Warren Buffett: The U.S. Is Moving Toward Plutocracy

Capitalism is like Cinderella, the Berkshire billionaire says in an exclusive interview with TheMarker. 'She knew at midnight that everything was going to turn into pumpkins and mice, but it was just so much damn fun, dancing there.'

Guy Rolnik
Guy Rolnik
Guy Rolnik
Guy Rolnik

DAEGU, South Korea - The United States is moving toward plutocracy - government of the rich, not by the people, says Warren Buffett, in an exclusive interview with TheMarker at Iscar's TaeguTec plant in South Korea.

Buffett, 80, arrived in the town of Daegu on Sunday evening, a stop on his tour of the Far East, including South Korea and India. The original highlight of the trip was to be the inauguration of Iscar's new plant in Japan. But as radiation levels rose as the Fukushima nuclear power plant collapsed after the earthquake and tsunami, that part of the trip was canceled.

Warren Buffett attending ground-breaking ceremony for new Iscar group plant in South Korea. Credit: Bloomberg

May will mark five years since Buffett carried out his first deal outside the United States, buying 80% of blade-technology company Iscar for $4 billion, from the Wertheimer family. He paid in cash.

Since then his relations with Iscar Chairman Eitan Wertheimer, who calls himself "Buffett's travel agent" and who often accompanies the Oracle of Omaha on his global travels, have grown close.

This was Buffett's second visit to the plant in Daegu. The first was in October 2007, a year before the great financial crisis broke out. The plant has developed enormously since then, as have most of Iscar's businesses. After a difficult year in 2009, for 2010 the company reported record sales that grew 40% year over year. Its business was driven mainly by the enormous emerging markets - China, India and Brazil.

Wertheimer is along on this trip too, with his wife Ariella. Also along is Iscar President Jacob Harpaz, Chief Financial Officer Danny Goldman, marketing manager Ilan Geri and TaeguTec manager Moshe Sharon.

During the trip, Buffett fulsomely praised Iscar's management for the company's financial results. The automobile business is a key client of Iscar's, and it was hammered by the financial crisis. Yet Iscar's performance in 2010 was in line with the forecasts management gave Buffett when he bought the company five years ago.

Iscar remains a well-oiled machine grinding out profits amounting to hundreds of millions of dollars a year for its owners. It is expanding. It is buying new plants and activities, and increasing its share in important markets.

At the height of the crisis, in late 2008, Iscar acquired the Japanese company Tungaloy for $900 million to strengthen its status and marketing power in Asia, especially Japan. Tungaloy is considered Japan's strongest company in cutting tools for chip processing. In the last two years Iscar has been integrating Tungaloy's plant into the company, while expanding and modernizing it.

This brings us to Buffett's main mission on the trip: to cut the ribbons on the revamped plant. But the enormous earthquake and the plant's proximity to the leaking Fukushima plant put the kibosh on the plan.

The extent of the damage to the Tungaloy plant is unknown at this stage. Nor is it clear when the plant might reopen, if the area will be safe to work in, or whether Iscar's other plants around the world can make up for the shortfall after the shutdown. All 1,400 workers at the plant were safely evacuated and are awaiting developments. Warren Buffett too will have to await developments in Japan; he spoke with TheMarker about this and many other things.

Keep your gun loaded

Warren Buffett, it has been five years since you bought Iscar. How does its performance compare to other industrial companies in your portfolio?

"It's a terrific company. There are all different sorts of businesses but Iscar is so far and away a leader in what it does. I'm not sure I've ever seen a bigger difference between number one or number two, and it widens all the time. You're looking at people in this room that have done a fantastic job of building a business. If you think about it, [Iscar] started in Israel 50 years ago or so, the tungsten [the raw material for the blades Iscar makes] comes from 10,000 miles away and most of the customers are a long ways away. And you've got these entrenched competitors. And who wins the race?

