Warren Buffett & Charlie Munger: CNBC Squawk Box Interview (2014 Berkshire Annual Meeting)

Warren Buffett discusses the record-breaking 2014 Berkshire Hathaway annual meeting with 38,000-40,000 attendees, the largest ever by at least 3,000-5,000 people. The Nebraska Furniture Mart does over $40 million in sales during the shareholder weekend, which equals a normal month's worth of business compressed into one week.

Discussion of the 10-year Treasury yield at 2.57%, lower than most expected. Buffett acknowledges he's "no good on interest rates" but is certain rates won't be at current levels in ten years. He states that Berkshire doesn't react to macro factors and their guiding principle is that the country will do better over time.

Buffett provides a candid discussion of how corporate boards actually function versus academic theory. He explains that boards are part business and part social organizations, and that compensation committee recommendations are virtually never voted down. He describes the social dynamics that make it difficult for directors to oppose multiple items without becoming ineffective.

Buffett tells a memorable story about a board meeting where one director spoke up against a major acquisition deal that was already greased to go through. Once the first director objected, others joined in what became a "belching contest," ultimately stopping the deal despite momentum and press already assembled.

Buffett discusses the highly successful partnership with 3G Capital on the Heinz acquisition. He expresses deep admiration for Jorge Paulo Lemann and his associates' operating abilities, noting that Berkshire would not have done the Heinz deal alone at that price. He expresses enthusiasm about doing more big deals together.

Buffett defends GM CEO Mary Barra who inherited the ignition switch crisis, stating she's handling a mess not of her own making. He emphasizes there's nobody better to handle the situation, though he acknowledges such problems take a long time to resolve.

Buffett explains why the Bank of America regulatory capital miscalculation of $4 billion did not concern him as a major shareholder. He clarifies that it didn't affect GAAP net worth or earnings, and that changing Berkshire's preferred from cumulative to non-cumulative actually adds $5 billion to regulatory capital.

Discussion of Pfizer's proposed acquisition of AstraZeneca partly motivated by tax inversion benefits. Buffett argues against punitive measures like exit taxes, predicting any attempt at revenue-neutral corporate tax reform would trigger massive lobbying battles. He suggests companies already paying low rates will fight increases harder than beneficiaries will push for change.

Buffett defends Berkshire's investments in wind farms and other tax-advantaged projects, explaining that while they're not economically feasible without tax breaks, Congress deliberately created these incentives to encourage renewable energy and low-income housing. He distinguishes between using existing tax law versus lobbying for special advantages.

Charlie Munger joins the conversation and discusses the 50-year partnership with Buffett. They share the story of their first meeting when Buffett was 29 and Munger was 35, bonding over humor and intellectual curiosity. Munger describes them both as "natural wise asses" and explains their shared love of ideas and teaching.

Breaking news of Target CEO Greg Steinhaffel's immediate resignation following the massive data breach and troubled Canadian expansion. Buffett and Munger discuss their extensive retail experience and failures, with Munger suggesting data breaches are increasingly likely and not necessarily the CEO's fault.

Munger and Buffett discuss corporate tax reform proposals like Simpson-Bowles which suggested a 28% rate. Munger argues the economy might work better with lower corporate taxes and higher consumption taxes, citing successful examples from Hong Kong and Lithuania. They debate whether disclosure of different companies' effective tax rates creates fairness pressure.

Discussion of economist Thomas Piketty's work on wealth inequality and capital. Buffett and Gates note that their fortunes represent first-generation wealth showing system dynamism. Buffett explains how estate taxes address Piketty's concerns and clarifies that wealthy individuals can choose dynastic wealth, philanthropy, or government bequests.

Charlie Munger delivers a scathing critique of high-frequency trading in response to Michael Lewis's book Flash Boys. He states HFT firms have cleverly obtained advantages that do civilization no good, comparing them to "letting a lot of rats into a granary."

Munger expresses his contrarian view on energy policy, arguing against exporting oil and for using it more slowly. He believes oil is "utterly precious" like Iowa's topsoil and prefers suffering now to make the future better. Buffett agrees from a 500-year perspective, preferring to use other countries' energy while maintaining enough for national defense.

Final discussion on whether stocks are expensive at new highs. Gates says equities are still a bargain relative to interest rates. Munger suggests stocks may not do quite as well as the past 100 years under the "new normal" but won't sell. Buffett states stocks are in a "zone of reasonableness" and clearly preferable to 30-year bonds.