Author Topic: Is Berkshire Hathaway Under Attack?  (Read 6941 times)

ericopoly

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Re: Is Berkshire Hathaway Under Attack?
« Reply #10 on: February 25, 2009, 11:47:57 PM »
I don't think he wants to buy shares back.

1)  It's not like he can't find places to allocate cash at attractive prices
2)  It weakens the balance sheet (Berkshire is strong not because it returned cash to shareholders, but rather because it retains it to build a diversified earnings stream on attractive terms -- constantly adding more tributaries to the Amazon of earnings).


calonego

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Re: Is Berkshire Hathaway Under Attack?
« Reply #11 on: February 26, 2009, 06:17:30 AM »
He's likely always been/will be willing to buy back (at the right price).
If you can get a close call on your own IV - a share buyback at a substantial discount is not only highly accretive, it's also as close to a zero risk allocation of capital as one can make (provided you are highly confident in IV).
Why on earth would you buy someone else's company for half IV, if you can buy your own for that ( exc. ego).
You get that really cool reverse compounding situation too - it's permanent and so risk free.

I'm sure he'd rather be back hunting snipe, rather than elephants...
He doesn't even look at small stuff anymore.

Although he does seem to enjoy the spotlight more now though (can this interfere with his rationality??)
JC

ericopoly

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Re: Is Berkshire Hathaway Under Attack?
« Reply #12 on: February 26, 2009, 07:27:09 AM »
Why on earth would you buy someone else's company for half IV, if you can buy your own for that ( exc. ego).


Well, because "his" company is really just an amalgam of many companies.  One of his biggest is his minority stake in WFC.  He must have extreme confidence in WFC for that.  Think hard about this -- doesn't make sense to buy all businesses back equally when you can just focus on the absolute best opportunity to increase IV in a concentrated manner.  He doesn't care about too large of positions -- he quotes Mae West "Sometimes having too much of a good thing is wonderful." (not sure if that quote is precise).  He once put 25% into KO -- we're nowhere near that level yet with WFC.

He could buy more WFC at $9-$11 instead.  That will add more to IV.  Remember he wrote (a year ago) that he believed IV of WFC actually increased, despite the troubles brewing.

Further, if WFC did go to zero the balance sheet would be no worse off from a cash standpoint than if he had bought back shares.  Sure, you'd own a fractionally higher proportion of the other businesses but from strictly a financial strength standpoint of Berkshire itself, it would be impaired equally the same.
« Last Edit: February 26, 2009, 07:54:40 AM by ericopoly »

ericopoly

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Re: Is Berkshire Hathaway Under Attack?
« Reply #13 on: February 26, 2009, 07:52:06 AM »
Put it this way:

He could sink $10b into WFC.  He is only risking $6.50b on an after-tax basis.

Which has more impact on Berkshire IV?  Buying back $6.5b of BRK shares, or buying $10b of WFC shares?

WFC is like Buffett's left hand -- does he not know his left hand at least as well as the rest of his body?  It was one of the largest stakes Berkshire owned before the collapse, and he bought it for his personal account at no less than $20 last summer.  He likely found it to be a 50cent dollar at the time.  At $10, it must have been (in his mind) a 25 cent dollar (or less).

Now, should he pass up 25 cent dollars in order to buy more Berkshire?
« Last Edit: February 26, 2009, 07:56:02 AM by ericopoly »

zarley

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Re: Is Berkshire Hathaway Under Attack?
« Reply #14 on: February 26, 2009, 08:54:20 AM »
does anybody know how buffett communicated the buyback offer to shareholders in 2000..was is through the annual report or a press release?  I was just curious.. thanks

Not sure if this was the only official discussion of it, but he mentioned it in the shareholder letter.

Quote from: The 1999 Annual Report
Recently, when the A shares fell below $45,000, we considered making repurchases. We decided, however, to delay buying, if indeed we elect to do any, until shareholders have had the chance to review this report. If we do find that repurchases make sense, we will only rarely place bids on the New York Stock Exchange (“NYSE”). Instead, we will respond to offers made directly to us at or below the NYSE bid. If you wish to offer stock, have your broker call Mark Millard at 402-346-1400. When a trade occurs, the broker can either record it in the “third market” or on the NYSE. We will favor purchase of the B shares if they are selling at more than a 2% discount to the A. We will not engage in transactions involving fewer than 10 shares of A or 50 shares of B.

calonego

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Re: Is Berkshire Hathaway Under Attack?
« Reply #15 on: February 26, 2009, 01:18:16 PM »
eric,

2009 is very different than 1999, but there were some excellent values then too.

Per your comments:

- he can find opportunity, all I'm saying is that it is generally wiser to purchase your own shares than another Co's at a similar discount to IV (maybe you're confusing another post, this had nothing to do with the IV of WFC till you brought it up).
- purchasing your own shares is tieing up cash in a way similar to buying a position you can't/won't sell. I can't see how it weakens the balance sheet if it's a correct decision based on IV.
- he only has one way to purchase more of many of his holdings. If you imply out the value of BRK via insurance op, plus CF of operating subs, it may prove prudent to buy the parent stock to purchase more of the private holdings.
- BRK would be far better off buying it's own stock back relative to buying WFC in the event something went horribly wrong. Just walk through what would happen to the BS in the event WFC went broke and he owned 800mln shares, rather than the 300mln he owns (and he cancelled some BRK shares at $75k).
- I'm confident he won't buy more WFC thinking he'll get a tax break from it going broke (which is highly unlikely). So the 10bln figure on a comparative basis should be allocated to BRK, WFC or other companies. I don't get why you'd only buy back 6.5bln relative to buying 10bln WFC.

