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David Rubenstein is a renowned financier and philanthropist who travels the United States talking to leaders for his show Peer-to-Peer Conversations on Bloomberg. In the interview below Rubenstein sits down with Warren Buffett, talking life, investing and how he sees the economy under Trump in 2017. The Oracle of Omaha threw his weight behind Democratic leader Hillary Clinton, but despite her loss, the companies he’s invested in have seen short term wins since the election result. The full interview has been transcribed below and is well worth the time. – Stuart Lowman
We’re at your favourite restaurant in Omaha, Gorat’s, why do you like it so much, is it the food or the price, or the combination of both?
It’s the food and the price and the heritage. Four generations of the Gorat family were involved here, we went to grammar school together and so I’ve known the people over the years, the steaks are great and you know the prices are right.
I had lunch here earlier today, it was very good, it wasn’t that expensive, and I quite enjoyed it, a lot cheaper than New York and Washington.
A lot, that’s why I buy people lunch here and then they can buy me the lunch in New York.
It’s a good deal, a good arbitrage. You grew up in Omaha, but then you moved to Washington when your father became a congressman, how did you start with your business career in Washington, it was with various pinball machines or golf businesses.
Yes, I always like to have a couple of businesses going and the best business we had was the pinball machine business, which was the Wilson coin-operated machine company and that was named after the high school my partner and I went to, but we had our machines and barber shops and the barbers always wanted us to put in machines with flippers, which were just coming in, but those machines cost $350, whereas an old obsolete machine cost $25, so we always told them we’d take it up when Mr Wilson or Smith, they call him Mr Wilson (he was one tough guy I’ve got to tell you).
When you graduated from high school, you weren’t as interested in academics, I assume, at that time.
I was not interested.
Your high school yearbook said, “He’s likely to be a stockbroker, but he’s very good in math”, why did you go to Warden and why did you only stay two years there?
I didn’t want to go to college, but my dad wanted me to go to college and we didn’t have SAT’s then, but he practically would have done the SAT’s for me. In truth, I always wanted to please my dad. He was a hero to me and still is, so he kept kind of pushing me along and said, “Well, why don’t we just fill out an application for the hell of it” and so he suggested Wharton and I applied there. They let me in and after the first year I wanted to quit and go into business and my dad said, “Well, give it one more year” and so I went to second year and I said, “I still want to quit” and he said, “Well, you know you’ve got almost enough credits, if you got to Nebraska (which I was quite willing to do), for one year you can get out on three years”, so that’s what I did.
Has Wharton ever called you up and said, “Well, you’re a half-graduate and if you give us some money…” or have they never bothered you?
So far they haven’t tried that line, but they may after they watch this.
After that you wanted to go to business school.
Yes, I’d won some minor scholarship in Nebraska to go to any graduate school I wanted to, that they’d give me $500 and my dad suggested Harvard, so I applied.
You didn’t get in.
I didn’t get in; it took ten minutes, the guy near Chicago, who interviewed me, so I spent about ten hours going to see him. He looked at me, he said, “Forget it” and then I came –
Did you ever run into that guy again or have you ever heard from him since?
No, he needs protection now.
So I guess Harvard doesn’t come after you for money because they turned you down, but you went to Columbia Business School. Why did you go to Columbia?
Well, I was at what was then called the University of Omaha, in the library in August and I was leafing through catalogues and I just happened to see that Columbia had Graham and Dodd as teachers and I read their book, but I had no idea that they were teaching, so I wrote Dean Dodd and I said, “Dear Dean Dodd, I thought you guys were dead and now that I find out you’re alive, I’d really like to come to Columbia if you can get me in”.
So you did, I assume, pretty well at Columbia Business School?
I did okay there, yes.
You worked for Mr Graham in his partnership and how did that work?
It was terrific in the sense that I was working for my hero, but Ben was going to retire in a couple of years and so I was only back there about a year and a half, but every day I was excited about being able to work for him.
So what you were good at was picking stocks according to his formula, which was to look for companies that were undervalued, now we call it value investing. Did you realise that he had some principles that were unique and is that why you followed his guidance?
