CNBC's Becky Quick sits down with Berkshire Hathaway CEO Warren Buffett. The billionaire investor weighs in on Kraft Heinz, Apple, the financial sector and his own investment strategy.

Berkshire Hathaway chairman and CEO Warren Buffett joining us just after writing his annual letter to shareholders.

It's something that the investment community kind of waits on and sees as a must read because you spend so much time actually writing

Well this 1 I started very earlier very early because I had 1 section in mind.

But when I talk about the American tailwind, I probably wrote that in late summer.

And then I work around different sections, but it takes a long time.

Well, for people who have been reading this for a long time, this letter was remarkably different than you've written for the past 3 decades or so because at the top the opening of every letter in the past to this point has been Berkshire's percentage change in book value as the measure that you thought was most important This time you kind of stripped it out and said it's not the most important metric anymore for a couple of reasons.

1 is which Berkshire has changed so markedly.

But also you just think it's it's not going to be the way that you'll be measuring things in the future.

No it's it's it's it's not the more relevant figure at least over time not in any 1 year period, but basically as market value because we have become overwhelmingly an operating company and we hope to become even more so than a company that really held a lot of stocks and bonds.

So I've actually talked about that in previous reports.

I wouldn't have wanted to quit in a year where I got clobbered by the 1 I was dropping and was adopting 1 that made me look good.

So I actually included them both in and it was a good year to make the transition.

I've always had the image that I am talking to my sisters.

They're both Berkshires, pretty much their whole investment.

They're not active in business, so they're not reading about it every day.

But I pretend they've been away for a year, and I'm reporting to them on their investment.

And then this year because we may be repurchasing shares I tried to have the vision that they were talking to me about whether they should sell their shares and I was explaining to them exactly how I would look at it if I were in their shoes.

So it's Dierdoris and Bertie at the start and then I take that off at the end.

But I'm talking to them and I'm trying to talk to them in a manner where if they're practically entirely in Berkshire and if they were thinking of selling some, here's what I'd want them to know before they made a decision.

To do that, you used a new description for coming up with it this time, which was the idea of having 5 groves, being maybe a timber company and having 5 groves that Berkshire's really invested in.

You broke down and looked at each of them on a case-by-case basis, 1 being the non-insurance businesses that Berkshire owns, another being the equities bunch that you have, the final ones, the insurance companies, but you also have treasuries and cash that you're holding.

And then businesses that you own part of,

How'd you come up with the idea of just the groves?

Because it is something that somebody who's not so steeped in business can get their head around pretty easily.

Well Berkshire you know as dozens and dozens and dozens of companies.

And and when analysts look at it you know they want to go out and figure out you know how many boxes of valentines we sold you know at our candy company and you can get totally lost in terms of looking at the forest by trying to look at every tree because some of the trees are flourishing some of them are decaying and some of them are huge and important and others are more or less twigs.

So I thought I would group the assets in a way that was logical and where you could sort of figure out the valuation that you might attribute to that particular grove.

And I think it's a lot better than trying to describe

or 90 businesses with 300 but close to 300 or 90 thousand employees.

I mean we're in 1 of the businesses right now.

And to go through everyone and tell them about the latest story opened and it's it's it's much better just to look at them in groups because they make sensible groups.

To that point this is the Ask Warren show and we have gotten a lot of questions that have come from viewers some from Berkshire shareholders others from people who are just longtime watchers.

I'd like to bring up a question that comes from Marcelo P.

He writes in and I think this comes from Twitter.

Buffett in your letter you note that some of Berkshire's trees are diseased and unlikely to be around in a decade.

And how do we prevent healthy trees from joining them.

And but I I would not name the ones that have major problems just from a morale standpoint with the people.

But we have companies that are on the downswing as well as on the upswing.

And the ones that are, as I call it, diseased, they're a very, very, very small part of our earnings.

You'd gain nothing analytically, and you'd have 100 people go to work today feeling, well, we might as well give up or something of the sort.

So I don't like to name them specifically, although you could probably figure some out by looking at our list of companies.

