Berkshire Hathaway had its annual meeting this weekend so Warren Buffett has been all over the media and CNBC answering questions.

What does Warren know about the general economy? CNBC has been asking him questions about the rate cuts, whether or not the stimulus will work, if the Fed is done cutting rates, whether or not Bear Stearns should be bailed out etc.

What does Buffett know about these issues? He is NOT an economist. Yes, he runs a company that has a lot of different divisions, such as Sees Candy and Dairy Queen, that would give him insight into what the consumer is thinking.

But that doesn’t mean he “knows” what is going to happen. He’s just guessing- like the rest of us.

What does he know about the stimulus? He has no idea whether or not the average Joe or Jane will be spending it or putting it to their credit card debt. (My take: they spend it.)

Buffett has said in the past that he doesn’t believe in market timing. So why is he answering these questions then? How does Buffett know if the Fed is done cutting rates? He doesn’t.

What Buffett knows is valuing and investing in companies. The questions about whether Bear Stearns should have been bailed out are justified. Buffett himself was involved in bailing out Morgan Stanley less than 20 years ago. From the LA Times:

He said the Federal Reserve’s bailout of Bear Stearns Cos. probably prevented a crisis among investment banks because Bear Stearns held a large number of derivative contracts with other investment banks. If Bear Stearns went bankrupt, all those derivatives would have to be valued at zero or unloaded quickly.

But he and Munger agreed that not every business or investment bank should be rescued, because failure is an important part of capitalism.

“Capitalism without failure is like Christianity without h*ll,” Buffett said.

ha! ha!

Now THAT is what we like about Buffett. He gets straight to the point.

Let’s quit asking him general economic questions. Let’s ask him about what he knows best and that’s valuing companies.

The current financial crisis is a byproduct of a system that encouraged executives to “paint pretty pictures,” Buffett said.

Munger said lots of financial institutions acted with stupidity and overreached to improve earnings in recent years. “I think you have to start with the idea that a lot of the current troubles are richly deserved,” Munger said.

The complexity of the tactics that financial institutions often employ makes it difficult to determine what those companies are worth — even for Buffett.

“There are some financial institutions I can’t value,” Buffett said.

Listen to Buffett about the financial companies. Even HE can’t value them. Neither can you.

Do as he does.

Did you catch the interview with Warren Buffett on CNBC yesterday talking about the Mars/Wrigley merger? Buffett’s Berkshire Hathaway is providing $6.5 billion in financing for the deal.

Buffett loves brand name companies. He owns Sees Candies, Dairy Queen and Pampered Chef. He also owns shares in Coca-Cola- one of his longtime favorites.

Investing Rule No. 1: Buy Great Brands

What he has encouraged investors to do, over the years, is to buy stock in companies in which you know their product and it has withstood the test of time.

Yesterday, he talked about the “70-year taste test” for both the Mars and the Wrigley brands. If people bought gum and candy bars 10 years ago- the likelihood that they’ll be buying those items in another ten years is pretty high. From the interview:

Buffett: Yeah. Both companies have great brands. When I talk to classes of university students, for a dozen years or more I’ve used Wrigley as an example … I haven’t known about Mars except that they’re a provate company. But there is really nothing that can go wrong with something like the Wrigley or the Mars brands. It’s literally true that they have, ah, faced the test of time over decades and decades and people use more and more of their products every day.

That makes sense, right?

Investing Rule No. 2: Watch out for Inflation

Carl Quintanilla: Warren, we all know that a lot of the companies in this space are leveraged to the price of commodities, whether it’s cocoa, or what have you. Do you have a comment on what we’ve just been talking about the past week, whether it’s grains, or just global commodities in general. Does it feel toppy to you?

Buffett: Well, I’ve got a son that’s a farmer. He’s a very happy fellow. They used to tell the story out here in Nebraska about the farmer that won the lottery, and they sent a television crew out to see him. And the television interviewer said, ‘You know, you’ve just won twenty million dollars in the lottery, what are you going to do with it? And the farmer said, ‘Well, I think I’ll just keep farming until it’s all gone.’ (Laughter.)