"It's like a guy in England getting into a rowboat and his competitor's in New Jersey and he gets to New York faster. So it's pretty impressive."

The last time I interviewed you was in October 2007, four months before the collapse of Bear Stearns and 10 months before Lehman Brothers' fall - and you didn't see it coming.
"I wish I had seen it coming. I knew we had something of a housing bubble, but the way it hit like a tsunami in the housing market - I did not expect that."

What would you say are the key lessons you took from the financial crisis?

"They are not new lessons. Never owe any money you can't pay tomorrow morning. Never let the markets dictate your actions. Always be in a position to play your own game. Never take on more risks than you can handle. But all of those were old lessons, unfortunately. Even though I didn't see it coming, those lessons which are timeless allowed us to in effect profit from it rather than suffer from it. Good businesses, good management, plenty of liquidity, always having a loaded gun; if you play by those principles you will do fine no matter what happens. And you don't ever know what's going to happen."

What would have happened if the U.S. government had not bailed out the banks?

"[The problem] wasn't the banks so much - the number-one part of the bailout was to the American public. Immediately post-Lehman, there were $3.5 trillion in money market accounts. That was half of all the domestic deposits at the banks of the United States: 30 million people had their money in money market accounts. They did not have FDIC insurance and the first three days of the week following Lehman, $175 billion disappeared from those accounts.

"It was a cascade of fear, and if the government had not stepped in to bail out those 30 million people .... They were bailing out everybody, and as a practical matter they were trying to save the American economy, which was sputtering, from coming to a complete stop.

"I give enormous credit to [U.S. Federal Reserve Chairman Ben] Bernanke and [Hank] Paulson [Treasury secretary at the time] and to President [George W.] Bush and Sheila Bair [chairwoman of the U.S. Federal Deposit Insurance Corporation] and [U.S. Treasury Secretary] Tim Geithner.

"They acted in a way that was absolutely necessary, and only government could have done it. And they did it, they did the right things."

How worried were you?

"I wasn't worried because I knew the government would do the right thing. I knew they had the tools to do the right thing, they were the only ones that had the tools and I knew the people in charge were not the type to freeze in the headlights. I knew the president came out and said that he supported action.

"Congress wasn't worried for a while ... but I felt that Congress would do the right thing once they understood the situation. I didn't feel like they understood the situation as fast as some of the others.

"I really wasn't worried. We invested $15.5 billion in three weeks after Lehman. I thought it was an opportunity, but I did feel it was absolutely vital that the U.S. government realize the incredible seriousness of the situation and act promptly and in some unprecedented way. They guaranteed commercial paper, they guaranteed money market funds, and none of that was in their charter a week earlier."

So who's to blame for the financial crisis?

"The American people, including banks, Congress, the administration, Freddie Mac and Fannie Mae, the media - they all subscribed to the idea that residential housing could not collapse .... The idea that a $22-trillion asset class in an economy that is only worth in aggregate maybe $55-60 trillion, which for two-thirds of people with their own homes was their major asset, and in many cases they borrowed very significant funds against something that would plunge in value - this was something that we all participated in.

"It was a collective delusion, that once adopted, spread through all kinds of institutions and instruments of finance so that the interdependence of these items, once the delusion became exposed, once it became apparent that the emperor had no clothes, swept through the economy with the impact and the speed of a tsunami. All kinds of things happened that you wouldn't have thought possible because of this huge interdependence in markets."

You didn't mention the rating agencies.

"It includes them - there were a few people out there shoring up subprime, but basically it includes everybody."

What lessons are they learning now at Moody's?

"We've always said at our annual meeting that we don't pay attention to ratings, but Moody's has an imperfect model of the possibilities of home prices changing dramatically for the worst. But everyone had that imperfect model.