Some companies are just in the wrong industry.

I mean, if you made whatever it may, well, even making televisions in this country, I mean, that was the hot industry when I was young and we don't do it anymore.

So I I would not I would not like it if I were working at Company X and and my boss just got through the thing.

You do name some of the big redwoods that you consider to be essential to the Grove, though.

I think you said that Berkshire Hathaway Energy and the railroad, Burlington Northern and Santa Fe are 2 of the biggest redwoods that stand in the Grove.

And both set records for after-tax earnings last year.

Combined, they earn right around $8 billion after tax.

That's a third of our operating earnings.

large fraction of operating earnings last year.

And and those 2 companies alone are today.

Now Berkshire Hathaway Energy also has multiple companies.

But the BNSF railroad is just 1 big railroad.

Let's talk about that operating profit number it was 24.8 billion dollars but on a gap basis what you're now focusing on it was 4000000000 dollars and that comes because of an accounting change that came into play this time around.

It was a 20600000000.0 dollar paper lost on your investment holdings that you now count back in from the huge amount of securities that you own and then also the 3000000000 dollar write down on craft.

You go out of your way to emphasize again that you don't think people should be looking at these gap earnings even though you're reporting them that way.

Well that's the final gap earnings at 24800000000.0 also are gap earnings.

We had some outside tailwind on that, but they were 41% greater than any year we've ever had on operating earnings.

But beyond that, we have this large portfolio of stocks and also the right down in Kraft Heinz, but The main thing was the portfolio of stocks.

We've made a lot of money in stocks over time, but there's been years when we've lost money too.

I tell the shareholders that We expect to make money on stocks over time.

We haven't got the faintest idea what years will be up or down.

And then they changed the rule last year so that unrealized gains or losses are recognized through gap income.

That had not been true for dozens and dozens and dozens of years before.

That's why I tell Doris and Bernie what's happened in accounting during the year as well as the business.

But you should point out this time it was a decline of more than $20 billion, there will be quarters where you'll see a huge upswing and you don't think people should pay attention to the upswing either.

They should pay attention to how we do over 10 years in the stocks we own.

But actually the way the rule works now, every minute it's recorded earnings.

We're buying stocks that in some cases will hold 10, 20, maybe even longer years.

Those companies are retaining earnings, they're reducing the number of shares, they've got a lot of things going for them.

And I would, you know, I have been a lot of money.

We had 173 billion of equities at year end.

And I love having those and they will make us money over time.

But I have no idea what they'll do in the next year or 2.

Let's talk through a few other questions that have come in from viewers just regarding Berkshire while we're here.

Eric Lafont wrote in and said, Warren, how have you structured Greg Abel and Ajit Jain's compensation now that they oversee dozens of different businesses?

You did point out that you think the business is much better run now that those 2 are vice chairman each running their own set of companies.

I think unless there's some calendar quirk or something like that, they will have each received $18 million last year.

And the base salary is a high percentage of that and then a bonus is discretionary with me.

Bonus is discretionary just based on anything?

may be the only 1 you'll read about like that or proxies.

There's another question that comes in regarding Greg and the G that says that this is from the rational walk.

A suggesting question on Monday given that Abel and Jane are not only responsible for running most businesses but also vice chairman.

Shouldn't they be up on stage along with Charlie at the annual meeting.

Yeah, well, you will hear from them more in the sense that they will be up front with microphones ready to take on any questions that come.

It's not going to be that many years where the 2 of us are, they will be up on the stage when we rearrange the format.

Rearranging the format means rearranging me and Charlie to some degree.

And I hope lots of questions get directed to them at

the annual meeting, because we'll feed them into them.

I should mention 1 thing about their comp.

There's this rule, and I may not be giving it to you exactly proper, but there's a rule for public companies that that you get to deduct only a million dollars for a compensation unless the excess is tied to some formula.

So everybody pays, you know, you can be running the super company of all time, and they tend to range the base salary so they're a million or 2000000, and then call the rest something that qualifies under the IRS where they get the deduction for it.