Well, that was the situation in farming until the last year or so, but it’s a different world now. And I don’t know how much ethanol contributed to it, but, you know, you get twelve dollar soybeans and six dollar corn and that sort of thing, and it’s going to have an effect. I’m amazed we haven’t seen more inflationary effect so far with the CPI, when you consider what steel is doing, what oil is doing, what grains are doing, there is a lot of potential inflation down the road.

If all the underlying commodity prices are soaring- isn’t that inflationary? Of course it is. Be warned.

Investing Rule No. 3: We’re in a recession

Buffett: Yeah. I think we’re in a recession. I mean, a recession is defined in a certain way by the National Bureau of Economic Research, but I think it’s defined by the man in the street a little differently than whether there have been two quarters of reported (negative) GDP growth.

And incidentally, when GDP growth is below 1% a year it’s really falling on a per capita basis because our population increases about one percent. So even though the National Bureau uses an absolute figure, it’s up one-tenth they don’t count that as a recessionary quarter, but the GDP per capita has gone down in a quarter where the gain is half a percent or something of the sort. We are in a recession, unless you want to stick strictly to the technical definition, which I really don’t think has much meaning to the fellow who has lost his job or is facing a money-market fund that isn’t paying him out, or whatever it might be.

Berkshire Hathaway owns many consumer-friendly businesses such as furniture stores, jewelry stores and food. Berkshire has seen the consumer slowdown and he/she hasn’t started picking up.

Investing Rule No. 4: When you see an opportunity, take it

Farr: When you look at this deal, why now? The economy, if things are contracting and we’ve got rates where they are, why is this a good time for an acquisition? And do you have any integration concerns as Mars begins to take on this public company?

Buffett: Well, I think a good time to buy a really great business is when you can do it. Many, many years ago, as I remember, Herman Lay offered the Frito-Lay company to Coca-Cola. And he offered them the company first, as I understand it, and they decided for one reason or another they didn’t want to do it then. And of course Pepsico bought it and it’s the best thing they ever did. So if you get a chance to buy a wonderful business, then my advice is, grab it. As Yogi Berra would say, ‘When you come to a fork in the road, take it.”

You never know when an opportunity will present itself. Opportunities don’t wait for the “right” economy or the bull economy. They can happen in recessions, depressions, downturns, bears etc. Be prepared.

Investing Rule No. 5: Don’t Buy What you Don’t Know

Joe: And I know, you have a lot of utilities. And you had a big Petrochina investment in China. You sold out. Should we read into that, that maybe you’re not as active in that area as the situation seems to dictate at this point? Are we getting toppy? That’s the question I’m trying to ask you. I guess nobody knows. But is it crazy right now in commodities or is this the state of the world?

Buffett: Well, who knows on that? But I don’t play sectors, Joe. When I — the thing that makes my job fun is when I go to work in the morning, I don’t really know what’s going to happen. So, two months ago, I didn’t have the faintest idea I would be investing 6-1/2 billion of Berkshire’s money in this particular transaction. You know, and then the phone rings. I love it when the phone rings. Usually it’s the wrong number but every now and then something happens.

Becky: Although Warren, you have played some sectors in the past, with the transports playing on the rails, and other areas. You have not made broad commodities plays. Is there a reason for that?

Buffett: Well, it’s probably because I don’t know what commodities are going to do. The thing about commodities, if I knew what commodities were going to do, I wouldn’t have to play them through stocks. I could just go on the commodity market and do it. So, I, I don’t know what oil or wheat or soybeans or cocoa or anything like that’s going to be selling for next week or next month or next year. I do know people are going to be chewing Wrigley gum and eating Mars bars.

Buffett doesn’t follow the grain markets everyday, so why would he invest in them? Who knows what grains will do?

But, again, he KNOWS what Wrigley gum is going to do- because it has essentially done it for the last 70 years. The history is there. The market is there. It’s not speculative.

Lessons from Warren:

Buy what you know and understand. Buy great brands. Be patient and look for opportunities. They may present themselves when you least expect it.

Again, it sounds simple, doesn’t it?