"Freddie Mac and Fannie Mae are going to be the two biggest losers by far with the American people. It is going to cost us nothing in effect to lend money to the banks.
We lend 200 and some billion dollars, we get back 200-some billion. We're going to lose some money, the federal government probably, but not a lot. The big losses are Freddie Mac and Fannie Mae, and those were the two businesses that were under the management of the federal government, and what they did had nothing to do with rating agencies. They bought and guaranteed their own mortgages."

Do you see things differently today than you did 10 or 20 years ago - the shortcomings of capitalism?

"No, I think capitalism is terrific. Also 10 or 20 years ago. All systems have failings and can be subject to abuse, but if you look at what has been produced over the past couple hundred years or the last 50 years in Israel, and the last couple hundred years in the United States and the last 30 years in much of the emerging world - capitalism works.

"It's got its failings and imperfections, but I don't know of a better system and I certainly don't know a system that has produced the gains and the standard of living that capitalism has.

"I was born in 1930, I'm 80 years old, and in the 80 years since then, the average standard of living for Americans has improved six for one in real terms. Six for one! You go back to the Middle Ages, you went centuries and you were lucky if you were looking at a 1% increase. When I came out of the womb in 1930, we faced a depression, we faced a world war that it looked like we were losing but the system works. It unleashes human potential.

What do we need to do to improve the system and its shortcomings?

"Well, there always will be shortcomings. We'll probably react to the old ones and be hit with new ones - it's the unexpected that fools you. But certainly there are a couple of lessons that come out of what happened a few years ago.

"One is excessive leverage leads to trouble. Wherever it pops up, not necessarily in the banking system, it can be in households, but the idea that you have to leverage yourself to buy something you can't pay for in its entirety, it has its merits and limitations.

"It's kind of like alcohol. One drink is fine, but 10 will get you in a lot of trouble. With leverage, people have a great propensity to use it because it's so much fun when it works. There should be some ways of controlling leverage, and that applies to individuals with home mortgages. The idea of people buying houses at 2%-3% down is going to lead to trouble.

"The other thing is proper incentives. Incentives drive behavior. We had a lot of incentives in our system and we still do. I mean its head I win and tails the other guy loses, and those are going to lead to trouble. If you have improper incentives you are going to get very unpleasant results. Now capitalism has always had that, this is not some great discovery.

"I mean, when times are good, it is kind of like Cinderella at the ball. She knew at midnight that everything was going to turn into pumpkins and mice, but it was just so much damn fun, dancing there, the guys looked better and the drinks got more frequent and there were no clocks on the wall.

"And that's what happened with capitalism. We have a lot of fun as the bubble blows up, and we all think we are going to get out five minutes before midnight, but there are no clocks on the wall."

Jeffrey Sachs from Harvard was saying that the United States is turning into a plutocracy. And this is a feeling you get throughout the world, that the politicians are not powerful and the power is in the hands of a few strong players in the business sector. Do you feel that way?

"We are still a democracy, but we have moved in my lifetime towards a plutocracy. We do not have a plutocracy, I want to emphasize that, but the distribution of wealth and the influence of wealth have moved in that direction.

"If you look at the 1992 top-400 tax returns in the United States, the average income for those 400 people was $45 million per person. The last available figures show $340 million per person - that is eight for one in a period when the average worker went no place.

"The average tax rate for the top 400 went from 28% down to 16.6% during the same period, so we have had a system where as people have gotten richer and richer, they have been favored by taxation and have gotten richer to a greater degree. To my mind that is a bad trend, and it will probably get corrected in time. The rich have more influence in politics than they did 50 years ago."

How will it change?

"I think it will change because we still have a democracy. Eventually the power of a correct idea is felt, but sometimes it is long and delayed."

Lets pick up where we left off yesterday, lets talk about Iscar for a second. Can you tell me something about the management style of Iscar when you compare it to other companies in your portfolio?

"Well, we have so many companies, there are a lot of different styles. However you would define the Iscar management style – it would be incredibly successful. Its as well managed as any company I have ever seen. Thats why I went into it."

