Warren Buffett: I Missed The Boat On Google | May 8, 2017 | Summary and Q&A

Summary

In this interview, Warren Buffett reflects on the recent Berkshire Hathaway annual meeting and discusses a range of topics, including technology investments, the housing market, the economy, and Berkshire Hathaway's approach to business. Buffett also addresses questions about 3G and the political environment, as well as his views on the airline industry.

Questions & Answers

Q: What was Buffett's headline takeaway from the recent Berkshire Hathaway annual meeting?

Buffett's headline takeaway was that people continue to have fun at the annual meeting. He noted that shareholders come to the meeting expecting a good time and the company strives not to disappoint them.

Q: Despite not being a technology guy, Buffett spent a lot of time talking about technology investments at the annual meeting. Can he explain his interest in technology stocks like Apple and Google?

Buffett acknowledged that although he is not a tech expert and doesn't even own a smartphone, he was interested in certain technology investments. For example, he missed out on Google despite the fact that Geico, a Berkshire-owned company, was a heavy user of Google advertising. Buffett admitted that he should have had more insight into Google's potential, but he also highlighted that technology advancements and competition could have affected the company's future prospects.

Q: Why does Buffett feel more comfortable investing in Apple compared to Google or Amazon?

Buffett explained that Apple's stock was more reasonably priced at the time Berkshire bought it and the company was already doing well in terms of current earnings. He believed that Apple didn't necessarily have to do a lot better in the future to justify its valuation. On the other hand, companies like Google and Amazon were priced for their future potential, which made it harder for Buffett to invest at higher valuations.

Q: Can Buffett provide some insights into the value and benefit of Google's search ads?

Buffett highlighted the value of Google's search ads, mentioning that Geico used them extensively. He explained that Geico was paying around $10 or $11 per click, which was a good deal considering there were no costs of goods sold associated with the ads. He recognized that Google's search ads were an extraordinary business, almost like a natural monopoly, given the convenience and usefulness they provided to users.

Q: Did Buffett have any insight into the missed opportunity with Google, given that the founders came to see him before the company took off?

Buffett acknowledged that the founders of Google had indeed visited him prior to the company's success. However, he admitted that he missed the opportunity to invest. While he liked the founders, he didn't fully grasp the potential of Google's technology and the market dynamics that could have affected its success.

Q: Why doesn't Buffett buy Google now, given that he believes in its value and potential?

Buffett explained that psychologically, it's harder to buy a stock at a higher price after passing on it at a lower price. He acknowledged that if he were forced to buy or short Google, he would buy it, just like he would with Amazon. However, buying a stock at a higher valuation than he initially evaluated often leads to hesitation. Buffett emphasized that it's generally not a good idea to wait for a stock to reach a previous lower price before purchasing it.

Q: Are people always willing to pay a high price for smartphones or will prices eventually come down?

Buffett recognized that prices for smartphones can eventually come down if there's intense competition or if companies don't keep adding value to their products. However, he also pointed out that people don't choose smartphones solely based on price. The loyalty and preference for certain brands, like Apple, can create a significant price inelasticity, as consumers are willing to pay a premium for the product they trust and find valuable.

Q: Can Buffett discuss the performance of IBM's Watson and its relationship to Berkshire's stake in IBM?

Buffett clarified that the sale of Berkshire's stake in IBM was not related to the performance of IBM's Watson. He highlighted that Watson has shown promise and is being used in different areas like healthcare, HR, and legal services. However, Buffett noted the importance of assessing whether Watson's AI capabilities can effectively replace human labor and generate significant value. He also acknowledged the potential for other companies creating similar products that might compete with Watson.

Q: Will Watson's success threaten human jobs and result in reduced employment opportunities?

Buffett agreed that if Watson, or any similar technology, replaces human labor in a significant way, it could have a lot of value. He explained that machines don't ask for higher wages, don't require healthcare, and don't need specific benefits like humans do. However, Buffett cautioned that the threat to human jobs is not solely determined by technology but also by other competitive factors. He emphasized that the greatest value in AI like Watson could come from entirely new forms of information that humans are incapable of accessing or processing effectively.

