Buffett buybacks: Could Berkshire tender stock?

[rolling]

So what does it mean? what is a conservative IV for today ?

And more importantly, what is real IV for today? Because if they buy agressively below conservative IV the gap to real IV will widen very quickly.  I would bet 220 and over 250 per b share. I got to 255 yesterday on a slightly modified 2 column approach and don't think I was agressive (if net income from operations is rising 50-60% this year, then applying a 15 multiple to 2017 pre tax earnings, excluding underwriting gains, is the same as it was apllying a 10 multiple before)

 

About the 220, I'm just throwing dards... As far as I know they might agree with the 255 number...

[nickenumbers]

I wrote a blog post speculating about this. I'll paste it here but if you want to read it in a better format here's the link: http://vardeinvesteraren.nu/vardeinvestering/buffett-buybacks-could-berkshire-tender-stock/

 

 

Alwaysinvert.  I wanted to complement you on an outstanding post.  Well reasoned, original, and compelling.  Exceptional!

 

[alwaysinvert]

I wrote a blog post speculating about this. I'll paste it here but if you want to read it in a better format here's the link: http://vardeinvesteraren.nu/vardeinvestering/buffett-buybacks-could-berkshire-tender-stock/

 

 

Alwaysinvert.  I wanted to complement you on an outstanding post.  Well reasoned, original, and compelling.  Exceptional!

 

Thanks, that's great to hear.

[SwedishValue]

Is there anything we should expect in terms of volume patterns if Buffett is buying back significant amounts of stock? I've never thought about these things before, and I'm not sure whether to expect increased trading due to having an active buyer in the market or gradually decreased trading as Buffett would soak up free float?

[John Hjorth]

Is there anything we should expect in terms of volume patterns if Buffett is buying back significant amounts of stock? I've never thought about these things before, and I'm not sure whether to expect increased trading due to having an active buyer in the market or gradually decreased trading as Buffett would soak up free float?

 

That's great questions, SwedishValue,

 

We need to keep an eye on the development in the daily volume for the next three months, where we'll find out by facts presented to us in the 2018Q3 Q-10, if Berkshire has actually been buying back during the quarter.

[wabuffo]

Is there anything we should expect in terms of volume patterns if Buffett is buying back significant amounts of stock? I've never thought about these things before, and I'm not sure whether to expect increased trading due to having an active buyer in the market or gradually decreased trading as Buffett would soak up free float?

 

A preference for buying back A-shares?  It definitely would be easier to spot the volume increase if that's what he targets.

 

wabuffo 

 

 

[SwedishValue]

Is there anything we should expect in terms of volume patterns if Buffett is buying back significant amounts of stock? I've never thought about these things before, and I'm not sure whether to expect increased trading due to having an active buyer in the market or gradually decreased trading as Buffett would soak up free float?

 

A preference for buying back A-shares?  It definitely would be easier to spot the volume increase if that's what he targets.

 

wabuffo

 

B-shares trades at a discount to A-shares and are much more liquid, so my guess would be he buys B-shares.

[nickenumbers]

Great question about what to look for in daily volumes if BRK is purchasing back it's own stock..

 

My question- Would BRK buy back the B class or the A class or both?  I don't have a clear strategy of if they would have a preference for either class, or both classes to keep them in parity..

 

Reason would tell me that they could not purchase the B class in isolation because with their large amount of capital, they are in a unique position to purchase the A class large unit stock price, and allow the rest of us "small wallet" investors bid the B class up to parity.

 

Average Daily Volume in dollars is CLASS A $97M  vs.  CLASS B  $824M

 

I can't wait to read what you genius people come up with.

[John Hjorth]

Here is my take, however I haven't ever studied the spread between the A shares and the B shares:

 

If I was Mr. Buffett and and Mr. Munger, I would focus on the B shares to buy, because it's supposed to be the cheapest all the time, because of the irreversible nature of the conversion from A to B, not the other way around. Against that talks, that some blocks of A shares might end up never converted. [Think early Berkshire investors, First Manhattan Berkshire shares etc.]

 

We could track both, and conversions from A to B in the next Q-10. We already know what Mr. Buffett has converted from A to B.

[Guest longinvestor]

On the subject of trading volume, evidently it is inversely correlated with high price. At what price level does the B start trading less? $1000? Any thoughts on this?

[LC]

One thing buffett hates is being front-run. So if we're just talking about now, he's probably already doing it.

[nickenumbers]

If Buffett were to be buying back shares:

 

[*]How would we know?  Precisely.  Not notionaly but precisely.

 

[*]When would we know?  1 month, 1 week, 3 months?

 

[*]How would he be required to tell us?  Via this form or that document.  Which form and how?

 

[*]Is there a limit to how much he can buy?  Vis-à-vis Max Percentage imposed by a regulatory agency?

 

 

 

Thanks all.

 

 

[John Hjorth]

We'll find out by reading the section "Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities" in the next 10-Q [p. 45 in the 2018Q2 10-Q], combined with analysis of "CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY" [p.5 in the 2018Q2 10-Q], about three months from now.

