CNBC：Warren Buffett -  Keeping America Great（3）

http://www.cnbc.com/id/33901003

BECKY:  All right.  Class continues, everybody.  We are back with the two greatest capitalists out there with Investing 101, back to more students’ questions.  Why don't we start right here?

QUESTION:  My name is Adam Van Dam and I'm a first-year student here.  This question is for Mr. Buffett.  If the Burlington Northern acquisition is any indication of your long-term buy and hold forever investment philosophy, I am wondering if the financial crisis has impacted that philosophy or your investment process in any way?

BUFFETT:  No.  It hasn't changed at all.  We like products like this.  How is this for shameless products?  [APPLAUSE]  This started in 1886.  It's gone through all of these events.  And the end will be 1.6 billion eight-ounce servings of Coca-Cola [KO  57.44     0.15  (+0.26%)    ] products come today and there will be more next year.  We want to be in business with a durable competitive advantage with managements we like and trust and do them at a price we like.  It hasn't changed a 1/10 of a degree.  Incidentally, we own Fruit of the Loom, too, but I'm not going to do a product.  [APPLAUSE]

BECKY:  OK.  Our next question right here.

QUESTION:  Hi, I'm Brian Seedabalker.  I'm a second-year student.  Mr. Buffett, it's great to see you again.  I was on the trip to Omaha last month.  Thank you for hosting us.  My question is, how would you recommend an individual investor who follows the Graham and Dodd philosophy to allocate their capital today?

BUFFETT:  Well, it depends whether they are going to be an active investor.  Graham distinguished between the defensive and the enterprising and that.  So if you are going to spend a lot of time on investment, you know I just advise looking at as many things as possible and you will find some bargains.  And when you find them, you have to act.  It doesn't -- it hasn't changed at all since I was here in 1950, 1951.  And it won't change the rest of my life.  You start turning pages.  When I got out of school, I turned every page in Moody's 10,000-some pages twice, looking for companies.  And you have to find them yourself.  The world isn't going to tell you about great deals.  You have to find them yourself.  And that takes a fair amount of time.  So if you are not going to do that, if you are just going to be a passive investor, then I just advise an index fund more consistently over a long period of time.   The one thing I will tell you is the worst investment you can have is cash.  Everybody is talking about cash being king and all that sort of thing.  Most of you don't look like you are overburdened with cash anyway.  [LAUGHTER]  Cash is going to become worth less over time.  But good businesses are going to become worth more over time.  And you don't want to pay too much for them so you have to have some discipline about what you pay.  But the thing to do is find a good business and stick with it.

BECKY:  Does that mean you think we are through the roughest times?  You had always kept the cash word around, too.

BUFFETT:  We always keep enough cash around so I feel very comfortable and don't worry about sleeping at night.  But it's not because I like cash as an investment.  Cash is a bad investment over time.  But you always want to have enough so that nobody else can determine your future essentially.  The worst -- the financial panic is behind us.  The economic spillout which came to some extent from that financial panic is still with us.  It will end.  I don't know if it will end tomorrow or next week or next month.  Or maybe a year.  But it won't go on forever.  And to sit around and try and pick the bottom, people were trying to do that last March and the bottom hadn't come in unemployment and the bottom hadn't come in business but the bottom had come in stocks.  Don't pass up something that's attractive today because you think you will find something way more attractive tomorrow.

BECKY:  Another question right here.

QUESTION:  Mr. Buffett and Mr. Gates, my name is Antionette Genevieve.  I am a first-year executive MBA student.  And I actually work at Goldman Sachs, so thank you for your investment.  [APPLAUSE]

BUFFETT:  Why aren't you at work? [LAUGHTER] [APPLAUSE]

QUESTION:  My question to you is I'd like both of your thoughts on the investment of alternative energy as for developing our economy and getting it back on track.

BECKY:  Bill, you touched on this earlier.

