Warren Buffett & Bill Gates: Private Jets, Markets, and Investment Wisdom from Berkshire Hathaway 2013 Meeting

Warren Buffett discusses NetJets' operations during the Berkshire Hathaway annual meeting weekend, which saw 25% more private jets than the previous year. He reflects on how flying hours dramatically declined during the 2008 financial crisis as wealthy individuals 'felt poor' despite maintaining their planes and vacation homes. NetJets CEO Jordan Hansell reveals the company is up 55% in new owners year-over-year.

Buffett advises individual investors to pay more attention when markets cross milestones on the downside, not the upside. He recalls when the Dow crossed 100 in 1942 and emphasizes that American businesses will continue growing over time through retained earnings. He predicts viewers will see far higher market levels in their lifetimes and warns against trying to time the market based on current news.

Warren Buffett and NetJets CEO Jordan Hansell discuss the competitive advantages of the fractional ownership business. Despite dozens of competitors attempting to enter the market, NetJets maintains over 60% market share in the United States. They highlight differentiation through signature series aircraft like the Bombardier Global 6000 and Phenom, which were designed with NetJets input and offer unique features unavailable from competitors.

Buffett agrees with Bill Gross that bonds will eventually yield far more than current levels, though timing is uncertain. He strongly advises against traditional 40% bond allocations, stating bonds are 'terrible investments now' with the Fed buying $85 billion per month. He recommends investors hold enough cash to feel comfortable and put the rest in productive assets like equities, calling the standard bond allocation 'silly' at current prices.

Joe Kernan challenges Buffett on why he doesn't invest in major media companies like Disney, Comcast, or tech giants like Google and Facebook. Buffett explains he cannot predict which companies will perform best over 10 years in rapidly changing industries, preferring the predictability of ketchup and Coca-Cola. He notes that Todd Combs and Ted Weschler have invested in companies like DirecTV, Viacom, and Liberty Media, and while he feels conviction about IBM, it's less certain than consumer staples.

Buffett analyzes how media economics have shifted from distribution to content. When only three electronic highways existed (major networks), distribution was incredibly valuable and profit margins were fantastic. As distribution became ubiquitous, content became king. This explains why sports players now earn millions versus DiMaggio's $25,000, as widespread distribution magnifies the value of talent and content.

Buffett, who worked for JCPenney and has a rooting interest through Fruit of the Loom, expresses hope for the company's turnaround under Mike Ullman. He acknowledges they alienated a significant portion of their customer base over 18 months and notes that regaining momentum in retail against smart competitors doing smart things daily is very difficult. While hopeful, he recognizes the magnitude of the challenge ahead.

Buffett delivers clear investment guidance for individual investors wondering if they've missed the market rally. He emphasizes that nobody knows short-term market movements, but American business will do fine over long periods. He strongly opposes active trading and recommends owning a cross-section of American businesses at current prices, maintaining enough cash for comfort, and never worrying about daily or monthly fluctuations. He uses his farm as an example of profitable ownership without constant price quotes.

Discussing Charlie Munger's comparison of bankers to heroin addicts, Buffett explains how leverage is like heroin in finance. Because banks can issue government-guaranteed deposits, there's no market limit on leverage - they could theoretically have 100-to-1 leverage with FDIC guarantees. This enabled special purpose vehicles, derivatives, and massive portfolios at Freddie Mac and Fannie Mae. He argues government-backed entities particularly need regulation on leverage amounts.

Buffett reveals Berkshire has bought Wells Fargo stock every month in 2013, while selling some Moody's shares. He explains the disclosure advantage of owning less than 10% of a company - above that threshold, sales must be announced quickly, but below it, disclosure can be delayed. When pressed about continuing to sell Moody's, he deflects but notes they're selling at six times their purchase price.

Joe Kernan asks whether regulation or allowing failures would better discipline banks. Buffett points out the key problem: when banks failed, management stayed rich while shareholders lost 90% or more. CEOs of Freddie Mac, Fannie Mae, AIG, and major banks all departed wealthy despite needing bailouts. Because they could offer government-guaranteed deposits and leverage to the sky, he believes appropriate regulation of leverage is necessary rather than relying on failure to discipline behavior.

When asked if Berkshire's insurance businesses could pose systemic risk like AIG, Buffett distinguishes that Berkshire cannot issue government-guaranteed paper and has incredible resources relative to potential risks. He notes AIG's trouble came from derivative positions, and new collateral rules would have changed the outcome. While insurance companies are regulated by states rather than federal regulators, he doesn't believe another AIG-type crisis will come from insurance, predicting the next bubble will be something unexpected.