Oh yeah, well, believe me, every company knows it, and their employment consultants know and everything.

So you have all of these salaries, but then they have something that makes it very easy for them to make a lot more money.

And that money is deductible, whereas I don't think what we pay in the way of excess, I think it's over a million, is deductible.

And so we are paying them a fair amount of money, I believe, that's not deductible.

Whereas almost any other company you see, they're designing it so that it is deductible.

I always wondered why base level salary is $7,000,000.

They passed it, I don't know, 10 or 20 years ago.

And immediately, everybody, oh, we just had this revelation that now that you're really only worth a base salary of a tiny amount, you know.

And they came to me about designing something like this, you know.

I mean, we're not going to pay them a million dollars a year.

So, you know, they've got huge responsibilities.

So, you'll see a little different situation.

I think the bonus I give them, I think it was 16 base and 2 bonus, I think the 2 is probably deductible.

So, 619 on the East Coast and you're already making friends.

Let's get to another question from the audience.

He asks, How are Ted and Todd's performance since they joined about 8 years ago?

The money managers who are there, Ted Wetschler and Todd Combs, have they performed better than index?

Charlie said recently that most money managers did not add any value compared to an index.

The first few years each of them came at a slightly different time maybe a year to a year or a year and a half or something different times.

And they got well ahead of the index and they got paid compensation.

Now they got it paid so it came in thirds so that it could be clawed back two-thirds of it if they missed the second year and so on.

Overall, they are a tiny bit behind the S&P each by just almost the same margin over the same time.

Over the entire period and the entire period is a little different for both of them.

Yeah, so, no, it isn't a measuring stick, but I mention it because if I don't, somebody else will.

So, you know, They also, both of them, have done an incredible amount of work in terms of acquisitions.

Todd and particularly on our medical venture, Anything at Berkshire, we made an arrangement with Lee Enterprises in terms of managing our newspapers.

I mean, you know, he got my approval on it, but he did a million details.

they both have contributed all kinds of ways to Berkshire.

But it has been it's been a tough time to beat the S&P.

And but that's the deal we've got with them.

Carry forward of of of deficiency to make up.

I mean they they had some clawed back earlier.

I mean pretty good money for a few years.

Substantial Some of it clawed back because of the three-year look-back arrangement, and then now they've got a small carry forward.

Tony Dickinson writes in, what changes should we expect from GEICO with the transition from Tony Nicely to Bill Roberts and how do they approach leadership differently?

I mean, they've worked together so long, they're so compatible.

I mean, nobody can quite match Tony's feelings about Geico, but There's just no change.

I was at a meeting of Geico that they had maybe 40 of their top executives and everybody went around introduced themselves and gave the length of time they'd been with Geico.

I think the shortest time any 1 of those people said was 19 years.

Warren we're just sitting down with you for the first time since the news last week that Kraft Heinz put out.

There was so much news it's hard to even summarize.

When they came out with earnings that missed expectations they said by the way it's not going to get better in 2019.

They revealed that there's an SEC investigation taking place into accounting.

They wrote down the value of the brands by just over $15 billion.

Well, I may have learned a week or 10 days before about something like the SEC investigation.

And I'm not on the board, but Greg's on the board, and I talked to Greg.

And Greg had been talking a lot to the head of the audit committee, and he's a terrific guy, Jack Pope.

But the write-down, I do my own write-downs in my mind.

So I was not surprised by that, although the accounting firms look at write-downs a little differently than I do, but I would not argue with them on it.

And I can give you some math that would substantiate it.

I was wrong in a couple of ways on Kraft Heinz.

But the I think we talked to the glide luncheon time about the packaged goods brands losing some ground against the retailers.

The glide, the packaged goods companies are always in a struggle with retailers.

Our family had a grocery store for 100 years.

And then we didn't have much bargaining power.

But the really strong brands, they can go toe to toe with Walmart or Costco or whomever it may be.

Now, the interesting thing about Kraft Heinz is it's still a wonderful business in that it uses about 7 billion of tangible assets and earns 6000000000 pre-tax on that.

