CNBC Transcript: Warren Buffett Explains Why He Bought $10.7B of IBM Stock (Part 5)

Published: Monday, 14 Nov 2011 | 1:33 PM ET
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By: Alex Crippen
Executive Producer
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Warren Buffet & Becky Quick
CNBC/Lacy O'Toole

This is part five of an unofficial transcript of Warren Buffett's three-hour long live appearance on CNBC's Squawk Box this morning, Monday, November 14, 2011.  (Click here for part four.)

 Buffett revealed that Berkshire Hathaway has bought almost $11 billion worth of IBM common stock this year.  He also said it is "not clear" that Europe has the will or ability to do "whatever is necessary" to fix its debt problems.

 In this section, Buffett reveals that "Harold" refers to IBM, and tells us Berkshire Hathaway has bought almost $11 billion of IBM common stock this year.



 BECKY: All right. Welcome back, everybody. This is SQUAWK BOX, and we're speaking with Berkshire Hathaway chairman and CEO Warren Buffett this morning. And he just gave us the best tease we've probably ever had in the history of SQUAWK BOX. We said that he would tell us what he's been buying over the last quarter when we came back from the break.

 JOE: I have no audio.

 BECKY: You don't hear, Joe? I hear you. But...

 JOE: OK, now I've got it.

 BECKY: ...we've been trying to figure it out. Tell us again—tell us again your...

 JOE: How do you spell...

BECKY: ...clue?

JOE: How do you spell Harold?

BUFFETT: Harold...

JOE: How do you spell Harold?

BUFFETT: Harold was spelled H-A-R-O-L-D.

JOE: So it's not Macy's.

BECKY: All right, there was—there was a tweet that came in—oh, that's good. Herald Square from Macy's.  There was a tweet that came in guessing that maybe it's Halliburton because the ticker...

JOE: Right.

BECKY: ...symbol is HAL.

BUFFETT: Well, it's—that's a good guess, and it actually may be going in the right direction, but it's not correct.

BECKY: Oil and services?

JOE: Well, then it's not Harold Hamm? It doesn't have anything to do with Harold Hamm, does it?

BUFFETT: No, he's a friend of mine, but...

JOE: It doesn't have anything to do with him.

BECKY: All right, tell...

BUFFETT: Have you given me your best shot, Joe?

JOE: No, I'm still thinking. I don't want to give up yet.

ANDREW: I think we're going to have to give up.

BUFFETT: Well, keep thinking.

ANDREW: Oh, come on, let's just...

JOE: I'm going to hurt myself.

BECKY: Give us one more hint.

ANDREW: One more hint. Come on, Warren.

BUFFETT: No, I've—the next hint would give it away, so I'll just tell myself.

JOE: OK, then tell us. OK, I'm ready.

ANDREW: OK, so tell us. We'll—we're OK.

BUFFETT: OK, well, what I would have told you is that we have bought about—and it extends over more than the three months, but it's all been this year, but it was more in the third quarter than in the earlier two quarters. We bought about $10.7 billion worth of one stock, and there were several clues in what I said to you. First of all, I referenced a movie. Harold is somebody that's known as the abbreviation—or the common shortening of that is Hal. Now, if you think about movies...

ANDREW: Oh, wait...

BUFFETT: ...with Hal...

ANDREW: Oh, I know this.

BUFFETT: ...if you go back to "2001...

ANDREW: 2001.

BUFFETT: ...A Space Odyssey"...

BECKY: I know this!

BUFFETT: ...2001...

BECKY: Yeah, yeah.

BUFFETT: ...Hal was the computer, right?

BECKY: IBM. It's...

BUFFETT: And Hal, if you take H plus one letter is I, A plus one letter is B, and L plus one letter is M.

JOE: Yeah. IBM.


BECKY: You—wait, you bought over $10 billion in IBM?

BUFFETT: That's correct. But I also told you multiple times, `Think about it.' And if you remember, "Think" was the slogan of IBM for decades. And every desk of an IBM...

JOE: Ah, jeez. That's too—that's too many—too many dots. Go from Harold to shorten it to Hal, add a letter to get the IBM. That's—oh, boy!

BUFFETT: Well, but that was—"Space Odyssey 2001" was—or "2001 Space"—was—they referenced many times in that, in writing about it, that Hal was thought...

ANDREW: Right. You're right.


ANDREW: You're right.

BECKY: Wait. Wait a second, IBM is a tech company, and you don't buy tech companies. Why have you been buying IBM?

BUFFETT: Well, I didn't buy railroad companies for a long time either. I—it's interesting. I have probably—I've had two interesting incidents in my life connected with IBM, but I've probably read the annual report of IBM every year for 50 years. And this year it came in on a Saturday, and I read it. And I got a different slant on it, which I then proceeded to do some checking out of. But I just—I read it through a different lens.

JOE: What's the different lens? What's the different slant?

BUFFETT: Well, just like—just like I did with—just like I did with the railroads. And incidentally, the company laid it out extremely well. I don't think there's any company that's—that I can think of, big company, that's done a better job of laying out where they're going to go and then having gone there. They have laid out a road map and I should have paid more attention to it five years ago where they were going to go in five years ending in 2010. Now they've laid out another road map for 2015. They've done an incredible job. First, Lou Gerstner, when he came in, he saved the company from bankruptcy. I read his book a second time, actually, after I read the annual report. You know, "Who Said Elephants Can't Dance?" I read it when it first came out and then I went back and reread it. And then we went around to all of our companies to see how their IT departments functioned and why they made the decisions they made. And I just came away with a different view of the position that IBM holds within IT departments and why they hold it and the stickiness and a whole bunch of things. And also, I read very carefully what Sam Palmisamo...