In your letter you mentioned Eitan Wertheimer, Jacob Harpaz and you also mentioned the CFO, Danny. When you look at the financial planning in Iscar, what do you see there?

"I saw plenty of them even before we made the deal. I knew quite a bit less about making acquisitions internationally than I knew about making acquisitions within the United States - I knew the tax rules in the United States, but I dont know all that much about it internationally - so there were certain things that we needed to accomplish to make the acquisition feasible. I had talked to our lawyers in the U.S. about it and they didnt have a solution. I talked to Danny about it and he had a solution and it was plenty good."

You have said you don't want to invest in technology because you cannot look into the future and understand the business. Do you think you are missing something by forgoing the technology industry?

"I mean, you could say the same thing about how I didnt know what copper or cotton were going to do a few years ago. It would be nice to understand everything in the world but I am not going to do that and probably nobody else is.

"The important thing is to know what you know and know what you dont know. If you can extend the field of things that you know then so much the better. Obviously if you understand a great number of businesses then you have a better chance of succeeding than if you only understand a few.

"The important thing is to know the perimeter of your circle of confidence and to play within that circle – the bigger the better. But if something isnt within my circle, Im not going to be in that game. I found out about this Norwegian chess champion who's 20 years old. At 80 you would think that Im better than him, but Im not, and if I play him, he is going to beat me. He is going to beat me in about three moves.

"There is no use letting your ego tell you that you are good at something that you are not. To the extent that I can draw that line accurately Ill do well, and to the extent that I wont, I wont. Take Apple, could I have seen what happened five years ago? No. Steve Jobs saw it. It was in his mind and other peoples. Ill stick with what I understand."

Can you describe for me an instance when you thought you understood something, some industry or some company, and you realized in was not in your circle of confidence?

"Well, Ive made mistakes, and whether it was beyond my circle of confidence or whether I just didnt look enough at the facts is another question.

"Ill describe a shoe company that Berkshire bought many years ago that ended up being worth zero. Now shoes should not be beyond my circle of confidence, but I just didnt do my homework on that one. We have other shoe companies that are successful, but I have made plenty of mistakes. And one thing I can promise you is I will make some more.

"Mistakes dont bother me. I try to never do anything that would jeopardize the wellbeing of the whole place. So I build into the decisions I make the fact that I am going to make mistakes."

Correct me if I am wrong, I dont see any alternative energy companies in your portfolio either.

"We have looked at some and I do consider those within my circle of confidence, but we have never bought - and that includes energy and oil and gas and production and refining - we have never bought control of them. Weve owned a number of energy companies from time to time... But in terms of buying the entire business we have not had one that came along that was attractive to me, but that could happen next year or the year after."

When you look to the future do you think we are going to see value creation in alternative energy investment? Or will people lose money?

"Both. Thats the nature of developing technologies and industries.
"A few people make it big – just look at the auto industry. There were two thousand auto companies in America at one time or another. Look at the aircraft industry, there were four hundred airplane manufacturers in the United Sates over time. So whenever there is a major new development like television sets, you name it, over the years, it attracts capital, energetic people and energetic minds and most fail and a few succeed."

Maybe one reason to refrain from technology investments is while they have good PR, in many companies – looking ten or twenty years back - most of the value went to employees or the promoters or the management. Not even very successful companies created much profit for shareholders. Maybe technology is not an industry for investors but rather for employees and managers?

"Well, if they understand it well enough – the people that bought into Google, Apple and Amazon have done really well, so my reluctance to invest is not based on the fact that I think they will take advantage of me but more that I just dont know how to pick the winners."

When you choose investments, how important is it to you to understand the corporate governance and how the value is being distributed throughout the years among all stakeholders?

"Its important. If I were to buy a farm and have someone run it for me, the deal I would make with the farmer in terms of what%age of the crop he would get would be important. If I had someone managing an apartment building for me, my arrangement with him is important.