Q: Is Buffett concerned about the potential risks associated with artificial intelligence, as demonstrated in movies like "2001: A Space Odyssey"?

Buffett revealed that while he has sat in the same room with AI systems like Watson, he doesn't trust them completely. He jokingly mentioned that he keeps an eye on Watson during their interactions. He also shared conversations with experts in the field of artificial intelligence who have differing opinions on its potential risks and benefits. While acknowledging the potential concerns, Buffett emphasized that current AI systems are still far from achieving true human-level intelligence.

Q: Can Buffett provide his perspective on the impact of the French election on the markets?

Buffett expressed that he doesn't pay much attention to specific election results when it comes to making investment decisions. He pointed out that in his experience, market reactions to election outcomes can be unpredictable, citing the example of the market reacting negatively to Trump's election initially but rebounding quickly. Buffett emphasized that he has never made stock trades based on GDP figures or election results, focusing instead on the long-term value of businesses.

Q: How does Buffett view the current state of the U.S. economy?

Buffett stated that the U.S. economy has been growing at a rate of around two percent since 2009. He explained that quarterly GDP figures can be influenced by various factors, such as data collection methods and the relationship between quarters, which makes them less significant to him. He noted that the figures may not accurately reflect the actual state of the economy and may be subject to revisions. Overall, Buffett did not view the 0.7% GDP growth in the first quarter as a cause for concern.

Q: What insights does Buffett gain from the businesses he owns, such as the railroad industry and housing market?

Buffett explained that by owning various businesses, such as railroads and housing-related companies, he can assess the health of those industries through their performance. Examples include rail freight volume, coal shipments, and sales in the housing market. He acknowledged that railroads have significantly improved their productivity but have reduced the number of employees over time. In the housing market, he noted positive trends, such as increased sales and improvements in related industries like furniture and flooring.

Q: In the current political environment, how does Buffett respond to concerns about layoffs associated with 3G's approach to streamlining businesses?

Buffett acknowledged that there can be political reactions to layoffs, especially in companies where 3G has implemented workforce reductions. He emphasized that productivity gains are essential for societal progress and often require streamlining operations and reducing excess workforce. Buffett recognized the pain caused to those affected by layoffs but stressed the importance of taking care of individuals who may lose their jobs due to productivity improvements. He highlighted the need for society to support and ensure the well-being of these individuals.

Q: Will 3G's zero-based budgeting model put pressure on other Berkshire-owned companies, such as Coca-Cola, to adopt similar cost-cutting measures?

Buffett acknowledged that 3G's zero-based budgeting approach has been successful in achieving efficiency gains in the companies it owns. He noted that Coca-Cola has already announced job reductions at its headquarters to reflect a more cost-effective and productive organization. Buffett believed that companies, even those performing well, should always strive to have the right number of people necessary to achieve their objectives. He emphasized the importance of productivity in capitalism and the need to avoid unnecessary excess workforce.

Q: How do Berkshire-owned consumer businesses, such as Nebraska Furniture Mart and See's Candies, perform in the current environment?

Buffett highlighted the positive performance of Berkshire's consumer businesses, mentioning that Nebraska Furniture Mart, for example, has shown decent gains. He explained that the housing market has been improving, resulting in increased furniture sales. Similarly, See's Candies and Dairy Queen have done well, reflecting positive consumer sentiment and spending. However, Buffett noted that some of Berkshire's companies have room for improvement in terms of efficiency and eliminating inefficiencies.

Q: What are Buffett's thoughts on the airline industry as Berkshire holds significant investments in major airlines like United?

Buffett acknowledged Berkshire's large investments in the airline industry, including United. He noted that he has taken more commercial airline flights than most people, dismissing the idea that he doesn't understand or experience the airline industry. However, he implied that his personal experiences alone don't necessarily provide deep insights into the industry's dynamics and performance. He didn't offer specific comments on the airline industry's prospects and instead emphasized the importance of monitoring the companies' financial performance.