By the time I went to work for him I probably could’ve recited the words of his book better than he could, I’d read his books multiple times and so it was more a question of being inspired by him than it was by learning something new from him.
Why did you come back to Omaha?
I wanted to come back to Omaha. I had made many friends in New York, but we had two kids by that time and I lived in White Plains, I’d take the train there and back and it didn’t strike me as much of a life compared to being here in Omaha. Both sets of grandparents were alive at that time and the uncles and aunts, and Omaha was a more pleasant place to live.
All right, so you buy a house here.
I rented a house for $75 a month.
When did you buy your house that you’re still in?
In 1958, my third child was on the way.
So you started a partnership here and how did you raise money?
When I came back I had about $175,000 and I thought that was all I would need to live the rest of my life, I could take care of everything, so I really planned to go to school, I thought about going to law school.
Just think how successful you could’ve been as a lawyer.
That’s true, I’ve regretted it ever since.
I know, so you were in your first partnership when you had people cobble together some money, how much money did you actually cobble together?
Well, we met one night early in May of 1956 and there were seven people there aside from myself and they put in $105,000 and I put in $100, so we started with R105,100 and I gave them a little piece of paper called “The Ground Rules”.
Ultimately you ended that partnership, I thought.
What happened was that between May of 1956 and January 1st of 1962 I started ten more partnerships. I made a mistake. I had no secretary, no accountant or anything, so every time I’d buy a stock I’d break it into 11 tickets, I’d write 11 cheques, I kept 11 sets of books filed, 11 tax returns and I did it all myself right, and I took delivery of all those stocks because I was worried, it was other people’s money, so I’d go down to the bank and have these things delivered where after, finally I got wise and on January 1st 1962 I put all 11 of the previous partnerships together in something called the Buffett Partnership. I ran that till the end of 1969 at which time I dissolved it.
You dissolved that one, but then in 1969, you started a new partnership?
No, in 1969, by that time we had $105m in the partnership and about $70m or so that was in cash to be distributed and the balance was in three stocks, mostly Berkshire Hathaway that I distributed pro rata to everybody.
Okay and then you started buying more stocks through Berkshire Hathaway.
Yes, stocks and businesses.
What would you say is the reason for your ability to do this? Is it that you studied the companies more than anybody else, you stuck to your principles, you’re smarter than other people, people were just caught up with fads, you didn’t get caught up with fads, what would you say is the reason for your success?
Well, the first two to quite an extent. We bought businesses that we thought were decent businesses at sensible prices, that we had good people to run them, but we also bought marketable securities in Berkshire. Over time the emphasis shifted from marketable securities over to buying businesses.
What was the theory behind buying a railroad, because people thought they were kind of fossils as businesses?
The railroad business had a bad century, they’re kind of like the Chicago Company, everybody has a bad century now and then.
Over the years you’ve bought a number of companies and had stakes in companies. One of the ones that I know very well is Washington Post, how did that come about?
In 1973, the Washington Post company had gone public in 1971, right about the Pentagon Papers time, but in 1973, the Nixon administration (through Bebe Rebozo, who was a pal of Nixon’s), they were challenging the licences of two of the Florida television stations, the Post owned, so the stock went from $37 down to $16. Now at $16, there were about five-million shares outstanding, so the whole Washington Post company was selling for $80m and that included the newspaper, four big TV stations, News Week, and some other assets and no debt to speak of. So, the Washington Post company, which was intrinsically worth $400m or $500m, was selling for about $80m in the market. We bought most of our stock at about the equivalent of about $100m in the market and it was ridiculous. I mean, you had a business that unquestionably was worth four or five times what it was selling for and Nixon wasn’t going to put them out of business.
When you’re doing these analyses, then and now, do you have computers that help you, or how did you actually read it all, did you just get printed materials, or how did you, in those days get the materials to read about the Washington Post, or how do you do it today?
