Warren Buffett | Charlie Rose | November 13, 2009 | Summary and Q&A

Transcript

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Summary

Warren Buffett discusses the progress made in the American economy since the financial crisis and his recent acquisition of Burlington Northern Santa Fe railroad. He shares his views on the future of the economy, the importance of investing in essential businesses, the role of railroads in the country, and the need for a more savings-focused society. Buffett also addresses questions about the value-added tax, taxation of the wealthy, and the impact of excessive leverage and bubbles.

Questions & Answers

Q: What were your thoughts on the financial crisis of 2008-2009?

The crisis was an extraordinary time in the country, with the potential for a financial meltdown. The panic was so sudden and unexpected, causing the whole country to de-leverage. Fortunately, we had the right people in Washington, like Paulson, Bernanke, and Geithner, who responded effectively. If we had a group that behaved like a deer in headlights, the ending would have been far worse.

Q: Why did you acquire Burlington Northern Santa Fe railroad?

I saw it as an opportunity to buy a business that will be around for 100 or 200 years. The railroad industry is interwoven with the American economy and plays a vital role in moving goods efficiently and environmentally friendly. The United States will continue to prosper, and the railroads will be essential to the country's success.

Q: Did Charlie Munger support your decision to acquire the railroad?

Charlie gave it a low-level grumble, which I consider a real endorsement from him. He pointed out that it's a regulated and capital-intensive industry but acknowledged the importance of the service provided by railroads in moving goods around the country.

Q: What returns do you expect from the railroad investment?

I don't expect spectacular returns anymore. A reasonable return is good enough for me. We invest in essential businesses that are necessary for society, and while we should yield a decent return, we are not entitled to spectacular returns.

Q: How does the current shift away from coal affect the railroad industry?

We will gradually wean ourselves off coal, but it will take time. The rail industry is still responsible for moving a significant amount of goods, and there will always be a demand for such services. The industry will continue to evolve and adapt to new demands, such as the transportation of grain, chemicals, and other goods.

Q: Is the railroad industry modernizing?

Absolutely. Railroads, like Burlington Northern Santa Fe, have become far more efficient over the years. They are moving more tons of products with fewer people and less fuel. The industry has seen significant advancements and will continue to innovate.

Q: Can the railroad industry sustain its competitiveness?

Reproducing a railroad like Burlington Northern Santa Fe would require a massive investment, making it unlikely for anyone to enter the market. Additionally, the industry has modernized and will continue to adapt to changing demands. So, while there may be other modes of transportation, railroads will remain essential in the country.

Q: Shouldn't we be concerned about the level of leveraging in our economy?

Overleveraging can be dangerous, and we experienced the consequences of that during the financial crisis. However, lessons have been learned, and there will be more caution in leveraging moving forward. While bubbles and excessive leverage may still happen, the deeper the wounds, the longer the lessons learned will impact behavior.

Q: Will America become a more saving-focused society?

We may become a more saving-focused society, but the government's borrowing demands and the need for more revenues will still require borrowing. The government will need to find a balance between expenditures and revenues while also reducing the deficit to ensure sustainable long-term growth.

Q: Will consumer demand recover?

Consumer demand will eventually come back. While behavior has changed to be more cautious and risk-averse, the fundamental factors that drive the American economy have not disappeared. People's capacity to innovate and their desire for prosperity will lead to the creation of new businesses and expansion in the future.

Q: How will the deficit and debt impact the value of the dollar and the ability to attract debt buyers?

Continuously running fiscal deficits without addressing the gap between expenditures and revenues will have consequences. The rest of the world may become less enthused about buying US debt if they perceive fiscal policies to be out of control. The value of the dollar could decline, and the government may resort to monetizing debt, which would have inflationary effects.

Q: Are you concerned about the rising level of debt and deficit?

Running large deficits and increasing debt has consequences. If the debt keeps growing, the government will need to either pay more to roll over the debt or start monetizing it, which would lead to a devaluation of the dollar. Congress needs to find ways to close the gap between expenditures and revenues and ensure the sustainability of the country's fiscal position.