"Its important not only in terms of how the profits will be shared, its important in assessing the persons attitude. You want someone running a place that looks at you as a partner and not as an adversary and at Berkshire Hathaway, we really look at our shareholders as partners.

"I would rather have them do well than me do well. It comes out that we come out the same but you want someone with a fiduciary sense, a sense of stewardship. We have been uncommonly lucky in attracting management like that. To some extent people flock to like kind and because we have that tradition, that culture, because people have joined us with that attitude – it feeds on itself, as does the reverse. If its every man for himself, you get very few who will join that culture."

How is compensation of your executives and managers different from what we read about the Fortune 500 companies?

"I think we have a pretty rational compensation policy, but we have seventy plus companies – some are in capital intensive industries, some arent, some of them are easy businesses, some of them are really tough businesses, some of them have huge capital turnover but low margins, some have slow capital turnover but wider margins, so we have never had a compensation consultant, maybe one of the subsidiaries did but we certainly didnt. I dont spend 30 minutes a year on it, but they are fair-minded people and we have different arrangements at different companies because they are very different businesses. But, its not a big thing. People want to be treated fairly, but they also like running their own businesses, they like being appreciated – those things count too."

So, when they look to what happened to compensation in the U.S. in the last 10 years, dont they sometimes feel frustrated because compensation has gone up so dramatically and people have gotten so enormously – only reach out of compensation, without stock opportunities?

"Nobody has left us in 46 years to go to a competitor, I mean, we have had to terminate a few over the years, very few, and at different ages. We have people working in their eighties, and some people dont last that long – it does vary with individuals, that is why we have no retirement age."

So maybe when we see really high compensation maybe its a question of culture and not a matter of retaining top talent?

"In some places its every man for himself. They will take what they can get. The typical public company, where nobody owns very much, you have a compensation committee, on one side you may have a CEO who cares enormously about what he gets, and on the other side you have some people who come in for a few hours every month. Its not exactly like labor management type bargaining– it has never been a problem at Berkshire."

Lets talk about the macro-economy; a lot of people are concerned, with U.S. debt at about $15 trillion - you are still very optimistic about America. How do you reconcile this?

"America and a lot of other countries too are remarkably resilient. I mean, we make all kinds of mistakes in our country and we will continue to make them. But we are a country that has gone through a civil war, a country that has gone through 15 recessions, a great depression a flu epidemic, a cold war.

"There are always problems, but there are always opportunities, the thing that really counts is having 309 million people or so with a great number of them trying to make their lives better and the lives of people around them better.

"Even in a rich family they may argue about who gets most of the income, and I am sure they do. We have a very rich family in the United States. The old would want more, the young would want more, the people who are in their productive years would like to give less to those who arent. The pie will never be big enough to take care of everyones desires, but the pie does get bigger.

"Most of the decisions over time are pretty rational. Its the nature of democracy that its a pull and push, tug over the pie, but the pie in the United States is about $47,000 per capita, so its a pretty big pie, and it is a lot more fun arguing over a $47,000 pie than 5,000 or 6,000 per capita pie. But when the pie gets to $100,000, we will still be arguing."

But today foreigners have a bigger claim on this pie. Compared with the past 10-20 years, foreigners hold more equity, and more stock and more debt of America.

"Foreigners across the world have about a $3 trillion net balance against the United States. There was a time when we had a net balance against the rest of the world. Its better not to have a $3 trillion balance, but we also have about a $60 trillion economy – we can handle it.

"I dont like policies that lead to that number increasing and I have written about it, but lets not get into that. Everything that we have is denominated in our own currency, and thats a tremendous advantage."

Do you think that the Federal Reserve essentially printing money by buying most of the treasuries in the last two or three years will spur significant inflation?

"It certainly has that possibility. I just saw that the Fed was announcing that it was going to sell $10 billion a week of mortgages back. But by and large the Fed being a major buyer – some would call it quantitative easing, others would call it modernization of debt, it certainly isnt a good thing to be doing for very long."