Well, pretty much the same way, except there are fewer opportunities now, but I met Bob Woodward and he’d just come out with the president scandal and all of a sudden at all of thirty years of age, he was getting quite wealthy and we had breakfast or lunch over at the Madison Hotel and he said, “What do I do with this money?” and I said, “Investing is just about assigning yourself the right story. Imagine Ben Bradley, this morning said to you, “What is the Washington Post company worth?” what would you do if you had to write the story in a month? You’d go out and interview TV brokers and newspaper brokers and the owners and you’d try and value each asset”.
I said, “That’s what I’d do, I assign myself the right story and it’s nothing more than that”. Now there are some stories I can’t write, if you ask me to write a story on what is some glamorous, but non-profit making business worth, I don’t know how to write that story, but if you ask me to write a story on what is Potomac electric power, or something like, I can write the story and that’s what I’m doing every day, I’m assigning myself a story and then I go out and do it.
So you get the annual reports and then you read them, just like other people might read novels, you read annual reports?
Then do you do the calculations of what things are worth in your head or do you have computers to help you?
No, if you need to carry something out to four decimal places forget it.
Do you use a computer today even?
I use it to play bridge, and I use it to go to search a lot.
So there is a computer in your office, you use.
I don’t have one in the office, but I have one at home.
If somebody wants to get a hold of you can they get a hold of you on a smartphone or a mobile telephone?
No, a smartphone is too smart for me.
You rarely use a computer.
One of the trick questions that Bill Gates and I get when we were talking odds is “Who’s on the computer more, excluding email?” and the answer is, I probably am because I probably play 12 hours a week of bridge on it and then I use it a lot for search.
Who do you play bridge with, is it anonymous people on bridge or just your regular -?
No, my name is T-bone and I play with a woman in San Francisco who goes by the name of Searle and she’s a two-time world champ and I’m two-time world chump, so we’ve been playing together for decades.
Are you at a world-class level after all these years?
No, you couldn’t have a better teacher than she is, but there are still limitations.
You mentioned Bill Gates, how did you actually come to know Bill Gates?
It came about because Meg Greenfield, who was the editor of the editorial page of the Post called me in in the late 1980’s and she said, “Warren, I’ve always loved the Pacific Northwest” (she’d grown up there) and she said, “I want to know whether I have enough money to be able to afford to buy a house, kind of a vacation type house on Bainbridge Island or Seattle” and I said, “Meg, anybody who calls and asks me whether they’ve got enough money does have enough money, so it’s the ones that don’t call that don’t have it”, so she bought the house.
She invited me and again, Graham, and a few people, out to the house and she knew the elder Gates’, so she called Mary Gates and then Mary went to work on Bill to try and get him to come and Bill said, “I’m not going to go down there and meet some stock broker” and Mary was a very firm type and said, “You’re coming” and he said, “I’m not coming” and by the end of the day they started negotiating hours and she said four hours and said one hour and this went back and forth and he came down and when we met we talked for about 11 hours straight, without being interrupted.
Wow, so that was the beginning of a relationship.
Yes, we hit it off.
You never bought any of his shares.
I bought a hundred shares just to keep track of what this young kid was doing.
He is now on your board, is that right?
So the relationship has become very close and you get involved with him in many philanthropic things as well.
Oh yes, we have a lot of fun talking.
Let me just ask about the philanthropic things that you’ve done with Bill and Melinda. How did that idea of giving away your money to somebody else’s foundation come to you?
Well, I originally had planned that my first wife would handle the disposition of everything that we had and we came to that conclusion when we were in our twenties and we started something called the Buffett Foundation over 50 years ago, but I didn’t give away a lot of money during those intermediate years because I felt I was compounding at a rate that I could give away billions instead of millions if I waited a little while. She died in 2004, so that plan disappeared and then I was faced with the question of how I give away this money in a way that goes to the people I want without me doing all the work.
So you called Bill or Melinda one day and said “Guess what, I’m going to give you the bulk of my fortune”, what was their reaction?
It wasn’t quite as elegant as that actually. You know, I may ask that, I don’t remember that clearly, but at some point, I did call them up, it was not over the phone, I think.