Q: Can the deficit and debt reach a point where people stop buying US debt, causing a crisis?

The rest of the world doesn't have many choices when it comes to investing their surplus dollars. If they decide not to invest in US government bonds, they may choose other assets. However, they can't choose not to invest in dollars. While there may be fluctuations in interest and preferences among different assets, the rest of the world will still need to invest their surplus dollars.

Q: Do you think America needs more taxation or a value-added tax?

I believe we need to find more revenues to address the fiscal deficit. However, I don't like the idea of a value-added tax because it is regressive. We need to be mindful of the fairness of our tax system and ensure that the burden doesn't fall disproportionately on certain groups.

Q: How do you view taxation of the wealthy?

I recognize that I pay a lower tax rate on dividends and capital gains than my cleaning lady does on her payroll tax. The system has become more geared towards the richest individuals over time, and there is a need to address the wealth disparity. We need to strike a balance between encouraging prosperity and ensuring a fair distribution of wealth.

Q: Will the American system become more unfair with the increasing influence of the wealthy?

The American system has become more geared towards the wealthy, especially with the increasing influence of money in politics. It's important to fight against plutocracy and ensure that the principles of democracy prevail. We need to find ways to share the prosperity and ensure that everyone in the country can benefit from the economic success.

Q: What rate of taxation is appropriate for the wealthy without inhibiting growth?

I have witnessed various taxation systems throughout my career, and I haven't seen higher taxes on the wealthy inhibit growth. The idea that people will stop investing because of higher taxes is unfounded. In fact, the rich have always worked hard, regardless of high tax rates. The market system brings out people's best talents, but we also need taxation to address economic disparities.

Q: Are there any concerns about the future of the American economy and its capacity to create jobs?

The American economy has faced challenges in the past, but we've always come back stronger. We've created millions of jobs after previous tough unemployment cycles. While it's hard to predict exactly what the future holds, we can be confident that the American economy will bounce back and people will continue to innovate and create new opportunities.

Q: Will the lessons learned from the financial crisis last?

The lessons learned from the crisis will have an impact on thinking for a while, especially as the wounds are deep. People may be more cautious and aware of the risks associated with excessive leverage. However, fear, greed, and folly are innate human emotions that won't change. We may get smarter in many ways, but emotionally, we're still susceptible to the same patterns.

Q: What do you worry about when it comes to the recovery of the American economy?

I worry about the occurrence of major exogenous events like a significant terrorist attack or a drastic oil price increase. Such events could disrupt the economy and hinder our recovery. However, barring such events, the American economy will come back and ultimately thrive due to its capacity for innovation and the drive for prosperity among its people.

Q: Are you concerned about the potential impact of rising debt and deficits on the value of the dollar?

Flooding the world with debt and having fiscal policies that are perceived as out of control can reduce enthusiasm for buying US debt. This could lead to the devaluation of the dollar. Congress needs to address the gap between expenditures and revenues to prevent further damage to the country's fiscal position.

Q: How do you feel about sharing the prosperity in America?

I support sharing the prosperity and ensuring that everyone benefits. A prosperous country should not solely benefit a few individuals. While a market system promotes prosperity, we need taxation and policies to address wealth inequality and ensure a fair distribution of wealth. The fight against a plutocracy is essential for democracy to succeed.

Q: How do you explain the enduring nature of greed and fear in the market system?

Emotional aspects like greed and fear are inherent in human nature and do not change. People may become smarter in various ways, but emotionally, we still fall into those patterns. We have to recognize those emotions and find ways to mitigate their influence in decision-making.

Q: Is the American system unfair and biased towards the rich?

The American system has become more biased towards the rich over time, particularly with the influence of money in politics. This imbalance needs to be addressed to ensure fairness and prevent a plutocracy. Wealth disparity should not be extreme, particularly in a country as prosperous as the United States.