Seth Wenig/AP
Warren Buffett

Inside the Mind of Warren Buffett

August 22, 2008 05:18 PM
by findingDulcinea Staff
In a wide-ranging interview on CNBC, the investing guru shared his thoughts on a number of subjects.

Warren Buffett Speaks

Many years ago, the brokerage firm E.F. Hutton (which later merged with another firm) widely advertised the message that “When E.F. Hutton talks, people listen.” While this claim was hyperbole, it unquestionably applies today to Warren Buffett. And so when Buffett, longtime chairman of Berkshire Hathaway, appeared live in a wide-ranging interview on CNBC Friday, the entire business and political world did indeed listen.

Some of the highlights:

Discussing Fannie Mae and Freddie Mac, Buffett said the mortgage giants would have failed long ago without their implicit government backing. He expects the federal government will likely step in to save them, and while the companies may stay in business, shareholders may lose money. For context, Buffett invested in these stocks years ago, but sold them around 2000. Seeking Alpha reported that Buffett told stockholders that, “we felt uncomfortable with certain aspects of the business as they developed. … We did not sell because we were worried about more governmental regulation—the opposite if anything. We felt the risk profile had changed.”

On the economy, Buffett told CNBC that “troubles feed on themselves,” and thus the current economic problems may be deeper and longer than expected. He is likewise skeptical that the housing market can turnaround until there is a normal supply of homes for sale, which could take years.

On the energy market, Buffett believes that the long-term supply and demand dynamic has changed significantly in recent years, and that demand for oil must wane. He generally supports T. Boone Picken’s plan to reduce America’s dependence on foreign oil.

In response to concerns about America’s long-term economic health, Buffett expects that the economy will grow over the long term, but is concerned about the long-term political implications of America’s trade deficit. He is very concerned about inflation, seeing the inevitable spread of wholesale inflation into retail prices as something that could spiral out of control. However, he is no longer betting that the U.S. dollar will fall.

On the stock market, Buffett believes stock valuations are generally more attractive than they were a year ago. However, he has little interest in investing in a company that recently lost billions of dollars and needs replenishment. In a tease, Buffett said that he has recently added to his already significant position in either American Express or Wells Fargo.

Buffett admitted he made a $500 million offer to buy a Chinese company that was not accepted, and that he could foresee investing a substantial sum in China if government restrictions on foreign ownership can be overcome. He is optimistic about China’s growth potential because it has unleashed the potential of its people.

Politicians of all stripes seek to curry favor with Buffett because of his influence. However, while Buffett reiterated his support for Barack Obama and his admiration of John McCain, he also believes that neither campaign is adequately addressing certain issues, because to do so would cost them votes. He rejects Obama’s call for a windfall profits tax for oil companies, noting that there are plenty of other commodities whose price has risen without any calls for a special tax. Buffett had harsh words for John Edwards for soliciting campaign contributions while lying about an extramarital affair that would prevent him from ever becoming president.

Related Topics: Buffet on national debt; letter to shareholders

The sitdown with CNBC came as the {documentary “I.O.U.S.A”} entered a limited release. The film, funded by the Peter G. Peterson Foundation, seeks to educate Americans about the long-term danger to the U.S. economy of its budget deficits and unfunded liabilities. At a town hall meeting in Omaha, Nebraska on Thursday night, Aug. 21, 2008, Buffett joined a distinguished panel to discuss the film and the long-term health of the U.S. economy. Buffett was in the minority on the panel, believing that the U.S. economy could grow its way out of its debt problem in the long run.

In late February of each year, Buffett publishes his annual letter to the stockholders of Berkshire Hathaway. These letters are eagerly anticipated for their insight, wit and blunt examination of Berkshire’s high and low points from the past year. In the February 2007 letter, Buffett wrote about the airline industry, “If a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” Bemoaning a missed opportunity, he wrote, “The only explanation is that my brain had gone on vacation and forgot to notify me.” In commenting on the many investments in U.S. companies by sovereign funds, he noted, “This is our doing, not some nefarious plot by foreign governments. Our trade equation guarantees massive foreign investment in the U.S.” Buffet also ominously warned about pension-cost surprises in corporations, and much larger jolts in the public pension system. He wrote, “Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that the problems will only become apparent long after these officials have departed.”

With the major financial institutions in the U.S. struggling with writedowns and liquidity problems, Buffett’s Berkshire Hathaway has taken a potentially lucrative role as an equity-based lender for several recent major merger transactions.

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