pretty frequently was about Wells Fargo, what Warren thought about it. And one in particular shareholder said, “you say, in reference to Solomon Brothers, that if you lose a shred of reputation for the company, I’ll be ruthless.  How come you weren’t ruthless in this case?”

Steve Pomeranz: Great question.

Becky Quick: And his point was multiple, first of all, he pointed out that the CEO did lose his job. I think a lot of times things happen behind the scenes.  Also, Wells Fargo is a company that is not outright owned by Berkshire Hathaway; Berkshire Hathaway is the largest shareholder.  I think own about 11% of the shares outstanding.  But I think that’s a different distinction as well.  It’s not a Berkshire company. Because it’s a bank company, the shareholders are not allowed to be active shareholders once you own more than 10% like that.  So, it’s not a situation where Buffett was authorized to have a conversation.

Steve Pomeranz: He is on the board, though.

Becky Quick: He’s not, no.

Steve Pomeranz: He’s not on the board?

Becky Quick: No, he’s-

Steve Pomeranz: I thought he was.

Becky Quick:
No, he’s not.  And, so, he’s not allowed to have, I think he’d get in trouble with some federal regulators if he was really involved in some of those talks.  He did say that there were some really serious things that went wrong there. Not only that the practice was allowed to develop, he said that’s something you can understand because bad incentive practices get put in all the time.  But the idea that it went on for so long, and that they didn’t change it, and that they didn’t come out more forcefully, I think, really compounded the problem, and I think that was his point.

Steve Pomeranz: I think he said the CEO was really in greatest error because things float up to the CEO.  And at that point, something should have been done as soon as something egregious like that was heard.  I mean, Warren Buffett says it takes a lifetime to build a reputation, but just a moment of a big mistake like this to lose it all. I think it’s going to take Wells Fargo a long time to get its name back.  I know it’s working really hard to do that.  Let’s talk about IBM. IBM was a very controversial investment for him some six years ago because it was his first foray into the technology area, and he had eschewed that area for his whole investing career.  And he bought quite a bit of it and made a very compelling case for it, and, recently, he sold off 30% of his holdings.  So, what was the reason for that?  What’s going on with IBM that made him to change his mind?

Becky Quick: Well, Steve, you’re right.  He has always claimed that he is not a technology investor, he doesn’t understand technology.  The reason he bought into IBM was because, he said, that based on his own market research, on his own research and that of some of his assistants, it seemed like IBM was a really sticky product. Once you’re invested with them, or once you’ve put them into your company, once you’ve installed their hardware, it would be really hard to get off of it.  He also was kind of taken with Watson, I think.  And what he does, he says, is that he’s constantly sort of reassessing his holdings, trying to figure out based on where the stock price trades and based on what he sees as value in the company.

I think a couple of things happened.  I think he was not as thrilled with Watson as he had kind of hoped.  He said the company wasn’t as far down the road as he had hoped it would be at that point.  They had disappointed not only him but also their own internal projections of what they’d been saying five and six years earlier.

So, it was disappointment with how much progress they’d made.  But then also looking at the stock price and once it got above $180, that was the price point where he decided to sell.  The reason he stopped selling is because, when IBM came out with earnings a few weeks ago, maybe three or four weeks ago at this point, the earnings were a disappointment, and the stock fell back to $156. So he had stopped selling at that point.  Now, when he told us that he has sold the stake, 30% of what was about 9% of the shares still outstanding, he still owns 6% of the shares outstanding, which makes him one of, if not the biggest, shareholder in the company.

But again, he said, if the stock price had continued to drop, he might buy it; if it went up again, he might sell it.  So, I think it’s just a constant re-valuing based on where the stocks trade in.

Steve Pomeranz: Yeah, well, we’re talking about technology.  And I’m an investment advisor, and I’m also an investor, and one part of being an investor is regret.  You may be very successful, but there’s always the one that got away.

Becky Quick: [LAUGH] Yes.

Steve Pomeranz: You know where I’m going with this, I’m sure.

Becky Quick: You could have been better, right.  It’s the ones you missed.

Steve Pomeranz: Yeah, exactly.  My gosh, but-

Becky Quick: Why didn’t I see that?

Steve Pomeranz: Exactly, so the last person in the world that you would think would have a high level of regret is Warren Buffett, but he actually was so honest about that.  He does, and it’s all about Amazon and Jeff Bezos. Tell us about that.

Becky Quick: Yep, yeah, look, he looks at Amazon, and, first of all, he says, Jeff Bezos is probably the best manager in the corporate world at this point.  He can’t believe that he’s been able to be so successful with creating companies and businesses essentially in two different industries.