[Guest longinvestor]

What really happened is that the advance information/transparency about buybacks was working against the company and the remaining shareholders. The opaqueness with the new buyback policy is the same practiced by them when buying other securities. The burden of pricing the stock switched from Omaha to Mr. Market. Omaha can just go back to adding value. I am guessing that Buffett feels a weight off his shoulders.

[John Hjorth]

I think the line of thinking by longinvestor is backed by the fact that Mr. Buffett hasen't given an interview about it yet [AFAIK]. Nobody can convince me that Becky Quick hasen't tried to get one with him by now.

[SwedishValue]

I agree with both John Hjorth and longinvestor.

[John Hjorth]

Here I'm reposting an exchange between longinvestor and I in the topic Sequoia Fund Investor Day Transcript.

 

Please note the date of the exchange. Food for thought. I would say that we have a forecaster among us here at CoBF, who can actually forecast.

 

... Not exactly the greatest timing... Let's say they sold BRK.A in mid Q4 at $280K/share, heck it still wasn't over $298K at year end.  Today its at $325.  Perhaps they should have assessed the assessment of BRK's future value of cashflows with a reduced tax rate, no?

 

Writing this caused me to lookup Mastercard, O’Reilly, Waters and TJX as well.  All are up significantly. Given the low cost basis' on what they sold, there is no way they picked better than they sold. They've locked in another year of under-performance with those sells. ...

 

NoCalledStrikes,

 

As always, it's easy to see in the polished & clear rear mirror. [ : -) ]

 

My only addition here is, that rolling out of Berkshire and into something else most likely adds risk to the total portfolio, so the judgement of potential return on what one is rolling into matters much while doing that. [because Berkshire has lot of built-in diversification.]

 

 

I suggested to do something about all three points by buying Berkshire - a ton - to him. I suggested some sort of average in, to get it roughly right. His reaction: "No, just buy it. You say the entry point right now is not totally silly, and it's long term, right?"

 

I got some BRK.B for him at 182.80 on November 27 in his tax deferred account, and the rest - a lot - the day after - actually the exact day that Berkshire started to take off - at 186.00 in his taxable account.

 

It was just a lucky punch, based on several elements of randomness, that got him out of the start block in a good way with Berkshire.

 

 

Kudos to you for "timing" Berkshire for your brother. Surely he's happy but hopefully he is "long term". There is a different kind of happiness that the long term shareholder feels but something words cannot express. And my long term started 15 years ago. I met a couple at the Berkshire meeting whose long term started in 1978.

 

Now, let me address the urban myth going around right now; that the tax reform and the resulting benefit to Berkshire is the reason for the recent swelling of the market price. Sure. After all, the market is a voting machine and the math on that is easy. 20% more profits inuring to the shareholders and $37B of one time estimated BV gains ain't shabby at all.

 

Let's get to the weighing machine. I've been calling out (for more than a year) that the IV was well north of what the stock is selling for, now. That 1.2x BV threshold has messed with rationality of lot of folks. I've consistently been in the school that at 1.2x, it was a 70 or 60 or 50 or...xxxty cent dollar. How much of a bargain is a matter of time. Buffett uses "instantly and materially" when he talks about the buyback benefiting remaining shareholders. The 1.2x is a vaguely correct estimate of a ridiculous discount to IV. The market for sure made that precisely wrong. Market value will eventually catch up with IV.

- - - o 0 o - - -

 

My apology for not responding to that particular post back then, longinvestor. So short reply here: I have said to my brother, that no matter what happens, Berkshire will be his last stock to sell. His burn rate in retirement, from what he can see right now [start april this year] is basically equal to his state pension, payments from his pension scheme from his former public employment and from ATP. [ https://www.atp.dk/en ].

 

So no withdrawals from his stockportfolio needed, based on unchanged lifestyle compared to while he was still working. They have only one kid, a young lady of the age 36. Likely she'll be really wealthy later in her life.

 

- - - o 0 o - - -

 

We don't need to take daily notes about volumes, it's all on the Berkshire page at NYSE.

[alwaysinvert]

Seems like the trading volume has been pretty tepid since the Q2. I guess that makes it unlikely that there are any significant buybacks going on right now. Has someone observed anything else?

[nickenumbers]

AlwaysInvert.  Roger that and I concur. 

I have been watching and the share volume has been at or below average.  The price has been up, but so has the general market been up.

 

It could be that they are looking to purchase a large block direct from the position owner.  They could also be nibbling on the B shares starting to build a position. 

 

Is there a requirement to disclose if they are buying, or only when their position size goes above a certain threshold?  I would guess it would be binary requirement  [if they buy, they have to tell the public, period.]  I don't know that, but that is my best guess.

[gfp]

They don't have to tell the public they are buying.  It will be disclosed as either treasury shares or reduced share count once cancelled - in the regular quarterly and annual filings.  They won't 'build a position' of a certain size - they will periodically cancel the treasury shares they accumulate, reducing shares outstanding

[Dynamic]

I'm not 100% sure of the reporting regulations, but I found this on Investopedia about Rule 10b-18 and it's worth following that link and reading the whole article as I provide just an excerpt below, and the article explains that Rule 10b-18 is not mandatory and merely provides conditions that would limit the potential liability against securities fraud rules, so there may be other ways to repurchase than the following and still keep the SEC happy:

 

The Four Conditions

• Manner of purchase: The issuer or affiliate must purchase all shares from a single broker or deal during a single day.
  
