Ben Stein: My dinner with Warren

By Ben Stein, contributor

NEW YORK (Fortune) -- Sunday, December 13, my pal Phil DeMuth and I flew into an unbelievably cold Omaha to meet and eat the next day with the maestro, Warren E. Buffett. The next day was even colder, but Warren greeted us in his trademark folksy manner at the door to Berkshire Hathaway's old fashioned, but solid, offices in downtown Omaha. I know that space is limited so I will get right to what went on.

First, his office had changed a little bit since I was there a couple of years ago. He now has model trains everywhere, emblematic of his recent buy of Burlington Northern Santa Fe (BNI, Fortune 500) -- apt gifts, because Warren has been a model train collector since his childhood. Phil had brought him a 1930s Lionel catalog, which Warren read eagerly, Citizen Buffett with his Lionel trains Rosebud.

Ben Stein
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I asked him why he thought Burlington Northern was such a great buy and he answered in characteristic fashion...with numbers. He explained that Berkshire (BRK.A) had gotten so big that even a very successful small purchase would hardly affect earnings at all.

But a medium successful large purchase would be more helpful. (He explained this with numbers in such a rapid fashion that it was as if a computer were spitting out the analysis, which, in a way, it was. He is so astonishingly facile with numbers that it is almost eerie.)

Over dinner at the amazing Piccolo Pete's, the Italian restaurant in a working class neighborhood that seems to set aside most of the restaurant just for him, he said the economy had really been in desperate shape last fall.

The man who saved it, he said, was Ken Lewis, beleaguered head of Bank of America (BAC, Fortune 500). By buying Merrill Lynch just as everything at Lehman was falling apart, he put some confidence back into the system and stopped -- or helped mightily to stop -- a "run on the bank" which would have laid waste all of Wall Street.

If Merrill had failed, said Buffett, it would have been followed swiftly by Morgan (MS, Fortune 500) and then by Goldman. By overpaying wildly for Merrill, Lewis essentially saved the nation from financial collapse.

Without that buy, commercial paper would have simply stopped dead and the banks' slender capital would have been swamped by debt as that commercial paper could not be rolled over.

Buffett said he did not see signs, or at least not many signs, of recovery at his companies. The entities making home and construction projects were still slow, freight-car loadings were weak, and even in Omaha, a city hardly affected by unemployment, sales of jewelry and furniture were disappointing.

This, however, said Buffett, was not a reason to doubt the stock market's 2009 comeback. Buffett noted that the biggest gain the Dow had ever notched in the postwar period came in 1954 when, according to him, the unemployment numbers were dismal (although nowhere near as bad as today's) until late in the year, when a rapid recovery began.

The same thing could be happening now, he said. (I checked this later and as usual, Buffett had it right about the recovery from the 1953-54 slowdown.)

Buffett had mostly praise for Goldman Sachs (GS, Fortune 500), a frequent object of my criticism. The firm gets its huge income, he said, because there are so few banks presently available to make immense trades, and therefore it can get bigger spreads than it could have a couple of years ago.

Plus, he said, it was extremely good and careful about hedging. He used examples of Goldman's buying credit default swaps on Berkshire's immense puts on the stock market, which are not due to mature for many years but so far are in the red as the stock market has lost so much value since Buffett sold the puts.

These swaps soared in value in the darkest days of 2008, on fear that Buffett would not ultimately be able to meet Berkshire's obligations when the puts came due. Buffett said there was zero chance of that and advised Goldman to sell the credit default swaps at a major profit. But Goldman strictly held onto the hedge, he noted, with what seemed to me a mixture of admiration and amusement. (Berkshire Hathaway, of course, is a large holder of Goldman Sachs.)

Buffett told many stories of his childhood delivering newspapers in Spring Valley and Wesley Heights, two exclusive neighborhoods in Washington, D.C. He said he could almost instantly fold up a newspaper against his thigh and with one hand throw it exactly against the right door of apartments off New Mexico Avenue in 1943. He added, "And I still could."

He also spoke of his caddying at the ultra tony Chevy Chase Club, carrying two bags for 54 holes. "I was the smallest and most pitiful looking caddy," he said, "so the other caddies took pity on me and didn't beat me up." He said it was too exhausting, and he did it only one day. It surely must be the only thing he ever gave up on.

Buffett said that he did not see a good labor market for some time to come. Nevertheless, he said, he advised young people to "follow their passion" and do what they loved. If that did not provide a living, they should try something else.

President Obama still rates high with Buffett, despite his grandfather's warnings about Democrats and people who don't pay their grocery bills. (Buffett's grandfather was a successful grocer and his father, among other achievements, was a three-term GOP congressman.) However, Buffett is extremely worried about nuclear proliferation, especially to terrorist groups and to Iran.

We all spent a good part of the dinner discussing ways the terrorists might greatly diminish life in this country. I won't share these thoughts, but they are grim. (If my mother can read this from the afterlife, Buffett is the only human being I have ever met who puts FAR more salt on his food than I do.)

Now, for what you really wanted to know, Buffett thinks that for the ordinary, non-professional investor, a broad index fund still makes sense. For the professional, he still follows the advice of his mentor, Ben Graham, to look for value plays, where what you pay for a company is clearly less than it is worth.

I did not have the wit to ask him how one defined value in a constantly shifting world. We all agreed that interest rates would change towards the upside at some point, although we did not know when or by how much (of course).

Buffett, like everyone else, is mystified by the Japanese example of super high deficits, a huge national debt, and no inflation and ultra-low interest rates. Something like that is apparently happening here, he suggested, which we would all agree is true (although this week's producer prices number was worrisome and had not come out as of our dinner). But why it is happening now and did not happen in the past (there was inflation between 1933 and 1937, in a far worse economic environment), no one knew.

We talked about the death of Paul Samuelson, the genius economist, and how he had been a longtime BRK stockholder even as he preached efficient market theory. (I did not know at the time that one of the economic greats, Lowell Harriss, my long-time teacher, mentor, and friend, from Columbia, had died the same day as our dinner. R.I.P., dear friend.)

The night air after dinner was brutally cold. Buffett, while still the smartest of the smart, did not seem to know how to turn on the windshield defroster in his wife's Ford SUV and I think I may say I saved his life by showing him how to do it, since the windshield was rapidly icing over and the roads were slick.

Anyway, it was a dazzling evening. The only ready comparisons that come to mind are time spent with Milton Friedman and time spent with my father. A deeply, deeply impressive genius, statesman, and gentleman. He can caddy my investments anytime. To top of page

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