So first, it was online shopping and creating Amazon.  And then, it was with Amazon Web Services, with creating that entirely different industry and beating all of the guys who already grew up in that industry.  He points to Jeff Bezos talking about how he thought maybe he’d have a two-year lead time on building up the cloud services division before the competitors jumped in, and he had more like seven years, which he still can’t get over.  So, Warren is enthralled with Jeff Bezos.  He said he laid out exactly what he was going to do if you read his very first letter to investors, and he’s stuck to that plan and done it.

Now, Warren said he’s been amazed at the execution, didn’t think it would be able to go that far.  And said, “yeah, I kinda missed it.”  But, inherent as that is, okay, Warren, you’re still not buying shares because he thinks they’re too expensive now.  And he kind of dances around that. But as much as he praises it, he’s still not buying it.  And he said the same thing about Google, that they missed that one too.

Steve Pomeranz: Yes, I know, yeah.  Well, it is a question of price, I think, in this case, because Amazon’s always incredibly expensive, Google as well. So, it’s not the kind of price that Warren would pay.  Because I don’t think he would project a spectacular level of growth, to go out enough years, to justify paying such a high price.

Becky Quick: Right, right, and again, you start getting into areas that he says he feels less confident. And his point has always been that he doesn’t have to swing at everything. He just waits for the big, fat, slow pitches in the areas of his competence, things he understands.  And I think that’s probably a lot of the issue too.

Steve Pomeranz: Yeah, he stays within his circle of competence, and he really won’t venture outside that. Talking about circles of competence, he’s a little angry that he’s got $95 billion or so…

Becky Quick: [LAUGH]

Steve Pomeranz: …In cash, which is a little bit more than most of us have sitting around.

Becky Quick: Yeah, to have such problems.  If I only had 95 billion I didn’t know what to do with.

Steve Pomeranz: Exactly, and he’s really upset that he’s paying 1%.  And he calls, he says, I saw an interview you did with him.  And he says, it’s 100 times earnings, which is right.  I mean, if you’re getting 1%, and you spend $100, you’re paying 100 times what your earnings. And he says that’s ridiculously expensive.  But it’s sitting there because he’s waiting for the next opportunity.  And then another discussion talked about, I think Munger was talking about, you fish where the fish are.  And he says these days, you’ve got to go fishing where the fish are and there’s lots of boats there, but the fish are still there. So what, in effect, he’s saying that they are looking for companies, and there are still attractive companies, but he is competing with other buyers.  And these other buyers have the ability to use, or the part of their business model is to use, a lot of debt to pay. So they can pay a lot more for these companies, and Buffett won’t pay.

Becky Quick: And there’s so much liquidity out there at this point too.  It’s really easy to get cheap…or money for next to nothing at this point, so that’s made it a lot more complicated. He and Charlie Munger both say that, “yeah, businesses are expensive at this point, when you start looking at them from that perspective.” He did talk a little bit at the meeting about how they appeal to a certain kind of seller.  A lot of times there will be someone who is running a company who doesn’t want to be a public company anymore.  So, they love the business, want to keep running it.

That’s the type of company that has been such a great fit over the years for Berkshire Hathaway.  A lot of companies that have come there have come because, like Burlington Northern, coming because they just don’t want to be a public company anymore.  And they don’t want to be looking at trying to run a business based on quarterly results that you constantly have to hit.

A lot of businesses, it makes more sense to be looking at the long term.  And that’s something you can get if you’re a Berkshire Hathaway company.  So, he gets some calls that maybe others don’t.  Because they want to still run the business, they just don’t want to be bothered with the quarterly earnings and the investors hounding them over things all the time.

Steve Pomeranz: I wonder if their model was starting to age a little bit because they like to buy a lot of family owned and run companies.

Becky Quick: Yeah, yeah.

Steve Pomeranz: And families are aging out.  The founders are getting older and they may or may not be public, but I think there’s less of that.
So maybe it’s more with this idea of being a public company and not wanting to have to and wanting to be able to concentrate on the long term and not on the quarter to quarter results.

Becky Quick: And that probably happened also from the fact that, for Berkshire to move the needle, it’s got to be a bigger and bigger deal. And it’s hard to find family run companies that are of the ilk of something like a Burlington Northern, $20 million market cap or more.  They need deals that, they’re really looking for things that are $5 billion and north of it.  It’s not that they won’t buy things that are smaller, it’s just that it’s not going to really move the needle for Berkshire if you’re buying a bunch of $1 billion companies.

Steve Pomeranz: Well, I could spend another 20 minutes talking about this stuff, but, unfortunately, we are out of time.  Becky, you’ve been so gracious, speaking with-

Becky Quick: I love talking to you, thank you so much for taking the time, I really appreciate it.

Steve Pomeranz: Thank you so much, Becky Quick, co-anchor of Squawk Box.

And you can hear this conversation again and join our conversation at stevepomeranz.com.  Thank you, Becky, you’re so gracious.

Becky Quick: Steve, thank you.

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