• Timing: An issuer with an average trading volume less than $1 million per day or a public float value below $150 million cannot trade within the last 30 minutes of trading. Companies with higher average trading volume or public float value can trade until the last 10 minutes.
  
• Price: The issuer must repurchase at a price that does not exceed the highest independent bid or the last transaction price quoted.
  
• Volume: The issuer cannot purchase over 25 percent of the average daily volume.
  

The SEC also specified more detailed disclosure requirements for repurchases. In each quarterly report on Form 10-Q and in the annual report on Form 10-K, the company must provide a table showing, on a month-by-month basis: the total number of shares purchased, the average price paid per share, the total number of shares purchased under publicly announced repurchase programs and the maximum number of shares it can repurchase under these programs or the maximum dollar amount.

 

Speculation: I would not be surprised to see only very modest buyback activity this quarter, and not to find out about the August and September buybacks (if there have been any) until early November when the 10-Q is released. I suspect Berkshire wants this mostly as an option for future capital deployment and may use it later to prevent the cash pile exceeding the float.

 

They will be aware that investors will be able to see the average repurchase price each month if they do conduct any repurchases and follow Rule 10b-18, so this might even encourage them to hold off this quarter or wait for a large announced negotiated repurchase from a major holder.

 

For example, if they were to wait and then start repurchases in October, they might reveal a reduced share count towards the end of October (26th Oct, perhaps) on the front page of the 10-Q, but would not have to disclose the average purchase prices paid in October, November and December until the 10-K is released in February 2019. If they wait until after 26th October, say, they could avoid even hinting at the volume of repurchases until the 10-K is released in Feb 2019.

[alwaysinvert]

Speculation: I would not be surprised to see only very modest buyback activity this quarter, and not to find out about the August and September buybacks (if there have been any) until early November when the 10-Q is released. I suspect Berkshire wants this mostly as an option for future capital deployment and may use it later to prevent the cash pile exceeding the float.

 

They will be aware that investors will be able to see the average repurchase price each month if they do conduct any repurchases and follow Rule 10b-18, so this might even encourage them to hold off this quarter or wait for a large announced negotiated repurchase from a major holder.

 

For example, if they were to wait and then start repurchases in October, they might reveal a reduced share count towards the end of October (26th Oct, perhaps) on the front page of the 10-Q, but would not have to disclose the average purchase prices paid in October, November and December until the 10-K is released in February 2019. If they wait until after 26th October, say, they could avoid even hinting at the volume of repurchases until the 10-K is released in Feb 2019.

 

Good stuff. It might make sense for them to hold off a bit if they want to get the most juice for the squeeze from buybacks over the market. On the other hand, if they expect the share price to go up anyway (in light of a good Q3, for example) then this logic is moot. 

 

Still, this will only mitigate but not solve the cash pile problem. If they want to avoid dividends for as long as possible, they are going to have to find some way of repurchasing bigger chunks than the stock market reasonably allows them to.

[Dynamic]

Actually, I think we will very probably see a pretty good Q3 from the business point of view and from the market value growth of the stock portfolio.

 

Difficult to tell if they're finding good places to invest the excess cash. Last quarter I think they did OK, but the markets have risen substantially since late July in quite a few areas and perhaps they'd be more reluctant to load up on Apple and banks in the latter part of this quarter, though I'm sure there will be a few things to interest them.

 

I think we might even see BVPS rise by as much as 5½-6% this quarter over 30th June's figure. That could lead to Berkshire's price increasing further, so perhaps if the price fell into the $195-$200 range, maybe even $205, Berkshire might even buy back 5-20% of the 4.1 million B-shares average daily volume to put up to $160mn per day to work (maybe 2-3 times the daily operating profits, so only slightly trimming the cash pile). This is, at best, reasoned speculation, so don't read too much into it.

[gfp]

If Apple keeps at its recent behavior there will be a decent impact on book and that income statement pass through.  Hit 222 today. 

[John Hjorth]

Perhaps it's more simple.

 

Perhaps Mr. Buffett is still standing with the bat over his shoulder, ready to pitch, - and this is about some of the early Berkshire investors still alive, who have made a killing, by holding on for so many years - perhaps now in the hundreds of millions, or billions of USD.

• Think Occam's razor,
  
• Think about none of us are getting younger, day by day,
  
• Think about last time for such transaction was almost six years ago [in that particular historical context],
  
• Think about the actual phrasing almost six years ago [again, in that particular historical context]:

  Omaha, NE (NYSE: BRK.A; BRK.B)—Berkshire Hathaway has purchased 9,200 of its Class A shares at $131,000 per share from the estate of a long-time shareholder. The Board of Directors authorized this purchase coincident with raising the price limit for repurchases to 120% of book value. Berkshire may purchase additional shares in the market or through direct offerings at no more than 120% of book value.