You didn’t ask them to call to say, “We’ll call the Bill and Melinda Gates and Warren Buffett Foundation”, you don’t want your name on it?
No, I did not think that would do any good.
So you are on the board of the Bill and Melinda Gates Foundation now.
That is true, but they run it.
What would you say are some of the highlights, the deals that you’re most proud of and let’s take one that you did recently, the biggest deal you’ve ever done was Precision Castparts, it’s about $37bn in purchase price.
Yes, it was between $32-33bn of cash and then we assumed about $4bn of debt.
To spend $37bn, did you spend a year studying the company?
How much time did you spend with the CEO?
I met the CEO, I think on July 1st last year and he happened to be calling on certain shareholders and one of the fellows in our office had had a position in the stock for some time, so it was an accident I met him. If I had been out playing golf or something it never would have happened, but I went in and I liked him, I heard him talk for 30 minutes and I then said to the fellow in our office, “Call him tomorrow and say if he would like to receive a cash bid from Berkshire Hathaway, we would supply one and if he wouldn’t like to receive one, forget we ever called”.
That was it; you didn’t hire any investment bankers to help you with the analysis?
Do you ever hire investment bankers to help you analyse a company?
Not to analyse a company. Sometimes they’re involved in a deal and we’re perfectly willing to pay a fat commission.
One time you told me a story about how an investment banker was hired by somebody you were going to try to buy.
What happened on that was, I said we’d pay $35 a share for a company then in American Energy and they hired an investment banker and the investment banker came out and spent about a week and they sent a big bill at the end and they said, “Well, you’ve got to increase your price to make us look good”. I said, “I’m not really worried about whether you look good”. So they hung around Omaha for about a week and finally they called up and sort of pleaded and said, “You know, can’t you increase your price somewhat so that we can send a bill and get paid appropriately for our non-services?” and so I said, “Okay, you can tell them we’ll pay $35.05 and you can say you got the last nickel out of me”, so that’s what we paid.
Normally you make a price and you don’t go back and do you ever do any unfriendly deals?
Why is that?
Oh, well you can say Berkshire Hathaway originally was an unfriendly deal, but no, we’re just not interested. Not that unfriendly deals are necessarily bad, I mean there are managements that should be replaced, but –
People must call you every day and say, “I have a deal for you, it’s perfect, and how often do any of these deals ever pan out?”
They don’t call every day and we’ve made our criteria fairly clear, so there’s relatively few that call and when somebody calls I can usually tell within two or three minutes whether a deal’s likely to happen or not. There are just a half a dozen filters and it either makes it through the filters or it doesn’t.
One time I was told that you got a letter from somebody from Israel, saying, “I’d like you to look at my company”. What’s the likelihood that somebody from Israel sends a company prospectus over and you say you’re going to buy it and you did buy it?
Yes, we did buy it. We bought 80 percent of it at that time for $4bn and then we later bought the remaining 20%.
Before you bought it, did you go to Israel to look at the company?
No, I did not go to Israel. I hope it’s there.
Were you happy with what you bought?
You also bought one of the biggest railroads in the world and that’s worked out okay recently?
That’s worked out okay.
What was the theory behind buying a railroad because people thought they were kind of fossils as businesses?
The railroad business had a bad century, they’re kind of like the Chicago Company, everybody has a bad century now and then, but finally the railroad industry got rationalised to quite an extent and modernised and the railroad business is a good business. It’s not a great business, but it’s a good business and in the fall of 2009 we already owned a fair amount of BNSF, Burlington Northern Santa Fe and it looked like we could do it at a sensible price. That was a Thursday and on Friday I said we would pay $100 per share if the directors were interested and he’d chat with the directors over the weekend and the following Sunday we had a contract signed. Somebody from the White House called and said, “Would you mind having a tax named after you?” and I said, “If all the diseases have been taken away, why shouldn’t I, I’ll take a tax”.
Your view still is the best place in the world to invest is the United States?
