Warren Buffett reveals his investment strategy and mastering the market (PART 3).

ANDY SEWER: Right. Why don't we do an update about the Health Care Initiative, which now, the company has a name-- Haven. Was that your idea?

WARREN BUFFETT: No. I didn't worry about a name. We could've gone on as a no-name operation for 10 years, as far as I'm concerned. We've got a wonderful partnership in the sense that it's large and has reasonable market muscle, with more than a million employees among the three of us.

We've got three CEOs that can make things get done and organizations that so are so big that normally, they wouldn't get very bureaucratic. If you tried to do this with many big companies, you'd have legal weighing in and public relations weighing in. We don't have any of that stuff.

They may have them in certain areas, but Jamie hasn't got to worry about doing that sort of thing and neither does Jeff. So we've got a unity of commitment and an ability to execute on the commitment. The only problem is, you've got a $3.4 trillion dollar industry, which is as much as the federal government raises every year, that, basically, feels pretty good about the system.

As we went around talking to people to find a leader for the group, for example, everybody says, the system, it turns out very good medicine. But you can't go from 5% of GDP to 18% without really making you less competitive, among other things, in the world. So everybody thought the system needed some adjustment, just not their part of the system. And that's very human. I'd do the same thing, I'm sure, if I was in the same place.

So there's enormous resistance to change, while a similar acknowledgment the change will be needed. And, of course, if the private sector doesn't supply that over a period of time, people will say, then, we give up. We've got to turn this over to government, which will probably be even worse.

ANDY SEWER: How often do you talk to Jamie and Jeff about it? I know Todd Combs, I think, is your point person.

WARREN BUFFETT: Todd really does all the work. If this works, give Todd 100% of the credit from the Berkshire standpoint.

ANDY SEWER: Does Haven have to buy companies to gain expertise? What do you--

WARREN BUFFETT: No.

ANDY SEWER: What is the plan?

WARREN BUFFETT: The plan is to support a very, very, very good thinker on this subject, who is a practicing physician and who commands the respect of the medical community, to, in effect, figure out some way, so that we can deliver even better care and have people feel better about their care, too. They have to perceive that they're receiving better care over time and stop the march upward of costs relative to the country's output.

We've got this incredible economic machine, but we shouldn't be spending 18% when other countries are doing something pretty comparable in terms of doctors per capita, hospital beds per capita, and all that. The very top stuff in medicine, I think, is very much concentrated in this country, and that's great.

I want us to be the leader, but I think we're paying a price. If we're paying seven extra points of GDP, that's $1.4 trillion a year.

ANDY SEWER: Is the administration focusing-- by focusing on drug prices, is that sort of a rabbit hole? Is that missing the bigger picture?

WARREN BUFFETT: They're trying. And Congress, generally-- I mean, you talk to the average congressmen-- they regard it as a problem. And they see specific instances of drug prices or something like that.

It's a big problem to change. The problem is, it intersects in so many ways. And that's why we've got Gawande heading it, and We've got three bigger-sized organizations backing him. We're not trying to do it to make money. That is not a goal that we end up with some business that we make money off of.

ANDY SEWER: Will he be talking to health insurers, for instance?

WARREN BUFFETT: He'll be talking to everybody. His game plan is not something we're going to try and lay out, because it's in his head, to some degree. I mean, obviously, we selected him by hearing, and reading, and so on what he's done.

But he'll learn as we go. We will conduct certain experiments, or he will, and try out a community, where one of us has a lot of employees maybe. There are various ways to experiment.

ANDY SEWER: Shifting gears, where do you find things like that Abe Lincoln tail-and-leg quotes? Do you read Bartlett's book of quotations--

WARREN BUFFETT: No, I don't read, but probably 50 years ago, I looked at a few Bartlett's quotations. But I read a lot and--

ANDY SEWER: Do you just remember these things and apply them?

WARREN BUFFETT: Well, if you're 88 years old, I mean, you ought to remember something. You don't remember what happened yesterday, but you remember the old stuff. You've got a lot of interesting quotations in your head.

ANDY SEWER: Yeah, but not like you do, I think. That's great. OK, so one company you invested in was GE, and you did well with that investment.

WARREN BUFFETT: Yeah, I was too early, actually. If you look back, I was very active in the last half of September and early October. And then I wrote that article in later October. And I knew it was going to get bad. I wrote in the article, it was going to get bad.

But I didn't think the stock market would react as much as it did between then and March. So I had, more or less, used up our powder well before the bottom was hit.

ANDY SEWER: That's interesting. How have you avoided not getting back into GE more recently? I mean, I'm sure that they've reached out to. Everyone says, why doesn't Warren Buffett invest in GE, and save it, and take it to the promised land? It's this great American company.

WARREN BUFFETT: Well, actually, I think Larry is actually doing a good job.

ANDY SEWER: Larry Culp?

WARREN BUFFETT: The Danaher. Yeah, Larry Culp at the Danaher is a good sell, and, I think, his priorities are straight. And, I think, he's a very able guy, and he's on the right track. And I'm a I'm a fan of GE's in the sense that we're a big buyer from them. We're a big seller to them. I know them, the managers.

Jack Welch is a very good friend of mine. We don't agree on politics 100%, but we have a lot of fun together, and I love the guy. So I've got a great desire for GE to do well. It just hasn't looked that attractive to me.

ANDY SEWER: You talked about the groves of trees in the letters shareholder. One was the third grove, which was sort of the in-between stakes.

WARREN BUFFETT: Yeah, the equity interests.

ANDY SEWER: Yeah. Is it is it the case that those are sort of not the healthiest grove of trees? And why would that be?

WARREN BUFFETT: No, Pilot Flying J is very-- there are companies that, under GAAP accounting, we have the record under equity method. We own more than 20%, but we don't control them. So it's treated under GAAP accounting as a special category. It didn't fit well in the other grove, so I had to make it a separate grove by itself. It's not that significant a grove.

ANDY SEWER: You say that the sum of Berkshire has a greater valuation than the parts.

WARREN BUFFETT: That is true.

ANDY SEWER: Did you ever try to calculate that? How much is that?

WARREN BUFFETT: Well, that depends on circumstances. There's some times when the float from insurers can be very valuable. There are some times when the ability to use production tax credits will stay in the utility business, but have been on as part of our consolidated return, helps. But that varies a lot. But it is a plus, and we can move capital.

Take a business like See's Candy, which we bought 40-odd years ago. It's a wonderful little business. It's put us out of capital. We've tried 50 different ways to expand geographically, do all kinds of things. Doesn't work. And we'll try it again, and it won't work. But we can move that capital to help buy BNSF Railroad or do all kinds of other things.

So we've got a seamless and tax-efficient way of moving capital where it's needed. And we've got some companies that really chew up capital, and we've got others that kick it off. And we can move it from one spot-- If you try to do that with your investments, you'll incur some taxes as you go along doing it. It's less efficient than what we've gotten.

TO BE CONTINUED