BILL:  Well, there are many, many ideas.  And there's enough that we can say most of them will turn out to be dead ends.  You know, the solar-thermal, solar-electric, nuclear is going to go through some of the revival and see if it can solve some of its cost challenges. As a country, we want to make sure all of those get lots of R&D and regulatory enablement because one of them is going to give us much cheaper power without causing any problem.  We don't know which one it is.  And we don't have quite as much R&D going into those things as I'd like to see.  We have quite a bit, but I think the government policies could drive for more.  But it is one of these areas that is somewhat faddish in nature.  When you have a lot of energy focusing on a field, the amount of money that goes in is very large.  And the overall return on capital is often quite large.  The car industry in its heyday was a disaster.  The airline industry, even the software industry because people don't remember all the non-Microsofts that don't exist until today.  When something is hot, you get kind of a bubble.  So energy, you're going to have to be a bit careful to make sure it's one that's really got its cost structure in line and it's not just being pushed along by subsidies and there will be scientific surprises.  So a very hot area, but not necessarily a good area for investment.

BECKY:  All right.  Why don't we leave it there for now?  When we come back, we will have more with Bill Gates and Warren Buffett.  [APPLAUSE] We'll be talking about leadership and President Obama right after this break. [APPLAUSE]

BECKY:  All right.  Welcome back, everybody.  We are at Columbia University.  And right now we're going straight to the top of Columbia Business School.  We are joined by Dean Hubbard. [CHEERS AND APPLAUSE]  Glenn Hubbard, by the way, is not only the head of the Business School here, he also happened to serve at the White House where he was chairman of the Council of Economic Advisors.  So this is a man who knows not only about what's happening in the economy, but also what's happening with these students.  You talk to them all the time.  What's the question that you'd like to pose to Mr. Gates and Mr. Buffett?

HUBBARD:  Thanks, Becky, and thanks to both of you for being here today.  And, Warren, welcome home.

BUFFETT:  Thank you. [APPLAUSE]

HUBBARD:  Warren, one thing you said years ago that's always stuck with me is you never know who is swimming naked until the tide goes out.  And that, of course, says maybe there's some value in knowing when it's going to be low tide.  It also says there's value in knowing context.  How do we develop -- how do we encourage business leaders who understand context and connect the dots?

BUFFETT:  Well, I think they have learned a lot about that in the last year.  Some never learn, you know.  At Berkshire, we have actually 70-some managers.  I think most of them are a fair amount smarter than they were 15 months ago but they were plenty smart to go in.  But, you know, I think that what I learned from a Ben Graham, who came up here every Thursday afternoon.  He didn't need to do it, you know.  He donated whatever he got paid back to the school and all of that.  But having sound principles takes you through everything.  And the bedrock principles that really I learned from Graham and Dodd, I haven't had to do anything with them.  They take me through good periods.  They take me through bad periods.  In the end, I don't worry about them because I know they work.

GATES:  Well, it's surprising that the fundamentals of business are pretty straightforward, you know.  You try to take more in income than you spend in cost.  That's a pretty straightforward subtraction.  But it's surprising in terms of projecting out into the years ahead that, you know, are we making the right investments, are we gaining on the competition, are we making it a little bit harder for people to replace what we're doing?  That kind of common sense, I guess you've got to develop it through experience.  And I think it's neat if you are young and you can see that in a small scale and be hands on with it because a lot of people who start with large businesses may have a hard time with it.  So, you know, the basics are pretty straightforward.  Learning how it works and doesn't work in a variety of industries, by reading a lot, I think that's something that comes with time and a business school is an intense period where you can get ahead of the game.

BUFFETT:  I send one message out every year and a half or two years.  They get one letter from me every couple of years.  And basically it says, run this business like it's the only business that your family can own for the next 100 years.  You can't sell it.  But every year don't measure it by the earnings in the quarter that year.  Measure it by whether the moat around that business, what gives it competitive advantage over time has widened or narrowed.  If you keep doing that for 100 years, it's going to work out very well.  Then I tell them basically if the reason for doing something is everybody else is doing it, it's not good enough.  If you have to use that as a reason, forget it.  You don't have a good reason for doing something.  Never use that.

BECKY:  Let's get to some student questions.  [APPLAUSE]

QUESTION:  Mr. Buffett, Mr. Gates, it is absolutely fantastic having you here.  Thanks a lot.  My name is Kata Cafunka.  I am a second-year MBA student here at Columbia.  Actually, my question is really related to what you were asking.  Many of us and many people in general aspire to become somebody like you.  But actually only a few people got that height, right?  So what do you think were the major qualities that you have that distinguish you from the majority?

BECKY:  All right.  Bill, Warren, what makes you stand out from the crowd?