How do you defend yourself against such consequences of inflation?

"Well, when I was born in 1930, the dollar bill of that moment is worth six cents, so it isnt inflation that destroys the country.

"Every time I get worried about inflation I think about how 94% of that dollar bill from when I was born isnt worth anything, yet I seem to have done pretty well, so it cant destroy everything.

"Nevertheless, I worry about inflation always because it is such an easy solution to things in the short term. The ultimate defense against inflation is your own talent, your own earning power. I mean, the best doctor in town, the best lawyer in town, the best musician, the best anything, whatever it may be, they will always command their share of resources of their society whether the currency is dollars or shekels or shark-sheet.

"Next to your own talent the best thing to own is a business with talent. I mean, if you own Coca Cola, it will always be able to command, whatever the currency, a certain portion of peoples earnings or hourly earnings. So I always emphasize to students, develop your own talents, no one can take them away from you, no one can even tax you until you start bringing money in from them. And inflation cant take your own talent away from you.

"If you know how to perform brain surgery, people are going to find you and they are going to figure out some way to give you whatever chicken they are producing and whatever the case may be. If you look at investments, the one thing you dont want to have is investments that are tied to a currency unit as opposed to a producing business.

You've taken to investing outside the United States. In some places like China corporate governance is a significant issue. Do you feel the difficulty is compensated for by the growth in Asia and in the BRIC countries?

"I dont think it is so overwhelmingly different in other parts of the world. Its not so great in the United States – it is obviously something I look at in any investment, but if I am looking to buy stock in a company in Israel or the UK, or Germany or wherever the case may be, I dont find great differences.

"In fact, in some of those countries I would say management gets treated less lavishly than in the United States, so obviously if I find something offensive, I am not going to do it. But I find that sometimes, in terms of looking for marketable security investments, I have always looked around the world and I may have talked about it a little more lately and people may have been more cognizant of it, but for 50 years I have always looked at securities around the world."

Yet even today most of your portfolio is in the U.S. Yet places like South Korea, China, Indonesia and Vietnam are expected to achieve tremendous growth looking ahead 10 or 20 years. Do you think this growth will translate into value for shareholders?

"I think the United States prospects are pretty good. If someone told me I could only invest in the United States and I got a $20 trillion market Id be happy. I like the idea of having more opportunities around the world, but you can get very rich investing just in the United States."

You keep saying in your annual letters in the last few years that now that youre managing such a big portfolio that you cant beat the market anymore.

"Thats tough. Id say I am hoping to get a couple percentage points more than the market."

Why do people flock to invest with you if you say year after year that you cant beat the market? Yet then 30,000 people convene every year in Omaha at the Berkshire annual event.

"Most people cant do a couple percentage points better than the market. Im telling people I still expect to do a little better than average, but nothing like Ive done in the past. I wouldnt be running it if I thought I would be doing just average. That may be what happens, and I know that I cant do more than a couple points better than average. But its better than most people do themselves. It may be better than I do."

Lets talk about philanthropy and corporate social responsibility. I read a piece in the Harvard Business Review last month by Professor Michael Porter, who said capitalism and corporate responsibility need fixing. He advocates they stop fixating on their margins and should start sharing value with the community and with the environment. Do you feel that companies can look at themselves as corporations for all stakeholders, not only shareholders?

"No, we look to shareholders. We also show shareholders what they gain from the business that looks at society, but thats certainly up to them.

"We certainly encourage behaving responsibly, but in terms of allocating the shareholders funds to other causes, I do not feel thats our function in any way. Not at all.

"I do feel so with my own funds, and I know a number of our shareholders are incredibly philanthropic... But I do not think its my job to take the money of the owners and reallocate it according to my desires."

You talk a lot about investing in companies that have a moat around them. When I look around, specifically in our country, but probably it is also true in other countries, like the U.S., some of the most significant moats built around companies are also linked to antitrust issues.

