Warren Buffett | Heinz-Deal | March 4, 2013 | Summary and Q&A

Transcript

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Summary

In this special edition of Squawk Box, Warren Buffett, Chairman and CEO of Berkshire Hathaway, is interviewed by Becky Quick. They discuss various topics including Buffett's annual letter to shareholders, Berkshire's performance compared to the S&P 500, the Heinz acquisition, the sequester, the Fed's actions, and insider trading. Buffett provides insights into his investment strategies, the importance of price in buying stocks, and the role of management in Berkshire's businesses.

Questions & Answers

Q: How does Buffett measure the performance of Berkshire Hathaway?

Buffett regularly measures the performance of Berkshire by comparing the change in book value with the S&P 500 index with dividends added back. If Berkshire is not delivering better results than the index over time, they aren't doing anything. While the real value of Berkshire is greater than book value, year to year book value is a good tracking measure of intrinsic business value. Some years they may fall short of the S&P due to the difference in the number of stocks and tax effects on gains, but their goal is to beat the S&P over time.

Q: Why did Berkshire not make a major acquisition in 2012?

Buffett explains that they were disappointed in not making a major acquisition in 2012, but they followed up quickly with the Heinz acquisition. Heinz makes sense as a business Berkshire likes, with partners they trust, and at a price that Buffett finds acceptable. Buffett emphasizes the importance of having great partners and that they hope to own Heinz for a long time.

Q: Would it have been better for Berkshire to buy back its own stock instead of acquiring Heinz?

Buffett highlights that if they had the chance to buy Berkshire's stock at a lower price, they would definitely do so. He believes the surest way to make money is to buy your own dollar bills for less than their worth. While the exact value of Berkshire's stock is uncertain, Buffett is confident that it is worth more than 120% of its book value. If they had the opportunity to buy their stock at or below 120% of book value, they would do so, but it does not preclude them from making other acquisitions.

Q: What is Buffett's outlook on the sequester and its impact on the economy?

Buffett explains that the sequester reduces the amount of stimulus to the economy, but he believes that a 6% deficit of GDP in the fourth year of a recovery is still a fair amount of stimulus. While there may be short-term pain caused by the sequester, he believes that bringing down spending and increasing revenues is necessary to address the deficit. He acknowledges that it may be done in a "meat-axe" way, but the deficit needs to come down, and it may take a combination of approaches to achieve that.

Q: How does Buffett view the potential risks of unwinding the Fed's balance sheet?

Buffett explains that it is much easier to buy assets than to sell them, and he believes that getting to the unwinding stage of the Fed's balance sheet will be interesting. He highlights that the Fed is buying roughly a trillion dollars' worth of government-issued paper and creating bank reserves. When they start selling, it will be a different action, and the market's reaction will be noticeable. Buffett expresses his respect for Chairman Bernanke but emphasizes the challenges that may arise when unwinding the balance sheet.

Q: Has Berkshire taken any precautions to prepare for the unwinding stage of the Fed's balance sheets?

Buffett states that Berkshire has not done anything differently to prepare for the unwinding stage. He and Charlie Munger, Vice Chairman of Berkshire, have never considered macroeconomic factors in their investment decisions, and their focus is on finding the right businesses at the right price. Buffett acknowledges that having a substantial amount of cash on hand is important, but their investment decisions are not driven by macroeconomic considerations.

Q: Is Buffett worried about Berkshire becoming too diversified and having to sell off companies in the future?

Buffett explains that Berkshire is designed to have a group of businesses run by people who love and know how to run them. Each business has its own management, and their goal is to run their respective businesses, not Berkshire. Buffett believes that managers who love and know their businesses deliver the best results. Berkshire's businesses are not straying too far from their core operations, and they focus on providing good value to their customers.

Q: How does Berkshire prevent premature leaks of insider information during acquisitions?

Buffett acknowledges that it is important to minimize the number of people who know about potential acquisitions, but it is challenging to keep it completely confidential. During an acquisition, few people, including lawyers, auditors, CFOs, and assistants, are involved. Buffett prefers to push the deals through quickly to minimize potential leaks. He also mentions that any insider trading, such as the unusual options activity before the Heinz acquisition, should be penalized.

Q: What was the total legal bill to close the Sokol affair?

Buffett estimates that the total legal bill for the Sokol affair, where David Sokol was accused of insider trading, is around $4 million. Buffett mentions that the legal bills for Berkshire and Sokol have not been completely settled yet.

Q: Have Buffett and Sokol spoken since the Sokol affair?

Buffett states that he has not spoken to David Sokol for a couple of years.

Q: Is Buffett concerned about the increasing concentration of Berkshire's investments?

Buffett agrees that Berkshire has been investing a substantial amount of money, but he believes that they are still finding good value for their investments. He reiterates that buying great businesses for fair prices is more important than buying fair businesses at great prices. Berkshire's partnerships, like the one with 3G for Heinz, provide opportunities to leverage their investments globally. Buffett emphasizes the importance of having good management partners to run the businesses effectively.