Warren Buffett On NetJets & The Economy | May 6, 2013

TL;DR

Private-jet activity was recovering as wealthy customers flew more often and new NetJets ownership increased, signaling greater economic optimism after the sharp behavioral pullback of 2008. Buffett argued that temporary downturns do not undermine a sound long-term business, while retained corporate earnings and national growth should drive stock markets higher over time.

Transcript

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Key Insights

• Private-jet usage is a sensitive indicator of confidence among wealthy consumers. NetJets customers sharply reduced flying during the 2008 downturn despite already owning aircraft fractions and continuing to pay management fees, then increased their activity substantially as economic conditions and personal confidence recovered.
• The 2008 decline in private flying reflected a feeling of lost wealth rather than simple embarrassment about visible luxury. Buffett observed that very rich customers changed their behavior significantly even though they still possessed planes and vacation homes, showing that perceived wealth can influence spending independently of actual ownership.
• NetJets activity was recovering through both greater use and customer acquisition. Existing program participants were flying more often, while first-time ownership was up 55 percent year over year, according to the interview, providing two distinct sources of growth for the fractional aircraft business.
• Major events can create exceptionally concentrated demand for private aviation. NetJets recorded its highest level of flights into and out of Omaha for that year's Berkshire Hathaway meeting, while the combined meeting and Kentucky Derby weekend ranked near the company's busiest periods.
• Economic cyclicality does not automatically make a business unattractive over time. Buffett compared NetJets with BNSF, whose carloads fell from a peak of 219,000 to 152,000, and argued that temporary declines are a normal part of owning businesses exposed to major recessions.
• NetJets' competitive position is based on operational breadth, service, safety precautions, and differentiated aircraft. Buffett said numerous companies had entered fractional ownership, but competitors could not match those qualities, while NetJets maintained a United States market share in the low 60s.
• Signature Series aircraft are designed to distinguish NetJets from conventional airline service and competing fractional offerings. The displayed Phenom and Global 6000 incorporated substantial input from NetJets personnel, supporting management's claim that its aircraft experience was not interchangeable with standard airline travel.
• Long-term stock appreciation is supported by retained corporate earnings and national economic growth. Buffett compared retained earnings to leaving part of the interest in a savings account, arguing that investors should worry less about a particular market level and pay more attention when falling prices make stocks cheaper.

Questions & Answers

Q: Why did wealthy NetJets customers fly less in 2008?

Wealthy NetJets customers reduced their flying sharply in fall 2008 because they felt poorer as the downturn unfolded. Buffett did not think the main cause was embarrassment about stepping off a private aircraft. Many customers still owned aircraft fractions, paid monthly management fees, and retained vacation homes, yet their behavior changed significantly because their sense of financial security had weakened.

Q: How did NetJets activity reflect the economic recovery?

NetJets saw existing owners fly more hours and attracted substantially more first-time participants. Management reported record flights into and out of Omaha for the Berkshire Hathaway meeting and said new owners were up 55 percent year over year. The company connected this activity to an improving economy, greater optimism, and customers seeking an efficient way to attend major events.

Q: Was private-jet traffic higher at the Berkshire Hathaway meeting?

Private-jet traffic appeared materially higher during that year's Berkshire Hathaway annual meeting. Bill Gates estimated from the runway activity that the number of private jets was about 25 percent above the previous year, and NetJets management said that estimate was in the ballpark. The company also reported a record number of its own flights into and out of Omaha for the meeting.

Q: Why did Buffett still consider NetJets a good business?

Buffett considered NetJets a good long-term business even though it could not be insulated from a major economic downturn. He argued that cyclical declines are part of business ownership and compared private aviation with other Berkshire operations that also contracted during the recession. A temporary reduction in demand did not, in his view, eliminate the company's enduring competitive strengths or future opportunity.

Q: What competitive advantages did Buffett identify at NetJets?

Buffett identified NetJets' broad operation, service quality, and safety precautions as important advantages that competitors could not easily match. He said many companies had entered the fractional ownership field, but some had subsequently left it. NetJets maintained a United States market share in the low 60s, which management said had remained steady for some time.

Q: How did NetJets differentiate its Signature Series aircraft?

NetJets differentiated its Signature Series aircraft through designs completed with heavy input from the company's own personnel. Management contrasted this approach with airline travel, where customers might board the same aircraft model across different carriers. The displayed fleet included a Phenom holding seven people and a Global 6000 holding up to 13, with eight Signature Series aircraft then in the fleet.

Q: What did Buffett say investors should do when markets fall?

Buffett said investors should pay more attention when market milestones are crossed on the downside because stocks are becoming cheaper and effectively going on sale. He observed that people tend to become more excited when markets reach new highs, but he did not view any particular index level as decisive. His emphasis was on price, long-term business growth, and patient ownership.

Q: Why did Buffett expect stock markets to rise over time?

Buffett expected markets to reach much higher levels over time because American companies retain part of their earnings and the country continues to grow. He compared retained earnings with leaving part of the interest inside a savings account, allowing the balance to compound. Because shareholders do not receive all corporate earnings as dividends, the retained portion can build business value over time.

Summary

In this video, Warren Buffett talks about private jets, the stock market, and various investment strategies. He discusses the recent increase in private jet usage and suggests it is a reflection of the improving economy. Buffett shares his thoughts on the stock market, emphasizing the importance of a long-term perspective and the unpredictability of short-term market movements. He also discusses his investments in companies like Wells Fargo and Moody's, and his views on the future of the media industry. Buffett expresses his support for J.C. Penney and offers insights on the risks of leverage in the banking industry. He concludes by addressing questions about Berkshire Hathaway's investments and the role of regulation in preventing future financial crises.

Questions & Answers

Q: What is the reason behind the increase in private jet usage?

