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Buffett on 4 years underperforming S&P: 'You can buy an index fund, very low cost index fund and get those results. So unless we're delivering something better than those results over the years we aren't doing anything. It's true now that the real value of Berkshire is considerably greater than book value but year to year book value is not a bad tracking measure of how our intrinsic business value is. Generally speaking if the S&P has a big up year we're gonna fall short because they're 100% in stocks, we're a third in stocks, and then we tax affect our gains so we take 35% off those gains as they occur. So we would expect to beat the S&P in a so-so year or a down year, we expect them to beat us in an up year, but our job is to beat them over time.' On 4-year underperformance: 'Both - it's a reflection of massive gains in stock market and how big Berkshire has gotten. We've still never had a five-year period when we fell short. We've had 43 consecutive five-year periods where we've won. But if the market is up this year any significant amount then our five-year record will get broken.'
On Heinz acquisition: 'Heinz makes sense because we've got a business we like and we've got a partner we like and we've got a price that I barely like. But we've got a great business and terrific partners. Jorge Paulo Lamont I've known for a dozen years - you couldn't find better business people and they are - they will do the work. We are a financing partner. And we hope to own Heinz 100 years from now. If you own great brands and you take care of them they're terrific assets.' Shows pragmatic view - business and partnership quality more important than perfect price, though he's honest he'd prefer cheaper entry.
Viewer asks if better to buy back Berkshire stock than buy Heinz at 20% premium. Buffett: 'Buying Berkshire up to 1.20x book we feel we're making significant money. In other words we feel the value of Berkshire is well over 120% of book. How much nobody knows. We can't get chances to buy $12 billion worth of Berkshire. We had that one piece from an estate that was 1.2 billion but that's a big piece. But one doesn't preclude the other - we could buy Heinz and we could buy our stock if it was in that 1.20 range. The surest way to make money is to buy your own dollar bills for 80 cents or 90 cents. Now it's not precise what that dollar bill is - whether our stock is worth 138 or 135% of book or some number I don't know. I just know it's worth more than 120. But if somebody walks in here I don't have to know whether they weigh 300 pounds or 350 pounds to know that they're fat. You don't have to be precise on these numbers. If we get chances to buy our stock at 1.20x book or less we will be buying. But if we get a chance to buy another Heinz we will do that too. One does not preclude the other.'
On sequester: 'I think it could go on for quite a while. The sequester in effect reduces the amount of stimulus to the economy.' On political gridlock: 'Congressional stasis is worse than it's ever been in my memory. TV cameras and 24/7 coverage has made it worse enormously. Television extension accentuates - somebody says "I won't give a dime on taxes" and then their constituencies hear those, are the people who vote in the next primary. So they get locked into positions. If you'd gone back to the Continental Congress they negotiated in private and they were not out there staking positions and saying I won't do this or I will do that. I don't think we'd have a Constitution if we'd had a bunch of television cameras out on the side and a whole bunch of people that couldn't speak for their constituencies. The way you get a deal made is if Obama and Boehner and presumably Reid and McConnell too - if they could actually go into a room, go up to Camp David or wherever it may be and hammer something out with the knowledge that once they hammered it out they could deliver their constituency. That's the way deals are made whether it's in labor negotiations, whether it's buying companies. It just isn't made by dealing with people who can't speak for their constituency.' Shows frustration with public grandstanding preventing actual negotiation.
On Fed balance sheet unwinding: 'I think it will be interesting when they get to the unwinding stage of the Fed's balance sheet. It's very easy to buy - you've got the Treasury issuing securities like crazy and you just sop them up. If you buy 85 billion a month and you just credit bank reserves. The Fed has about a trillion one or something of currency in circulation. You just put more currency in circulation but basically you credit bank reserves. So if you're gonna have three trillion of assets you need to create a trillion eight or trillion nine of bank reserves and they pile up and the banks get a quarter of a percent on it and they don't like it because they're losing money but they don't have good places to put out a lot of money now. When you start selling, at that point you start sopping up reserves and that's a much different action than buying. You saw just the whiff about two or three weeks ago - just the whiff of the fact they might start tightening up - stock market all over the world [reacted]. Everybody that manages money is waiting to catch the signal that the Fed will reverse course. I think they're on a hair trigger. I think the Fed will try to give little signals here and all of that but in the end there are an awful lot of people that want to get out of [positions].'
On unusual Heinz options activity day before announcement: 'We try to minimize who knows about it but you're always going to have - your lawyers know about it, our CFO is going to know about it, my assistant's going to know about it. And that's true with the other parties as well. In this particular case you had four investment banking firms, you had two commercial bankers, and you had people at our place, at 3G. So a lot of people end up knowing. That's why I like to push these things through as fast as possible. And obviously I will guarantee you that person that bought those options on Wednesday - I mean that is inside trading. I mean they're going to nail that guy and they should. We were doing great up to that point. If you looked at the Heinz stock behavior it did not outperform the market or anything. I thought we were going to get there. And even on that Wednesday the day before we announced the stock I believe was actually down. But that options trading clearly reflected somebody that knew something and it'll be very interesting to see who it is. We've never had anybody at Berkshire that all the deals we've had has been involved in insider trading.' On Sokol affair legal costs: 'More than I would like. We had our own legal bills, we had his legal bills, and it's not totally done yet. If I had to guess - I'm really guessing here - maybe four million dollars or something like that. I have not spoken to Dave Sokol for a couple years.'
On banks trading below tangible book like Bank of America and Citigroup: 'A bank that earns 1.3 or 1.4 percent on assets is going to end up selling above tangible book value. If it's earning six tenths of a percent or five tenths of a percent on assets it's not going to sell [at book]. Book value is not key to valuing banks. Earnings are key to valuing banks - you earn on assets. Now it translates to book value to some extent because you're required to hold a certain amount of tangible equity compared to the assets you have. But you've got banks like Wells Fargo and USB that earn very high returns on assets and they sell at a good price to tangible book. You've got other banks like maybe the two you mentioned that are earning lower returns on tangible assets and they're going to sell below book.' Shows focus on ROA as true driver of bank valuation, not accounting book value.
Advice for Tim Cook and Apple shareholders: 'I don't own any Apple stock and I haven't. I did talk to Steve Jobs a few years ago about what they did with the cash as we've talked about earlier. But the best thing you can do with a business is run it well. And if you run it well the cash will take care of itself. So the question is can Tim Cook do what Steve did and only time will tell on that. But I would not - if I were a shareholder - I would not be worried about what they do with the cash. I'd be worried about whether the next iPhone sells 100 million or 200 million units or whether they come up with something else and all of that sort of thing.'
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