JOE: Palmisano.

BECKY: Palmisano.

BUFFETT: ...Palmisano, yes, has said about where they're going to be and he's delivered big time on his—on his—on his first venture along those lines.

JOE: Incredible.

BUFFETT: But anyway, we...

JOE: And...

BUFFETT: ...bought about 64 million shares and it cost us about $10.6 or 7 billion.

JOE: Have you spent time with Sam?

BECKY: What does that mean, yeah?

JOE: (Unintelligible)

BECKY: What—how much—how much of the—how much of the company do you own?

BUFFETT: We own about 5 1/2 percent of the company.


JOE: (Unintelligible)

BUFFETT: The other thing I would say about IBM, too, is that a few years back, they had 240 million options outstanding. Now they probably are down to about 30 million. They treat their stock with reverence which I find is unusual among big companies. Or they really—they are thinking about the shareholder.

BECKY: We...

JOE: But you're buying this, Warren, you're buying this on a high, which is really—most people think you got to buy things when they're down. They look at 52-week high and lows, say, oh, I'm not going to buy it, it's on a high, but stocks that are on highs hit new highs. I don't know how many Dow components are at all-time highs, but IBM is one, maybe McDonald's.


JOE: But you're buying this after it's really broken out the new highs this year, new all-time highs.

BUFFETT: We bought—we bought railroads on highs, too.

JOE: Yeah? They sent it—you know, stocks at new lows that, you know, can hit new lows where they...

BUFFETT: Right. I bought—I bought control of—I bought control of GEICO at its all-time high.

JOE: Yeah? Well, Warren...

BECKY: Yeah, we're looking...

JOE: ...have you talked to Sam or to—or to Ginni, the new CEO?

BUFFETT: No, I never talked to Sam. I've never talked to Sam. I've got this—I competed with IBM 50 years ago, believe it or not. I was chairman of a company, had, and I testified for IBM in 1980 when the government was attacking about on the antitrust situation. But I've never—I have not talked to Sam or now Ginni.

JOE: And you have a view on the...

BECKY: Wait a second. The company's finding out right now that you own 5 percent of the company by...

BUFFETT: Yeah, 5 1/5, yeah, yeah.

BECKY: ...5 1/2 percent by you talking about this right now?

BUFFETT: Yeah, right, right. I have not talked to the company.

JOE: And do you have a view...

BECKY: We've been watching the stock and it's been—it's been jumping on this. It's up about 1 percent right now. I've seen it up as much as 1.5 percent. Would you continue to buy more?

BUFFETT: Yeah. No, I wouldn't be talking about it if we weren't pretty much done. I set out to buy about $10 billion worth and we bought a little more than that. We started in March. I got the annual report I think very early in March and then I did some work and then we started—we bought a little in the first quarter and more in the second and third quarter.


BUFFETT: And we—and we bought some in the fourth quarter. We bought some in the—our report that we will file tonight will not show the whole 64 million. Probably show 57 million or something like that because we bought some in October.

BECKY: Because you bought more since this quarter. So, how do you keep that hidden that you're buying that much stock over that long of a period of time?

BUFFETT: I avoid talking to you.

BECKY: No, really, how do you—how do you hide that?

BUFFETT: Well, it's important to us that we do. And what's very interesting is here in a—what is it, seven-month period or something like that, eight months, maybe, we buy 5 1/2 percent of the company. At the same time, the company bought pretty much an equal amount. So here you have 11 percent of a huge company change hands and all kinds of people who've owned IBM forever. I mean, it's an old—it's an old company, it's a big company, it's amazing to me how much turnover there is in stocks, which means that, you know, investment has kind of gone by the boards and people just basically look at stocks as things to speculate in. But if you can buy 11 percent of a wonderful company in eight months or have that much trade just the two buyers without—of course, who knows how much we affected the price. We try not to affect the price. We usually buy a given percentage of what trades every day.

BECKY: You—this is the second time in the last several months that you've told us about a purchase you've made of a company you've been the reading annual reports for years.


BECKY: Bank of America was the first.

BUFFETT: Right. I read those for 50 years.

BECKY: Read those for 50 years and you're looking at companies a little differently. You never really bought tech stocks before. You had always said you don't understand technology stocks.


BECKY: Does this mean that this is a new era and you're going to be looking at a lot of tech stocks and I guess chief among them, would you consider Microsoft?

BUFFETT: I—well, Microsoft is a special case because Microsoft is off bounds to us because of my friendship with Bill and if we spent seven months buying Microsoft stock and during that period they announced a repurchase or increase of the dividend or an acquisition, people would say you've been getting inside information from Bill. So I have told Todd and Ted and I apply it myself that we do not ever buy a share of Microsoft. I think Microsoft is attractive but that—but we will never buy Microsoft. It—people would just assume I knew something and I don't, but they would assume it and they would assume Bill talked to me and he wouldn't have. But there's no sense putting yourself in that position.

BECKY: But...

BUFFETT: I can say I've never met Sam but I can't say I've never met Bill.

BECKY: But does this change the rules of the game that you would actually look at technology stocks now?

BUFFETT: I look at everything but most things I decide I can't figure out their future.

JOE: Warren...



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