BUFFETT:  It's always interesting when Bill and I appear together, they don't figure they can do what Bill does, but they know they can do what I do.  [LAUGHTER]  [APPLAUSE]  We did both have a passion.  We were doing what we did because we loved it.  We weren't doing it to get rich.  We probably felt if we did it well, we would get rich.  But we'd have done it, you know, if somebody was slipping bread in under the door, you know, to keep us going.  And so I think that passion for it is enormously important.  I was lucky enough to have a couple of great teachers, particularly one great teacher.  I had a great teacher in life in my father.  But I had another great teacher in terms of profession in terms of Ben Graham.  I was lucky enough to get the right foundation very early on.  And then basically I didn't listen to anybody else.  I just look in the mirror every morning and the mirror always agrees with me.  And I go out and do what I believe I should be doing.  And I'm not influenced by what other people think.

BECKY:  All right.  We'll get to Bill's answer on this in just a minute.  [APPLAUSE]  Bill Gates and Warren Buffett right after this break.

BECKY:  All right.  Ready?  Welcome back, everybody.  This is real crunch time.  Let's get right to it.  You got it question?

QUESTION:  Yeah.  Welcome.  My name is Steven Matthews.  I am in the executive Business School here.  Thanks for coming here.  My question is on Apple.  Mr. Gates, if you could just comment and tell us what your thoughts are on the job Steve Jobs has done as the CEO of Apple.  [LAUGHTER]

GATES:  Well, he's done a fantastic job.  And Apple is in a bit of a different business where they make hardware and software together.  But when Steve was coming back to Apple, which was actually through an acquisition of NeXT that he ran, Apple was in very tough shape.  In fact, most likely, it wasn't going to survive.  And he brought in a team.  He brought in inspiration about great products and design that's made Apple back into being an incredible force in doing good things.  And it's, you know, great to have competitors like that.  We write software for Apple, Microsoft does.  They compete with Apple.  But he, of all the leaders in the industry that I have worked with, he showed more inspiration and he saved the company.

BECKY:  OK.  Tag, you're it.

QUESTION:  Thank you.  My name is Michael.  I'm a first year MBA student.  The question is for Mr. Gates.  I was wondering if you think Google at all resembles Microsoft during Microsoft's early years.

GATES:  Well, they have some of the same problems we had.  [LAUGHTER]  [APPLAUSE]  It's another fine competitor.  They are hiring a lot of smart people.  They have gotten into the lead position in search, which is incredibly profitable to be number one in that.  They may get a little competition as time goes forward.  But they are a great example of what can happen, you know, two young guys who got together, pursued an idea and created a success that's absolutely gigantic.  And we all, you know, hopefully use search engines, maybe a variety.  [LAUGHTER]  And we benefit from that.

BECKY:  Right here.

QUESTION:  Hi, I'm Josh Austin.  I'm a second-year MBA student.  My question is for you, Mr. Buffett.  Value investors, such as yourself, believe that fundamental analysis, deep fundamental analysis is critical to intelligent investing.  However, you have said several times in the past that you have made very rapid capital allocation decisions, sometimes in less than five minutes.  I was wondering exactly which data gave you confidence in your decision.

BUFFETT:  Well, that's 50 years of preparation and five (minutes) of decision making.   [APPLAUSE]

BECKY:  Can you just look at the spreadsheet?  Can you look at an annual report and make a decision like that?

BUFFETT:  Yeah.  Sometimes I can.  Just take Coca-Cola, for example.  I sampled the product for 60 years and then I saw a couple of key ingredients, you know, that essentially tipped the scale in terms of buying it back in 1988.  But the good big decisions, they don't take any time at all.  If they take time, you're in trouble.

BECKY:  All right.  We will have more with Bill Gates and Warren Buffett, when we come right back.

BECKY:  All right.  Welcome back, everybody.  Gentlemen, last question today.  If America was a stock, would you buy it?  Bill.

GATES:  You bet.

BECKY:  Warren.

BUFFETT:  On margin.  [LAUGHTER]

BECKY:  Gentlemen, we want to thank you very much for your time.  You've been wonderful.  Bill, Warren, we really appreciate it.  Let's give them a big round of applause, guys.  [APPLAUSE]  And we want to thank all of you, too.  Columbia University, the Business School, Dean Hubbard, thank you, guys.  We really appreciate it.  It's been fantastic.  That does it for us today.  I'm Becky Quick, and if you want to watch this, you can go to CNBC.com and we will see you back here very soon.

? 2009 CNBC, Inc. All Rights Reserved