Barrons on Berkshire

[Guest longinvestor]

Thanks.  I meant more as being so specific about 1.2 book value.  Wouldn't it make more sense to say something along the lines of "Berkshire will repurchase when shares are significant discount to intrinsic value."

 

I think a lot of companies have policies where they repurchase when shares are at extreme discount to value (I assume), but they never set the repurchase threshold.  If it's to make it clear to shareholders, then setting the discount % from intrinsic value that triggers repurchase makes much more sense than 1.2x book, no?  From 2011 to 2012, the threshold went from 1.1 to 1.2, yet since 2012 there's no increase?  Especially with the view that intrinsic value has increased at a greater rate than book value increase? 

 

Unless there are extreme crisis, there's going to be no repurchase, right?  So ... that also ties the hand of future management, no?  I think future management can fend for themselves, but it just seems so unnecessary.  If buyback or dividends are rationale, sensible decisions why leave it to the successor to initiate it.

If anything, Buffett 's trying to make it easier for the next guy to pull off a buyback. He talked about the fact that in the coming decade or so, something like $400B will likely have to be allocated. With the buyback left at 1.2x not only will the stock buyback make it easier, one will notice that Buffett is happy to delay earnings realization into the future. Just PCP alone has some$400-500 million in  intangibles that would have been reported had it continued to be a standalone company.

 

If everyone's muscles are twitching now for a return of capital, it will turn into convulsions when the poor bastard steps into Buffett's shoes. The board will have to deal with it.

"When the time comes—and it could come reasonably soon, even while I’m around—and we really don't think we can get the money out in a reasonable period of time into things we like, we have to reexamine, then, what we do with those funds," Buffett said. "And at that time that we make a decision, it might include both, but it could be repurchases, it could be dividends."

With $30B coming though the door on a yearly basis (and likely to grow), Berkshire will have to start paying a dividend.  I think it'd be impossible to deploy that much capital into the market and expect to beat the averages.

Yes, it is no calamity if they do either. As a shareholder, I'd rather see them buy stock back and let me handle my cash needs when I need it. Also, I'd love to see them retire a lot of the B shares first.  But as Buffett said during this year's meeting, the market has to offer them the stock at attractive discounts to IV. Buffett even talked about how it would be a good test for the next guy to properly pull off a buy back. If he cannot jump over that one foot hurdle ?? Makes me believe that leaving the threshold at 1.2x for as long as feasible makes the most sense. The big ? is for how long. If they find another PCP size or bigger deal?

 

While we are on the subject, February 18, 1970 is a historic marker; That's the date on the letter Buffett wrote to his partners about winding down BPL. Wonder if something is in store for 2020? Just a WAG. Here are Buffett's last words from that letter,

 

Without the right group of partners, there would have been no BPL. Efforts can only be productive in the proper environment and that is what you have provided. I have probably been able to utilize my time and energy more effectively than virtually any money manager working with comparable sums. My activity has not been burdened by second-guessing, discussing non sequiturs, or hand holding. You have let me play the game without telling me what club to use, how to grip it, or how much better the other players are doing. I've appreciated this, and the results you have  achieved have significantly reflected your attitudes and behavior. If you don't feel this is the case, you underestimate the importance of personal encouragement and empathy in maximizing human effort and achievement.

[John Hjorth]

Thanks.  I meant more as being so specific about 1.2 book value.  Wouldn't it make more sense to say something along the lines of "Berkshire will repurchase when shares are significant discount to intrinsic value."

 

I think a lot of companies have policies where they repurchase when shares are at extreme discount to value (I assume), but they never set the repurchase threshold.  If it's to make it clear to shareholders, then setting the discount % from intrinsic value that triggers repurchase makes much more sense than 1.2x book, no?  From 2011 to 2012, the threshold went from 1.1 to 1.2, yet since 2012 there's no increase?  Especially with the view that intrinsic value has increased at a greater rate than book value increase? 

 

Unless there are extreme crisis, there's going to be no repurchase, right?  So ... that also ties the hand of future management, no?  I think future management can fend for themselves, but it just seems so unnecessary.  If buyback or dividends are rationale, sensible decisions why leave it to the successor to initiate it.

 

villainx,

 

To me, it is plain and pure Buffett logic, because Buffett long ago defined the rough estimate of the economic progress of Berkshire as the change in book value per share year by year.

 

Please also note the particular circumstances, that was ruling when the buy back treshold was raised from 1.1 x BV to 1.2 X BV. It was about buying back a large block of A shares [9,200 A shares] from the estate of an early [long term] Berkshire investor.

 

longinvestor has mentioned this before here on CoBF. How many early - and very rich, by holding on to the stock through thick and thin -, now still alive and at high age - Berkshire investors are there out there, what size are those individual "non float" blocks, and what will happen, when they come in play? [At least some of them will most likely come in play, because some capital gain taxes has to be paid, even if the shares are mainly distributed to inheritants, I suppose].

 

The alternative to a Berkshire buy back in such situation would most likely be a large conversion to B shares and a sale in the market of those B shares over a certain period, if Berkshire would not be willing to buy such A shares back near at that time ruling market price for the A.