According to Warren Buffett, the increase in private jet usage is likely a result of the improving economy and people feeling more optimistic about their financial situation.

Q: Why did private jet usage decline during the 2008 financial crisis?

During the 2008 financial crisis, even wealthy individuals cut back on their private jet usage due to the overall economic downturn. Despite still being financially well-off, many people felt a significant change in their behavior and reduced luxury expenses like private jet travel.

Q: Have private jet usage levels returned to pre-crisis levels?

Warren Buffett states that private jet usage has significantly recovered since the 2008 financial crisis but does not provide specific information on whether it has returned to pre-crisis levels.

Q: What is the advantage of owning a private jet rather than using chartered services?

Owning a private jet provides convenience and flexibility, allowing individuals to fly whenever and wherever they want without relying on the availability of charter services. Additionally, owning a jet allows for a customized interior and the ability to personalize the aircraft to one's preferences.

Q: As an investor, what do you think about the current state of the stock market?

Warren Buffett advises against trying to predict short-term market movements or buying and selling stocks based on current news. He believes that over the long term, American businesses will do well and that owning a cross-section of these businesses can be a profitable investment strategy.

Q: Do you think the stock market will continue to reach new highs?

Warren Buffett expresses confidence that the stock market will continue to reach new highs in the future. He believes that the value of American businesses will grow over time, resulting in higher stock prices.

Q: What are your thoughts on investing in media companies like Disney, News Corp, and Time Warner?

Warren Buffett acknowledges the potential of the media industry but admits that he does not have sufficient knowledge to make specific investments in companies within that sector. He emphasizes the unpredictability of individual companies' performance and prefers to stick with investments in companies he understands well, such as Coca-Cola and Heinz.

Q: Should individual investors be concerned about the recent market highs and the possibility of missing out on future gains?

Warren Buffett advises individual investors to focus on the long-term growth potential of stocks rather than worrying about short-term market movements. He suggests paying attention to opportunities when stocks become cheaper and being patient for the overall growth that occurs over time.

Q: How do you determine the percentage of stocks and bonds in a portfolio?

Warren Buffett recommends having a significant portion of a portfolio in equities and productive assets. He believes that stocks retain earnings and increase in value over time, making them a better investment choice compared to fixed dollar investments like bonds.

Q: What is your perspective on JC Penney's current situation and prospects?

While Warren Buffett is not directly involved with JC Penney, he expresses his hope for the company's success. He acknowledges that they faced challenges in alienating part of their customer base and believes that retailing is a tough industry. However, he believes that the current management team can make a positive impact and turn the company around.

Q: Should insurance companies be subject to stricter regulation to avoid potential financial crises?

Warren Buffett acknowledges that insurance companies are regulated but believes that stricter regulations may be necessary to prevent excessive leverage and risky practices. He points out that insurance companies are not backed by the government to the same extent as banks and therefore, there is less need for systemic regulation.

Q: Can insurance companies pose risks similar to those of banks?

Warren Buffett explains that insurance companies, in general, have less potential to create systemic risks because they do not have access to the same level of leverage as banks. However, he acknowledges that individual insurance companies can still have risky business practices and fail if managed recklessly.

Q: Should investment banks and other financial institutions have limits on leverage?

Warren Buffett believes that it is appropriate to regulate the leverage of banks and financial institutions to prevent excessive risks in the system. He highlights the dangers of becoming addicted to leverage, similar to how bankers become addicted to the use of leverage.

Q: What are some risks associated with excessive leverage in the financial sector?

Warren Buffett explains that excessive leverage allows institutions to take on more risk and create potential problems for the overall system. When leverage is used in conjunction with government guarantees or implicit backing, it becomes even more dangerous as it can lead to reckless behavior and the expectation of a bailout.

Q: How do you respond to the criticism that Berkshire Hathaway's investments contribute to the systemic risks in the market?

Warren Buffett argues that Berkshire Hathaway does not contribute to systemic risks in the market because it does not issue government-guaranteed paper or have excessive leverage. He highlights the size and stability of Berkshire Hathaway's resources, making it unlikely to pose significant risks to the system.

Q: What advice do you have for individual investors in the stock market?

Warren Buffett advises individual investors to have a long-term perspective, focus on owning a cross-section of American businesses, and avoid trying to time the market or make short-term trading decisions. He emphasizes the importance of patience and confidence in the long-term growth of the stock market.

Takeaways

Warren Buffett believes that private jet usage has increased due to the improving economy. He advises investors to focus on the long-term growth potential of stocks rather than short-term market movements. Buffett supports J.C. Penney and hopes they can turn their business around. He advocates for regulations to limit excessive leverage in the financial sector and acknowledges the risks associated with unregulated leverage. Buffett encourages individual investors to have a long-term perspective and to consider owning a cross-section of American businesses for long-term success in the stock market.

Summary & Key Takeaways

• NetJets experienced record flight activity around the Berkshire Hathaway annual meeting, with private-jet traffic estimated to be roughly 25 percent higher than the prior year. Management attributed the increase to an improving economy, stronger optimism, existing customers flying more frequently, and substantial year-over-year growth in first-time owners joining the program.

• Buffett recalled that private flying fell dramatically in fall 2008, even among customers who already owned aircraft fractions, paid monthly management fees, and maintained vacation homes. He believed these very wealthy customers reduced activity because they felt poorer, not primarily because they feared appearing extravagant, demonstrating how sentiment can rapidly change consumer behavior.

• Buffett described NetJets as a durable long-term business despite its exposure to recessions. He emphasized its broad operation, service, safety practices, differentiated aircraft, and market share in the low 60s. He also advised investors to focus on falling markets as buying opportunities and expect long-term growth from retained earnings and economic expansion.