"If they really granted monopolies, then you reach for profits - that is the case with our public utility operation. And we have a utility operation, a substantial one, in the United Kingdom. And they give us a monopoly in the distribution of power, but they also put a limit on what we can earn. Thats perfectly reasonable.

"If you were given a monopoly by a sovereign then it should be ample enough to encourage investment, but not ample enough to gouge the public. That principle is pretty well established in the industries in which we operate.

"I dont even know how to use these products that Apple comes out with – but obviously they are blowing away the competition, but thats because they are a better product.
"Coca Cola has been around since 1886. People like to drink it. Were not forcing anyone to drink it. So you can say it is a monopoly, but you have total choice.

"All the same, it would be really hard for me to stop drinking Coca Cola after all these years. I dont see many monopolies. I see companies that have developed strong reputations for their companies or products.

"Wal-Mart is a terrific business. It competes every day with all kinds of competitors, and the fact is that they do their business well and got big and make good money but theyre not a monopoly in any respect. No one has to walk into a Wal-Mart store."

Does Wall Street bear a resemblance to the robber-baron era 100 years ago?

"The robber-baron era operated by a different set of rules than we do today. We had to curb certain practices that give people economic power. I would say that the rules have been refined over the past century or so to curb abusive practices. I dont think that means people dont do that now. I mean, they go to jail or they get fined very substantially if they do. I am sure price-fixing from 150 years ago, people still do it, but if they do it they get caught and they go to jail."

When you look at the amount of leverage and power that the business sector had in Washington 100-150 years ago and you look at it today, what do you see?

"Well, if you go back 100, 150 years ago at the railroads, there was plenty of political influence from the rich. The rich and the non-rich will try and exert political influence.

"Every line in the tax code is there because someone was fighting for it. The people who care about that line are concentrated and focused on it, and people who are affected by that line are diffused and really not even aware of it.

"In a democracy there is always going to be a lot of attempts to use political influence. It is up to the democracy to prevent that from getting extreme for any group. Money plays a part, but a cohesive voting group takes a part, and the only thing more important than politics and money is votes."

Why do 30,000 people come every year to Nebraska?

"This year there may be 40,000! I think they come for several reasons. One, they come to have a good time... They come because they feel part of something. When they own stock in Berkshire, they feel like they are partners with us and theyre a real owner. In many cases its a lifetime commitment, and not just buying stock that will blow up next week. Its a lifetime commitment; its like buying a piece of a farm or a piece of a McDonalds franchise.

"They vary: some are very sophisticated in business and some dont know anything about business but just trust us. We try to have something for both sides. People who just trust us just come and they feel good about being there. I dont think they are interested in hearing the nuances of fiscal policy or the other end of the spectrum where we will have a large mutual fund and 30 analysts. We get a lot of those people and its fun for us and I think its fun for them to discuss some of the same stuff we are discussing here."

Going back to philanthropy, you and your friend Bill Gates decided to give most of your money to philanthropy, and now you decided a year ago to make it a public campaign. What made you do this?

"Well, we talked to people, wealthy people, we saw that they had a lot of common interests and questions about philanthropy and they would be interested in associating with others to learn about it and we also felt to the extent that a large number of wealthy people would pledge half their net worth to philanthropy, that that would have an influence on others.

"We all work from example in one way or another, and it is our hope and it wont happen overnight, but if a large number of wealthy people explain why they do philanthropy and how they do it, it means that the people who become rich 40-50 years from now will perhaps be more inclined to think about philanthropy and will maybe engage in it earlier, than would otherwise be the case. And we have had a good response."

Do you think that the rich people should look at philanthropy like they look at their businesses and expect the same effectiveness, management tools, strategies, direction, benchmark and so forth in their philanthropy business?

"Its a tougher game. In business you are looking for easy problems. In philanthropy you are looking for very tough problems. If you are doing serious, big philanthropy, you are looking at problems that defied intellect for a long time and people have known they were important. So youve got to expect way more failure.

