Warren Buffett reveals his investment strategy and mastering the market (PART 1).

ANDY SERWER: Warren Buffett needs little introduction. He's the godfather of modern-day investing. For nearly 50 years, Buffett has run Berkshire Hathaway, which owns over 60 companies, like Geico and Dairy Queen, plus minority stakes in Apple, Coca-Cola, and many others. His $82.5 billion fortune makes him the third richest person in the world. And he's vowed to give nearly all of it away. The Oracle of Omaha is here to talk about what shaped his investment strategy and how to master today's market.

I'm Andy Serwer. Welcome to a special edition of "Influencers" from Omaha, Nebraska. It's my pleasure to welcome Berkshire Hathaway CEO Warren Buffett. Warren, welcome.

WARREN BUFFETT: Thanks for coming.

ANDY SERWER: So let's start off and talk about the economy a little bit. And obviously, we've been on a good long run here.

WARREN BUFFETT: A very long run.

ANDY SERWER: And does that surprise you? And what would be the signs that you would look for to see that things were winding down?

WARREN BUFFETT: Well, I look at a lot of figures just in connection with our businesses. I like to get numbers. So I'm getting reports in weekly in some businesses, but that doesn't tell me what the economy's going to six months from now or three months from now. It tells me what's going on now with our businesses. And it really doesn't make any difference in what I do today in terms of buying stocks or buying businesses what those numbers tell me. They're interesting, but they're not guides to me.

If we buy a business, we're going to hold it forever. So we're going to have good years, bad years, in between years, maybe a disastrous year some year. And we care a lot about the price. We do not care about the next 12 months.

ANDY SERWER: But are you surprised at how long this economy has been expanding?

WARREN BUFFETT: I've been surprised by all kinds of things in the last 10 years about the economy. I don't think there was any economist I've ever read that talked about negative interest rates for long periods of time. If you go back and read Keynes, or you read Samuelson, you read any of them, they do not get into a negative rate environment. I think now there's still $11 trillion that's-- of government debt around the world that's at a negative rate.

So we've never seen it before. And we've never seen, at least the conventional wisdom on it, a sustained period of long and growing deficits while the economy's getting better, extremely low interest rates, and really very little inflation. So something different's happening, but something different happens all the time. And that's one reason economic predictions just don't enter into our decisions.

Charlie Munger, my partner, and I, in 54 years now, we've never made a decision based on an economic prediction. We make business predictions about what individual businesses will do over time, and we compare that to what we have to pay for them, but we have never said yes to something because we thought the economy was going to do well in the next year or two years. And we've never said no to anything, because we were right in the middle of a panic even, if the price was right.

ANDY SERWER: All right, so you don't pay much attention to the dismal scientists then, I guess.

WARREN BUFFETT: Well, I pay none in the sense of as a guideline to doing anything. It's entertainment. It's like going to a variety show or something like that. But I just don't know of any economist that actually has bought businesses successfully or done well in stocks. Paul Samuelson did. And as you may know, he was a big shareholder at Berkshire.

But it's-- they make guesses. And there's so many variables. In the hard sciences, you know that if an apple falls from a tree that it isn't going to change over the centuries because of anything or political developments or 400 other variables that go in. But when you get into economics, there's so many variables. And the truth is you've got to expect good times and bad times in business. And if you were to buy an auto dealership wherever you live locally or a McDonald's franchise or anything like that, you wouldn't try and time the purchase. You'd try and make the right purchase at the right price, and you'd want to be sure you got a good business, but you wouldn't say, I'm going to buy it because growth this year is going to be 3% instead of 2.8% or something of the sort.

ANDY SERWER: Fair enough. You have over $100 billion of cash at Berkshire.

WARREN BUFFETT: Berkshire does.

ANDY SERWER: Berkshire. Not you. Well, I'm gonna see how much you got.

WARREN BUFFETT: Yeah! [LAUGHS]

ANDY SERWER: Maybe you do! Berkshire has over $100 billion in cash. And you say that you always want this company to be a fortress. So how much cash should an ordinary investor have on a percentage basis, do you think?

WARREN BUFFETT: It depends on their personal situation. If you're working in something where you're living off your paycheck from week to week, you want to have a little cash around, and you certainly don't want have a credit card that's maxed out or anything like that. But if your house is paid off, if you don't have big living expenses, you got a portfolio of decent diversified businesses, you don't really need any cash.

ANDY SERWER: So you can be more cash-free than Berkshire is.

WARREN BUFFETT: Yeah. Yeah, I've got responsibil-- we've got insurance claims. We could have hurricanes that would happen, all kinds of things, where you might have to pay out billions of dollars. And I've got over a million people that own shares that are counting on me to run the place, so we get through periods like that.