Andrew asks about inviting short seller Doug Kass to the annual meeting. With good humor, Joe points out the irony that Buffett invited someone shorting Berkshire stock after knowing they would report a 51% jump in net income. The exchange reveals Buffett's confidence and willingness to engage critics, though he jokes about not giving Kass a million dollars for participation.

Bill Gates discusses the overarching question of interest rate movements, noting equities look good relative to bonds currently but timing is uncertain. He observes the unique situation where multiple countries simultaneously pursue low interest rates and currency weakening to stimulate economies. Unlike historical periods between World Wars, countries are fighting each other with weakening currencies, with the EU having given up that tool altogether. He emphasizes it's easier to predict rates will rise substantially than to predict currency movements.

On the three-year anniversary of the flash crash, Becky shares Charlie Munger's view that high frequency trading is 'legalized front running.' Both Buffett and Gates agree, with Buffett stating it contributes nothing to capitalism. However, they emphasize that for buy-and-hold investors, these frictional costs are minimal over many years. The flash crash didn't hurt long-term investors, and the stock market remains very inexpensive to operate in compared to real estate or other assets unless investors trade frequently.

Bill Gates explains the importance of executive sessions where the CEO leaves the room, calling it a great improvement in board governance. The Berkshire board discusses whether Warren is the right person, doing the best job possible, and how to support him differently. They've discussed topics like security and health. Gates emphasizes the board's fiduciary duty to provide an independent voice and evaluate CEO performance, even when that CEO is uniquely wise and knowledgeable about the company.

Joe Kernan asks Bill Gates about Microsoft's future given tablet competition and declining PC sales, noting Microsoft still generates $80 billion in revenue. Gates describes the cloud as a gigantic opportunity enabling previously impossible computing capabilities. He explains Windows 8 as revolutionary because it combines tablet portability with PC richness, allowing devices like Surface to offer keyboard functionality and Microsoft Office that iPad users lack.

Andrew asks Gates about comparisons between Apple's trajectory and Microsoft's slower growth period. Gates observes that tech leaders are always questioned about whether they've peaked, and more often than not, people are wrong - until eventually they're right. He identifies amazingly strong companies including Apple, Google, Microsoft, and rising competitors like Amazon, Facebook, and Samsung. He emphasizes that deep software capabilities on both client and services sides, especially for businesses (Microsoft's strength), create great profitability dynamics.

Gates describes China as uniquely challenging for software companies, with piracy rates over 10-to-1 versus the United States and 4-to-1 versus India in terms of payment per product used. Unlike other markets where piracy is mainly a consumer and small business issue, China has significant piracy in government institutions, state-owned enterprises, and large businesses. While the trend is improving, progress is fairly slow, requiring constant dialogue with companies and government about compliance.

Becky highlights Berkshire's dramatic transformation, noting that four of its five biggest non-insurance businesses were acquired since Bill Gates joined the board in 2004. Warren confirms they've gone from one business earning under $400 million pre-tax to five making over $10 billion, representing a fundamental transformation from stock trading to wholly-owned businesses. Gates sees this shift as creating more enduring value through amazing business franchises.

Both Gates and Buffett express optimism about immigration reform, with Gates highlighting two key issues: high-skilled worker visas (where the Gang of Eight proposal looks good) and the injustice of undocumented youth unable to access scholarships or opportunities. They dismiss concerns that the Boston bombing would derail reform, calling it illogical to extrapolate one case to all immigration policy. Buffett suggests both parties now have self-interest in passing reform, with Republicans scared of losing more minority votes.

Both Buffett and Gates strongly support requiring online retailers to collect sales tax, calling the current system very unfair to physical stores. Gates emphasizes it's good for state budgets and competitive fairness. Buffett describes the unfairness of customers examining items in Omaha stores then ordering out-of-state to avoid sales tax, saying the differential cost advantage is unjust to local merchants.

Joe asks about bioethics and technology, referencing Chinese scientists combining bird and swine flu. Gates describes bioterrorism as potentially worse than nuclear bombs, with the right genetic construct - intentional or unintentional - capable of massive damage. He explains the scientific debate over whether researchers should study mutations that make flu worse for early detection, versus not creating such information that could be misused. Buffett notes spending significant money on preventing nuclear, chemical, and biological weapons from reaching those who wish harm, calling biological threats currently more dangerous than nuclear.