Warren Buffett was interviewed for an hour by CNBC’s Becky Quick last week. He spent a good chunk of time during the interview sharing his thoughts on philanthropy, but he also discussed investing matters. In this article, I want to share my investing-related takeaways from Buffett’s latest interview. Before I get to it, I would like to thank my friend Thomas Chua for performing a great act of public service – Thomas posted a transcript of the interview at his excellent investing website Steady Compounding a few days after it happened.
The italicised passages between the two horizontal lines below are direct quotes from the interview.
1. Buffett initiated Berkshire Hathaway’s large position in Alphabet shares, even though Alphabet is laying out enormous capital expenditure for AI infrastructure, because he thinks Alphabet has a great chance of winning with their AI-related capital expenditure; Buffett thinks Alphabet is only ranked 5th or 6th in terms of the businesses he likes that are in Berkshire’s portfolio
[Warren Buffett] I initiated it, but I normally wouldn’t give you that answer on something like that, but I will, because I am not doing anything that he doesn’t approve of, and he’s not doing anything I don’t approve of…
…[Warren Buffett] The real question with Google, and all of its competitors now, is they’re all laying out hundreds of billions.
[Becky Quick] They’re big cap-ex spenders, the biggest.
[Warren Buffett] Yeah, and that’s real money. If our railroad were to lay out 300 million, or a billion, or 200 billion, that kind of money wasn’t even put into the railroad business, in terms of developing it. That’s the game they’re playing now. They won’t play that game with computer software.
[Becky Quick] So when they were asset light you didn’t like them, and the markets loved them. Now that they are spending heavily on cap-ex, a lot of shareholders don’t like them as much because they don’t…
[Warren Buffett] They’re more likely to be a winner, based on their record, than probably 90% or 95% of what will get merchandised through Wall Street, because Wall Street is only selling something…
…[Becky Quick] Why do you like Alphabet above all others, and what made you initiate this position? What was the eureka moment?
[Warren Buffett] I would say that I don’t like it as well as at least four or five other businesses that we own.
2. Buffett looks at buying shares and buying an entire company the same way – he’s analysing the quality of the underlying businesses
[Becky Quick] Okay, so you’re counting fully owned companies as well.
[Warren Buffett] We are always making the choice between whether we’ll buy marketable securities or the company. We look at it the same way. There are some minor exceptions, we can’t set dividend policy, for example, if we don’t own it, but the chances of those being material, the important thing is to buy a good business, and to buy it on the right terms, and then get the right person to run it.
3. A good business is one that can earn a high return on capital for a long period of time; American Express looks like a much better business than banks because it earns materially higher returns on capital while taking lower risk
[Warren Buffett] When I say a very good business, I mean something you can expect to earn high returns on capital over a long period of time…
…[Warren Buffett] So a good business is one that earns a lot more than the returns on essentially riskless investments, which you could define as Treasuries. But if you take something like American Express, most of the banks earn 13% or 14% on capital. If I asked everybody to guess what American Express would get, they would come up with some figure similar, but it’s so different, it earns 30% plus on capital, and does not incur more risk in doing so than the banks that earn 13% or 14%.
4. The key to investing is to find companies that can earn high returns on capital for a long period of time
[Warren Buffett] The trick in investing is to find businesses that are going to earn high returns on capital for an extended period of time, and that’s what happened with Berkshire for a long period of time.
5. Wall Street, to its detriment, often overlooks the internal rate of return a business earns
[Warren Buffett] I can’t recall a report on Wall Street that really gets into the internal rates of return that the business is actually earning. What’s more important is what a business is earning, but they ask all these questions about what will happen next quarter, and it’s ridiculous.
6. Buffett thinks the hyperscalers are all making AI-related capital expenditures not necessarily because they want to, but because they have to
[Becky Quick] But I’m talking about why Alphabet versus the other Magnificent Seven, or the other hyperscalers who are doing the same thing, spending a lot of money, Amazon, Microsoft, whoever it may be, to try and win in this position of AI.
[Warren Buffett] Well, I don’t want to sit around knocking the others. They don’t have any choice. They’re now playing a game, in many cases, that they don’t want to play. IBM would have loved it if they just kept playing the game IBM was playing in the ’30s, the ’40s, the ’50s, and the ’60s, and then somebody came along and said, we’ll get a better result for you, achieving the objective of all the customers you have, because that’s all you’re going to have, either happy customers or you don’t have customers, over time. The customer’s not dumb.
7. Wonderful businesses attract competition, and the key to investing is determining how long a wonderful business can stay wonderful
[Warren Buffett] But if you have a wonderful business, you are going to be subject to attack. So it’s not a question of whether it was wonderful yesterday, it’s the question of how long it is going to be wonderful.
8. Coca-Cola is currently entangled in a lawsuit with the US government over taxes which could have massive implications for American businesses
[Becky Quick] We talked about Coca-Cola briefly, the long time position you’ve held for more than 45 years. There is a major lawsuit with the government that could look at action, I believe, going all the way back to 1996 with Coca-Cola. The IRS has said that they owe them roughly $20 billion, of which they’ve paid…
[Warren Buffett] About $10 billion or so.
[Becky Quick] But we’re going to hear about whether the activities, and this has to do with their overseas business, some of the accounting that goes back and forth, Coca-Cola says they thought they had an agreement in 1996 that stood for how they should behave. The government’s now looking for more money and saying that’s not the case. It’s not just Coca-Cola that’s riding on this, so there’s a lot of other American businesses doing the same thing.
[Warren Buffett] A huge number, which is why the derivative effects of the suit could be the biggest in American history.
9. Buffett thinks the latest chair of the Federal Reserve, Kevin Warsh, is a good choice
[Becky Quick] But you think Kevin [Warsh] knows a lot and is a…
[Warren Buffett] A very, yeah, I think he was a good choice.
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