But if I were retired, I had a-- say, a million dollar portfolio of stocks that was paying me $30,000 a year in dividends or something of the sort, and my children were grown, the house was paid off and everything, I wouldn't worry too much about having a lot of cash around.

ANDY SERWER: Let's talk a little bit about Apple. Everyone always wants to talk about Apple, right? It's kind of the it stock, it company. You have a $45 billion stake, more or less. How closely do you follow the company? People are concerned they haven't really introduced any new products.

WARREN BUFFETT: Well, if you have to closely follow a company, you shouldn't own it.

ANDY SERWER: Really?

WARREN BUFFETT: No. If you buy a business-- if you buy a farm, do you go up and look every couple of weeks to see how far the corn is up? And do you worry too much about whether somebody says this is going to be a year of low prices because exports are being affected or anything like that? You buy a farm, and you hold it for-- I've got one farm that I bought in the 1980s. And my son runs it. But I've been there once. It doesn't grow faster if I go and stare at it. I can't cheer for it, more effort, more effort, or something like that. And I know there's going to be some years when prices are going to be good and some when the prices aren't going to be good. I know there's years when yields will be better than others. But I bought the farm.

And it just doesn't-- I don't care about economic predictions or anything of the sort. I do care that over the years it's well tended to in terms of rotating crops. And I hope yields get better, which they generally have. In fact, that farm 100 years ago would have probably produced 30 bushels, maybe 35 bushels of corn per acre. Now on a good year, it'd be 200. We've really made progress in this country. That's one reason commodity prices, go back a couple hundred years, they've moved so little is because we've just gotten better and better at whether it's cotton or whether it's corn or soybeans or all kinds of things. And you and I have benefited from that.

ANDY SERWER: And so Apple's kind of like a farm.

WARREN BUFFETT: Well, it's a long-term investment. If you owned the best auto dealership in town, the best brand, and had somebody good running it, you wouldn't drop by every day and say, you know, how many people have come in today? Or, I think, interest rates are going up a little. Maybe we ought to slow down our sales.

No, you buy it knowing there's 365 days a year. You're going to own it for 20 years. So that's 7,300 days. Things are going to be different from day to day and year to year. You shouldn't buy it if the day-to-day stuff is important.

ANDY SERWER: Let's switch over to talk about buybacks, which is another hot topic these days. And you did a fair amount. If you look in the annual report, you can see that between December 13 and 24, it looks like you guys bought back about $233 million worth of Berkshire, which was right near that particular stock market bottom. How did you know that? What was going through your mind?

WARREN BUFFETT: If I knew, I'd had bought a lot more than 200. That's not a big purchase for us, actually. We will buy Berkshire when we have lots of excess cash, all the needs of the business are taken care of. We spent $14 billion on property, plant, and equipment last year, way more than depreciation.

So we take care of the needs of the business, then we have excess cash. We'd love to do is find other businesses to buy, but if I think the stock and my partner, Charlie Munger, think the stock is selling below intrinsic business value, we will buy in stock.

ANDY SEWER: So it obviously was at that point?

WARREN BUFFETT: Well, we thought so, yeah. But what's really intriguing is when it goes down a lot. I mean, when you're buying dollar bills for $0.60 or $0.70, which, periodically, you get a chance to do it in stocks, then yeah, assuming you've the cash, whenever it gets so that some surprise could really take you out in some way. But if we've got excess cash, we'll buy it as fast as we can.

ANDY SEWER: At that point, it'll be more like a 2009 rather than just December of this pay season?

WARREN BUFFETT: Yeah, exactly. If you and I own a McDonald's franchise together, and it's worth a million dollars, and you own 50% of it, and you come to me and you say, I'll sell out for $400,000, I'll buy you out.

ANDY SEWER: In my mind, I'd be wary of that for just that reason.

WARREN BUFFETT: You should be, yeah. If you want $600,000, you'll say come back tomorrow.

ANDY SEWER: So just continuing about buybacks, Senator Schumers and Sanders want the government to weigh in to sort of legislate when companies can do buybacks. And then also, there was a report recently about executives doing insider trading, it appears, around the times of buyback. So are buybacks kind of a problem?

WARREN BUFFETT: Well, you'll have some people that misbehave irrespective of any activity. That really wouldn't have much to do with buybacks. I think, buybacks, the degree to which they've been part of nefarious activity that I've observed and put a lot of years in are very close to zero. But that just may be that there aren't enough opportunities.

But that article did not-- I didn't follow the conclusion on it. You're distributing money to shareholders, essentially. You can do it by dividends and presumably, American business should distribute money to its owners occasionally. We do it through buybacks. We've done some, and we don't do it through dividends.

But most companies do it through having a dividend policy. And then if they have money beyond the needs of the business, then, I think, if their stock is underpriced, then it makes nothing but sense.

TO BE CONTINUED