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2010-05-26 FCIC interview of Warren Buffett


doughishere
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This is just fascinating stuff.

 

The audio: http://fcic.law.stanford.edu/interviews/view/19

 

The Transcript is attached.

 

 

Buffett doesnt get enough credit....that dudes a lion.

 

MR. BONDI:  Okay.  What kind of due diligence did you and your staff do when you first purchased    Dun and Bradstreet in 1999 and then again in 2000?

 

MR. BUFFETT:  Yes.  There is no staff.  I make all the investment decisions, and I do all my own analysis.  And basically it was an evaluation of both Dun and Bradstreet and Moody’s, but of the economics of their business.  And I never met with anybody.  Dun and Bradstreet had a very good business, and Moody’s had an even better business.  And basically, the single-most important decision in evaluating a business is pricing power.  If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.  And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business.  I’ve been in both, and I know the difference. 

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MR. BUFFETT:  It didn’t cause it, but there were a vast number of things that contributed to it.  The basic cause, you know, embedded in psychology –- partly in psychology and partly in reality in a growing and finally pervasive belief that house prices couldn’t go down and everyone succumbed –- virtually everybody succumbed to that.  But that’s –- the only way you get  a bubble is when basically a very high percentage of  the population buys into some originally sound premise and –- it’s quite interesting how that develops –- originally sound premise that becomes distorted as time passes and people forget the original sound premise and start focusing solely on the price action. 

So every -– the media investors, the mortgage bankers, the American public, me, my neighbor, rating agencies, Congress –- you name it -– people overwhelmingly came to believe that house prices could not fall significantly.  And since it was biggest asset class in the country and it was the easiest class to borrow against, it created probably the biggest bubble in our history.

 

It will be a bubble that will be remembered along with the South Sea bubble and the tulip-bulb bubble.

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MR. BUFFETT:  People were watching a movie and they thought the movie had a happy ending; and all of a sudden, the events on the screen started telling them something different.  And different people in the audience picked it up at maybe different hours, different days, different weeks.  But at some point,  the bubble popped and it, for different people, they were seeing it at slightly different times. 

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Yeah, this is good stuff.

 

MR. BONDI:  Now, earlier you referenced the GSEs and it’s been reported than in 2000 you sold nearly all of your Freddie Mac and Fannie Mae shares.  What persuaded you in 2000 to think that those were no longer good investments?       

 

MR. BUFFETT:  Well, I didn’t know that they weren’t going to be good investments, but I was concerned about the management at both Freddie Mac and Fannie Mae, although our holdings were concentrated in Fannie Mac.  They were trying to -– and proclaiming that they could increase earnings per share in some low double-digit range or something of the sort.  And any time a large financial institution starts promising regular earnings increases, you’re going to have trouble, you know?

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MR. BUFFETT:  Well, there was a failure of everybody, in one sense.  But the biggest failure is that they were unable to act contrary to the way humans act in these situations.  I mean, you could say regulation about their screaming about the fact you people are doing foolish things.  And, sure, regulators could have stopped it.  If the regulators said -- or Congress could have stopped it -- Freddie and Fannie.  If Freddie and Fannie had said, you know, “We will only accept mortgages with 30 percent down payments, verified income, and the payments can’t be more than 30 percent of your income,” you know, that would have stopped it.  But, you know, who can do that? 

 

MR. BONDI:  Do you think that if Fannie --

 

MR. BUFFETT:  In fact, I think if you recommend that as a course of a future mortgage action, you better get an unlisted phone number.

 

lol

 

 

We will have other bubbles in the future.  I mean, there’s no question about it. 

I don’t think the President of the United States could have stopped it by rhetoric.  And I think any President of the United States had said, you know, “I am campaigning on a program of 30 percent down payments, verified income, and not more than  30…,” they might not have impeached him, but they sure as hell wouldn’t have reelected him.

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All of those investment banking franchises, I believe that the compensation structure was essentially minimum, 45 percent, and net revenues was getting paid out in comp, some years even higher. 

Any opinion on that structure? 

 

MR. BUFFETT:  I can tell you it’s very hard to change.  I was at Solomon.  And it -- the nature of Wall Street is that, overall, it makes a lot of money relative to the number of people involved, relative to the IQ of the people involved, and relative to the energy expended. 

They work hard, they’re bright, but they aren’t –- they don’t work that much harder or that much brighter than somebody that, you know, is building a dam some place, or a whole lot of other jobs. 

But in a market system, it pays off very, very big, you know.  And in effect, you know, boxing pays off very big now compared to what it did when the only auditorium you had was 25,000 seats at Madison Square Garden.  And now you’ve got cable television, and so you can put a couple of, you know, lightweights who you’ll never hear of again out on Pay-Per-View, and they’ll get millions for it now.

 

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Buffett is a really bad speaker but the omissions he makes are just startling.

 

 

That interview should be in business schools across the world.

 

 

Here's days of interviews..raw and uncut...im a little surprised I haven't thought about listening to these earlier...truly the fact that we can have these recoding is a significant thing...James grant I think would agree...listen to his interview....there's some telling stuff in here

 

 

https://fcic.law.stanford.edu/resource/interviews

 

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