Every February, famed value investor and Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) CEO Warren Buffett releases his annual letter to shareholders in conjunction with Berkshire's annual report. In the letter, Buffett lays out his thoughts on Berkshire's various operations and the markets in general.
Buffett usually also follows up the release of the annual report with a two-hour interview with CNBC's Becky Quick. In the interview, Buffett elaborates on issues brought up in the letter, plus much, much more in a more off-the-cuff manner -- even answering some rather pointed questions that may have been glossed over in the annual report.
Here are some of the highlights from this year's interview, which took place on Monday, Feb. 24.
Buying government bonds makes no sense
One of the more contentious issues of the day is whether stocks are overvalued, as their recent run-up (prior to the COVID-19 coronavirus outbreak) has markets near all-time highs. Though stocks may appear a bit expensive on a P/E basis, Buffett is still bullish on the stocks he owns.
"We own $240 billion worth of stocks now," he said. "We look at that as $240 billion worth of businesses that we own parts of. But -- I love owning those businesses."
Of course, Buffett is heavily into value stocks, especially bank stocks, which trade at a significant discount to the overall market. He also owns Apple (NASDAQ:AAPL), which, while it's had a big run, is still the cheapest of the large-cap FAANG stocks.
Most significantly however, stocks are still quite attractive when compared "risk-free" government bonds. In fact, U.S. government bonds are now yielding around 1.4%. Buffett explained why he thinks it's madness to by such a "safe haven" asset:
[I]t makes no sense to lend money at 1.4% to the U.S. government when it's government policy to ... have 2% a year inflation. I mean ... the government is telling you, 'We're gonna give you 1.4% and tax you on it. And on the other hand, we're gonna presumably devalue that money at 2% a year.' So these are very unusual conditions.
In contrast to little-yielding treasuries, even an "expensive" growth stock trading at, say, a price-to-earnings ratio of 33 gives investors an earnings yield of 3% -- twice that of government bonds. If part of a good, well-managed company, that 3% is likely to grow a lot, tax-free, until an investor sells.
He would vote for Bloomberg over Sanders, but shares some of Sanders' broader goals
As one of the world's most famous capitalists who is also a Democrat, some may wonder what Buffett thinks of Bernie Sanders' ascension in the Democratic primary. Buffett says he doesn't support Sanders' specific policies, but he says he does sympathize with his desire to fix income inequality in America: "I'm ... very much in sympathy with the fact that Senator Sanders believes that a lot of people are getting left behind and through no fault of their own. And there's all kinds of aspects of capitalism that can -- need in some ways to be -- regulated, but I don't believe in giving up the capitalist system."
Later in the interview, he went on to say, "But -- if given a choice, I would -- certainly vote for Mike Bloomberg as opposed to Sanders."
He finally got an iPhone
Berkshire owns a huge 5.5% of Apple, which is practically tied with Microsoft (NASDAQ:MSFT) as the largest stock in the world today by market capitalization. Though Berkshire owns higher percentages of other businesses, Apple is its largest public stock holding, and that 5.5% stake makes it Berkshire's third-largest business behind Berkshire's insurance operations and BNSF railroad.
Though Buffett has a huge amount at stake in Apple's stock, he has been famously curmudgeonly when it comes to technology in his personal life. In fact, Buffett has been using a flip phone instead of a smartphone for years.
That is, until recently. Buffett made the announcement on CNBC yesterday that he had finally scrapped his flip phone for an iPhone. Attendees of the upcoming Berkshire Hathaway annual meeting may get an entertaining look at the big transition for the 89-year-old:
I'm using the latest model. And ... I'll give you a little preview of our movie for the annual meeting -- we haven't done it yet. But we'll probably show me crushing with my foot my old flip phone, while cozying up to the new smart phone.
He was tight-lipped on Wells Fargo sales
Buffett was also asked why he had been selling off some of his longtime holding in Wells Fargo (NYSE:WFC). Many presume the move was meant to keep his holding below 10%, while he increased his stake in Bank of America (NYSE:BAC) -- exceeding 10% of Bank of America's shares outstanding. The stake in Wells has been reduced to 8.4%.
Buffett didn't take the bait to elaborate on the move, only saying: "We talk about everything except we don't give stock advice. ... I think they've seen that we've bought Bank of America and we've sold some Wells Fargo."
Investors are free to take that statement however they wish. In my mind, Buffett may be viewing the Wells Fargo scandals of the recent past as a more permanent overhang on shares than he previously thought.
He probably won't buy an airline outright
Berkshire hasn't made any elephant-sized acquisitions of whole businesses in recent years. That's because prices have been relatively high, and ultra-low interest rates have provided private equity with plenty of ammunition to outbid the famously frugal Buffett for various companies.
However, some have wondered recently if Buffett might make a play for a major airline. After all, Buffett owns near-10% stakes in all of the major U.S. airlines, so expanding his stake to take over an entire business may not seem out of the question for the airplane-loving investor.
However, Buffett quashed that notion somewhat, saying heavy regulations in both the airline and banking business might make owning an entire airline difficult. As an example, Buffett stated:
[W]e own 18% of American Express (NYSE:AXP) and American Express is a bank holding company and bank holding companies have limits as to what they can do. And we're a passive holder of a bank holding company with American Express. But instead we own an airline that was tied up with them they'd have lots of arrangements. There's a lot of complications because it's a regulated industry. Anytime you get in a regulated industry you have more complications...
Buffett was of course referring to the Delta (NYSE:DAL) American Express card. Yet despite the complications that could come from owning an airline, Buffett did say, "I'm not saying it's impossible. But -- it's complicated."
Buffett wasn't the one who bought Kroger, and he thinks it's a tough business
Berkshire hasn't bought many new stock holdings, but one name that did pop up recently was a new stake in Kroger (NYSE:KR), the country's second-largest grocer behind Walmart (NYSE:WMT). While Kroger has all the hallmarks of a Buffett value stock, Buffett revealed it wasn't he who bought Kroger, but rather one of his younger lieutenants, Ted Weschler or Todd Combs. In fact, he says he thinks grocery stores are a pretty tough business:
Kroger's done a good job, but it's in a very tough business. I mean, when you have ... Amazon (NASDAQ:AMZN) and Walmart slugging it out and Costco (NASDAQ:COST) taking a special part of it and everything, it's a tough business. But -- they've done a good job. And one of our managers decided to buy that.
It's hard to buy back Berkshire stock
Some Berkshire shareholders may wonder why Berkshire hasn't used its massive cash pile to buy back more stock, especially when Berkshire shares have lagged the overall market over the past several years and acquisitions have been hard to come by.
One clue might have come in Buffett's annual letter, in which he asked anyone with $20 million of shares ready to sell to please contact Berkshire about arranging a sale. That led one viewer to ask Buffett if it was actually mechanically difficult to buy back Berkshire shares. Buffett admitted that it was, since an unusually high percentage of Berkshire holders are holding for the long term, and Berkshire's high-priced A shares are somewhat illiquid:
I mean, Apple's been buying back a ton of stock. They were buying stock at the same time we were buying stock. But it was easier for us to buy Apple stock even though Apple itself was buying a lot of stock, than it is to buy Berkshire. Berkshire is -- well, it's held by people that are really trying to keep it. ... I think the amount of speculation in Berkshire stock is relatively low compared to most stocks.
So it may not be the case that Buffett has been hesitant to buy back Berkshire shares, but rather that he hasn't been able to do so easily. Hence, the ad in the annual letter.