Well, certainly it has to be the best, it’s the best I know of, and it’s been wonderful. I mean nobody has sold America short since 1776 and enjoyed what happened subsequently.
We were having roughly two percent or less lower growth in the last couple of years, do you think that it’s possible to ever grow three, four, and five percent again in this economy?
There will be some years, but two percent growth, if you have a little less than one percent population growth, it means in one generation, 25 years, call it that we will add maybe $18 000 or $19 000 of GDP per capita, a family of $475 000, so we’re just beginning. One percent, my life has been a compound interest and it’s maybe better to do it at higher rates, but if you have an already prosperous economy and we’ve got the most prosperous economy the world’s ever seen and you keep compounding it, over time people will be living far better 20 years from now than they are now.
You have said your secretary pays a higher tax rate than you do.
Toning down and counting payroll taxes, yes.
Are you in favour of changing that?
Some years ago somebody from the White House, not the President, called and said that they might be able to reduce my taxation and they said, “Would you mind having a tax named after you and I said, “Well, if all the diseases have been taken away, why shouldn’t I, I’ll take a tax” and so they’ve referred to this, but I really do feel that anybody that’s making millions of Dollars a year should have combined payroll and income tax that is at least 30 percent and in my office, everybody in the office does have that except me.
How do you think you became a Democrat when your father was a big Republican and you live in a very conservative state, how do you think that evolved?
Civil rights more than anything else. I didn’t think about it when I was 12 years old or 14 years old. I went to Atlas Steel and there was a school for blacks just a few hundred yards away. It just never dawned on me how different life was for other people and then as I got to see more of the world I just decided that there were a lot of things that were unfair and the Democrats seemed to be doing a little bit more about it.
In Berkshire Hathaway today, you have an annual meeting that attracts roughly 40,000 people. When you had your first annual meeting, how many people showed up at that?
We had 12, but you had to count my Aunt Katie and my Uncle Fred and a couple of the managers. We usually had about two outsiders.
When you started Berkshire Hathaway, did you ever in your wildest imagination think that you could build a company that became one of the biggest in the world, was that ever in your plans?
No, I’ve always just put one foot in front of the other.
What is it that you would like to have as your legacy, as you think about it?
I’d like to be the oldest man that ever lived actually, but no I like teaching and so if I had been a decent teacher and I have at a lot of universities, students come out every year.
Today is there anything on your bucket list that you would like to do that you haven’t done.
I’d have done it. If there’s anything I wanted to do, I’d do it. Money has no utility, time has utility to me, but money in terms of making trips, owning more houses, or having a boat or something, it has no utility to me whatsoever. It has a lot of utility to other people, which is the reason for the Giving Pledge.
What motivates you to still run a company when most people your age are playing shuffleboard or they’re relaxing or doing something?
Yes, they spend all week planning their haircut usually, but I get to do every day what I love with people that I love. I mean, it doesn’t get any better than that.
So the greatest pleasure in your life other than doing interviews like this is what, looking at new companies, making investments, giving away the money, what gives you the most pleasure, your grandchildren?
Oh, all of the above, but the truth is that I think that Berkshire Hathaway sort of is like how a painter regards a painting, the difference being that the canvas is unlimited, so there’s no finish line at Berkshire Hathaway and it’s a game that you can continue to play.
Any word of advice you’d give to somebody who is a young investor who would like to emulate you, what you would recommend that they do to build something close to what you’ve done?
I think you should look for the job that you would want to hold if you didn’t need a job. You’re probably only going to live once, Shirley MacLaine may differ with that or a few people, you don’t want to go sleepwalking through life and you’re really, whether you make X or a 120 percent of X, really isn’t remotely important as to whether in most cases, you marry the right person and you also find something that you would do if you didn’t need the money and I’ve had that job for 50 or more years. I was lucky in that I found early on what turned me on that way, but don’t settle for something if you can possibly, but don’t worry about making the most money this week or next month. When I went and I offered to work for Ben Graham, I said I’ll work for nothing and I meant it. I mean, just the idea of being turned on, so look for the job that turns you on, find a passion.
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