In any event, WFC is now in the mid-14s (and was when you wrote out what you wrote), I hope he bought shares at $9-11, but that isn't an option and wasn't when you wrote that.

I'm not saying BRK vs WFC, just that buying BRK may be highly prudent.
« Last Edit: February 26, 2009, 01:24:14 PM by calonego »
JC

ericopoly

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Re: Is Berkshire Hathaway Under Attack?
« Reply #16 on: February 26, 2009, 02:35:38 PM »
maybe you're confusing another post, this had nothing to do with the IV of WFC till you brought it up


WFC became relevant when you said: 

Why on earth would you buy someone else's company for half IV, if you can buy your own for that


Berkshire is an owner of WFC.  It is not "someone else's company".


I can't see how it weakens the balance sheet if it's a correct decision based on IV.


It improves the per share earnings of the company.  However, the fortress is weaker -- you are just leveraging up the company (exactly the same financial risk as paying out a huge dividend.  The rainy day fund is smaller).


"I don't get why you'd only buy back 6.5bln relative to buying 10bln WFC."

Well then, if you are that confident that WFC won't go broke then it's by far cheaper than Berkshire.  WFC was trading at nearly 1/2 of book there for a while, but their return on equity is insane.


« Last Edit: February 26, 2009, 02:45:51 PM by ericopoly »

ericopoly

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Re: Is Berkshire Hathaway Under Attack?
« Reply #17 on: February 26, 2009, 02:50:11 PM »
In any event, WFC is now in the mid-14s (and was when you wrote out what you wrote), I hope he bought shares at $9-11, but that isn't an option and wasn't when you wrote that.

The day it opened at $11 and traded at $9, 11% of WFC shares changed hands!  In one day! 

And I was advocating on another thread that I hope he doubles down -- IV could have grown by several percentage points on that day alone (I said that in another thread where people were voting on Berkshire appreciation).

ericopoly

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Re: Is Berkshire Hathaway Under Attack?
« Reply #18 on: February 26, 2009, 03:00:11 PM »
I don't get why you'd only buy back 6.5bln relative to buying 10bln WFC.


I was looking at it from the standpoint of how much the fortress would be weakened if WFC failed.  A dividend is a certain way to weaken it.  I think at all times he should buy more of whatever piece of Berkshire is the cheapest before considering buying Berkshire shares back in. 

We don't need more of the underperforming Berkshire companies that earn low returns.  He doesn't want to jettison disappointing wholly owned subsidiaries, that's just good for relationships and good for business (brings future deals to the table).  But you are buying more of them when you buy your shares back.  Instead, buy more of the best businesses when they are on fire sale.

JackRiver

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Re: Is Berkshire Hathaway Under Attack?
« Reply #19 on: February 26, 2009, 06:56:51 PM »
To any takers

What can be said about buybacks for companies that are using float or float type cash?  The purpose of the float is to generate income from it, whether in the form of interest, dividends, or asset price appreciation.  Buybacks with float cash don't make as much sense as buying a similarly priced income producing asset.  For Buffett to buyback Berkshire stock it would have to be at a substantial discount (really substantial with no other available investments so discounted).  I don't think that is the case today at current prices. 

As to the discussion given the above, I hope he doubled down on WFC earlier in the week, I know I did.  Then again, I don't know anything about how to value a bank.  BTW, the same non buyback policy would hold true for a bank as an insurance company (that is unless a ridiculous discount to IV).

As for the operating companies of Berkshire, I think people don't appreciate them as much as they should.  These are well managed businesses.  These businesses are generally the lowest cost producers in their respective industry segments (the most efficient).  They are in businesses that don't change easily and service basic needs and wants of consumers.  These businesses may be struggling a little (a lot) right now, but unless you have a hot product (which would suggest a rapidly changing industry--a negative to business analysis) or a business that is counter cyclical, then all businesses are performing less than they otherwise would be during this recession.  Given the above, Berkshires operating subs will outperform the competition in any economic environment (moderate inflation, high inflation, deflation).  Yes, we are in a deflationary environment right now, but our economic system is designed for moderate amounts of inflation over time.  Those in charge of our economic engine understand that, and they will do anything in their power to stamp out deflation. 

One closing comment about deflation.  Everyone always turns to Japan to try and understand deflation.  This is fine if you like thinking about irrelevant models, but it's not relevant to the United States.  Why?  Because Japan was/is the second largest economy, and we are the largest.  It would take me too long to write about why this makes a world of difference when it comes to fighting deflation but just wanted to throw it out there.  Trust me on this, the largest economic player in our global system need never worry about persistent deflation.  The tools to fight deflation will always work for the biggest economic player in the game.  Just sit back and thank god we are not number 2. 

Yours

Jack River