So the assets required to run the business, 7000000000, they earn 6000000000 roughly after depreciation pre-tax.

But we and certain predecessors, but primarily we, we paid a hundred billion more than the tangible assets.

So for us it has to earn on a hundred and 7000000000, not just on the 7000000000 that the business employs.

And we don't have a way, it'd be wonderful We had a way to deploy another 7 billion and 6 billion.

So I think that I think that when you're going toe to toe with a Wal-Mart or a Costco or maybe an Amazon pretty soon.

And you have a modestly good brand, maybe 1 word of the trend's a little against it or something like that.

You've got the weaker bargaining hand than you had 10 years ago.

The really classic situation is this if you think about it Becky.

So they've got all that time develop various products particularly ketchup things like that.

The craft part of it's a little more murky but it goes back to C.W.

Those companies have brought all kinds of brands out all kinds of you know you had them when you were a kid.

They've been distributed worldwide through tens and hundreds of thousands of outlets.

They've had hundreds of millions of times.

And that brand did 39 billion last year whereas all the Kraft and Heinz brands did 27, 26 or 7 billion.

So here they are 100 years plus, tons of advertising built into people's habits and everything else and now Kirkland a private label band comes along and with only 750 or so outlets Does 50% more business than all the Kraft Heinz brands.

I'm so house brands Private label is getting stronger.

It's It varies by country around the world, but it's bigger and it's going to keep getting bigger.

First of all, does that mean you overpaid?

We bought that originally it was a 50-50 deals private deal with 3g

yeah but 3g we had to 2 stockholders and then we overpaid for we overpaid for craft and And we wrote down 15 billion of that.

And that you know then that's the CPA's work way of looking at it.

Actually the markets marked it down more than that.

I mean the the thing to remember is you know how the stock doesn't know you own it.

You pay $10 for a stock, it goes to 8, and you think if it gets back to 10, I'll sell it.

you say, I can take out, sell half of it and take all my money out.

But in business, if we paid $7 billion for Kraft, which is all it takes to run the business, it would still earn the same amount as if we paid the $100 billion premium.

The stock, the business does not earn more just because you pay more for it.

And we not only after buying Kraft, everybody started speculating about things we buy, so the prices of everything went up.

And then on top of it, we pay large premiums for it, And we misjudged it.

I hear what you're saying about the house brands and the competition from places like a private label brand that Costco puts out.

But what about just millennials changing habits?

How much of it is that younger consumers don't want the brands that their parents and grandparents want?

But if you think about it, people don't really change their habits that much.

If you try to think of the billion-dollar brands that have been created in food and their private label, there's very few billion-dollar brands being created in food.

But you don't really see that that that has not been a huge change.

The ability to price though has been changed and that's huge.

We had an analyst on last week on Friday talking about what she perceived as the problems with Kraft Heinz.

And she said she thinks they're under investing in the business.

I mean that's kind of in 3 G's way to cut to the bone and that's how you make this profitable.

But she thinks the brands have been underinvested in.

I don't think so, but that's hard for me to tell.

But I see, well I was on the board, I mean I saw lots of innovation on different products, and you saw them advertised to some extent.

I do not think, but I don't know this for sure, but I think if you take the 10 largest food companies, I think in innovation, They've tried a lot of things, but how many things work?

If you look at Kellogg and General Mills and go up and down, Coca-Cola, I mean, how many new products really become big?

You read about them and all, but take Heinz ketchup.

It's got higher percentages in other parts of the world.

Philadelphia Cream Cheese is a strong brand.

And you are right, certainly, that in certain categories, maybe in a Kool-Aid or Jell-O or something like that, They go back 75 years or something and there's some secular trend against that.

They cut costs not in innovation or in product quality or anything like that.

Now they may have they may have made a mistake in terms of working.

I shouldn't say they we may have made a mistake in terms of trying to push hard against certain of the retailers and finding out that we weren't as strong as we thought we were.

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CNBC's Becky Quick interviews Warren Buffett (2/25/19)