"In my letter to my children, when I set up their philanthropic institutions, I said if all your efforts are successful - then you are a failure, because it just means you are doing easy things that society would get done anyway.

"But one big problem, aside from the fact that youre tackling way harder problems, the second problem is you do not have a market system feedback. You set up a hamburger stands and you are turning out lousy hamburgers, you will know it by the end of the day. In philanthropy, if you are doing something dumb, you will have people encouraging you to do more of the dumb thing. So, it has no market feedback, and thats a huge issue."

So how can you measure your performance?

"You are also attacking things where you may not know your performance for 10-20 years. Its not like rolling out a marketing campaign on a new iPad where you know instantly whether youve got something worthwhile. Its a tougher game in terms of measurements, in terms of percentages and in terms of successes. That doesnt mean that it isnt an important game or a worthwhile game."

When you started investing more of your time in philanthropy and talking about it more, did you start to study it as you look at businesses? Did you develop models of looking at things, or did you just decide to give your money to professionals in that field and hope that they are doing the right thing?

"Well, we thought about this, my wife and I jointly, already 50 years ago. I always felt I was going to be rich, and I would have everything that I needed but I would also have a lot left over, and somebody would need it so we developed our philosophy on it when we were in our twenties.

"We didnt have any money, but we had a philosophy. My feeling was I would come on money at a far greater rate than most people, and therefore it paid to wait for what I could do with billions."

When you were in your twenties you thought about billions of dollars?

"Well, I did. She didnt believe me, but thats another question. But we talked about it a lot.

"I knew she would outlive me, women are very active, and she would handle it. But then when she died first, I had to change my plans and you go back to Adam Smith and the specialization of labor and I felt just like people who felt I could manage their money better in making money.

"I felt like there were people who were set up and had the time and energy and the youth in some cases to do a better job managing the money effectively for other people than I could. It was a modification of something, when originally my wife would have done it."

What do you recommend to your wealthy friends when they start thinking about philanthropy?

"Well, I tell them a couple things. I tell them that they are better off making their decisions early on than later. Rich people live longer than most people and its the last will that counts. And if you are going to be 95 with a young blonde sitting on your lap, it is probably not the best time to be thinking about what you are going to be doing with your money. So think about it earlier on and decide really what your plans are.

"And I say, take care of everything you need yourself. The people I am talking about have a lot left over. Then try and figure out the way to improve the lot of the people in this world.

"If people have been touched by a given illness in their family, they are going to focus on that. If the school they went to made a real difference in their life they are going to want to focus on that.

"Bill and I make no recommendations to people as to what they do even when they do it, although I would be inclined to say there is some advantage in doing it earlier. In my case, by ten years after they settle on my death, all my money will be spent. It cant go to institutions where they put it in endowments, it has to be spent. I would rather have the people Ive selected during my lifetime handling it than some unknown person thirty or forty years hence."

And how do your kids feel about it?

"My kids feel terrific about it. For one thing, I have included them in it. They, in effect, each have a foundation, each one of the three. The spending power of having a billion dollars in it roughly; they get to give away $50 or $60 million a year.

"All three of them not only work with the money, they work with their own energies and I am not on the board of any of their foundations and I dont judge whether A does better than B. I am very confident in all three of them and I am enormously pleased with how it has gone so far."

How did technology change your lifestyle?

"I love a computer. One of the trick questions Bill Gates and I give when were doing a performance together is which one of us spends more time on the computer, excluding email. The answer is me. I play bridge all the time on the computer and I am always looking up stuff.

"Another thing I point out, I love playing for my own use, and it may cost me a million or a million and a half a year. Having a computer, I dont know what it costs me a year but probably fifty bucks a year. If I had to give up one or the other, I would probably give up the playing."

Do you do emails?

"No. they come to me through my assistant, but I am not interested in doing emails, but I love having them available."



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