He makes it look so easy.

Thank goodness for billionaire Warren Buffett.

Got a company that is going under? Call him. Maybe he’ll buy it.

That’s the sentiment on the Street today after the WSJ wrote about the possibility of Buffett “saving” Countrywide from itself.

Some sarcastic comments from a poster named deucesuppity on the Countrywide Yahoo Message Board echo many people’s sentiments about Mr. Buffett’s possible “savior” role:

buffet 2 buy cfc as well as all 30 dow stocks and will be chipping away at nas 100.

Yes- you know people are pretty desperate when they turn to the billionaires as the only possible bailout.

Buffett HAS done some bailing out in the past, however. So it’s not totally out of the realm of possibility. But why is Countrywide attractive at $21 a share? He would have been buying at $15 a share which it was last week.

Warren Buffett’s patience is legendary. In the past, he has waited sometimes as long as a decade to invest or buy a company he likes. He never overpays for an asset.

With the leveraged buyout boom and M&A activity soaring over the past few years, he retreated to the sidelines- buying only small companies with his ever building stash of cash.

And what a stash it is. As of the end of June, Berkshire Hathaway had $47 billion to go shopping with.

Last spring, Buffett had said that he was looking for the large acquisition- somewhere in the $40 to $60 billion range- or, conversely, a few acquisitions in the $20 billion area.

What companies would he be interested in? From the Chicago Tribune:

His investment criteria include companies with “good returns on equity,” little or no debt, and consistent earnings, Buffett said in his latest annual report.

The Tribune discusses the possibility of a retailer like Kohl’s which is based in Minnesota but expanding nationwide. Kohl’s is interesting, but in my opinion, doesn’t seem cheap enough for Buffett. Also, it has no overseas exposure, which Buffett likes right now.

But a more intriguing option is the Swedish-based retailer IKEA. From the Tribune:

Ikea is among the closely held companies that might interest Buffett, said Monish Pabrai, managing partner at Pabrai Investment Funds in Irvine, Calif. Ikea has “a very powerful brand and business model that would be hard to duplicate,” Pabrai said. “I would think that’s almost a perfect fit for Berkshire.”

IKEA is still being run by its founder, Ingvar Kamprad, who is now 81. He is, depending on the year, among the world’s richest people. In 2006, his fortune put him at #3 on the list with $28 billion, but no one really knows for sure.

He is, though, very actively involved in the company. And he is very frugal. From a rare interview he gave in 2006 from Reuters:

“People say I am cheap and I don’t mind if they do. But I am very proud to follow the rules of our company,” Kamprad told French-language Swiss Broadcasting Corporation.

Asked to confirm he drove an old Volvo, he said: “She is nearly new, just 15 years old, or something like that.”

Sound familiar?

Buffett has famously driven his cars into the ground- sometimes keeping them for over a decade. According to Forbes, he recently turned in his 6 year old Lincoln and bought a 2006 Cadillac DTS. Presumably, as it was last year’s model, he got a “deal” on it.

I’m thinking these two billionaires could have a lot to talk about if they sat down at the same table.

The IKEA idea is very intriguing.

IKEA has stores in over 30 countries which fits in with Buffett’s current global interests. It is expanding heavily into China. With three stores already, including the second largest store in the world in Beijing, according to the WSJ they are adding two stores a year until 2010.

Berkshire Hathaway also owns a share of YUM, the parent of KFC, the largest fast food franchise in China.

Berkshire has a habit of buying outstanding private companies that are well-run by their original founders, such as Pampered Chef. Buffett buys the company, keeps the CEO and doesn’t care what else they do as long as they make him money. He is known to be extremely hands off.

What could be better for IKEA?

I don’t know their succession plan or how Kamprad is going to divy up the company to his three sons. But it gets more difficult to stay private the bigger you grow.

Stay tuned. Buffett will make a move with his $47 billion when everyone else is in financial distress. I don’t think that time has come, just yet. But the conditions are definitely more conducive to a deal today, than they were last May when he said he was looking for opportunities.

IKEA and Berkshire Hathaway.

I’m in heaven at the thought.