Author Topic: Buffett buybacks: Could Berkshire tender stock?  (Read 190481 times)

wisowis

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #340 on: February 23, 2019, 10:02:54 AM »
So in the beginning of the letter he says he is changing how the value of Berkshire is reported in his letters.

Quote
Long-time readers of our annual reports will have spotted the different way in which I opened this letter. For
nearly three decades, the initial paragraph featured the percentage change in Berkshire’s per-share book value. It’s
now time to abandon that practice

He then goes on to say this about buybacks:

Quote

When a company says that it contemplates repurchases, it’s vital that all shareholder-partners be given the
information they need to make an intelligent estimate of value. Providing that information is what Charlie and I try to
do in this report. We do not want a partner to sell shares back to the company because he or she has been misled or
inadequately informed.

Call me crazy, but that sounds to me like reluctance to buy back in size when he was providing investors with per-share book value as the metric to be used to calculate intrinsic value.

I think this is him telegraphing that he is now open to large buybacks, now that potential sellers have been "warned".


Gregmal

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #341 on: February 23, 2019, 10:59:46 AM »
I guess we shouldn't be too surprised that he wasn't that active during this dip, as it happened and was over so quickly. If Buffett sprang into action on every 15% dip, then he would never have any cash left for when things get really bad.  I guess it was just the wrong type of dip.  If prices had stabilized at a lower level then he probably would have been a much bigger buyer.

My guess is he is still waiting for that super elephant that will cap his career, and he wants a huge amount of capital for that.  Buybacks permanently take away capital even if it enhances per share intrinsic value, while cash stored in open market purchases can be sold to help pay for that super deal.

The longer stocks and private business values stay elevated the less likely he will make a big deal.  I guess he will just continue to spend dribs and drabs to avoid building up cash absurdly high, but won't be aggressively buying back shares.

I think if this is the case its even more troubling. Translated, this essentially means he is putting his legacy and the "exclamation mark" on his career ahead of easy and obvious, not to mention more traditional method of creating per share value.

On one hand he thinks valuations are excessive(which could also just be an excuse for making some mistakes), yet if this is the case what is the need for all the cash if you think your own equity is cheap? Further, I saw a comment here or maybe in the annual letter thread about "he's shouldn't just buy the dip on every 15% correction". Well, first off, if you know the value of what you are buying, this is irrelevant, and second, how many 15% corrections have we had in the past two decades? And where would one be had they bought BRK or any other number of market proxies during those drawdowns? Just seems like an awful lot of excuse making. Are shareholders really comfortable with this guy, and his track record of late, spending $50B-$75B on an acquisition???

rb

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #342 on: February 23, 2019, 11:02:11 AM »
Are shareholders really comfortable with this guy, and his track record of late, spending $50B-$75B on an acquisition???
Yep!

alwaysinvert

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #343 on: February 23, 2019, 11:08:03 AM »
Quote
Third, it is likely that – over time – Berkshire will be a significant repurchaser of its shares, transactions that will take place at
prices above book value but below our estimate of intrinsic value.

I guess the question is still exactly how that will be achieved but I interpret that sentence as being very close to a promise.

aws

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #344 on: February 23, 2019, 12:11:40 PM »
I think if this is the case its even more troubling. Translated, this essentially means he is putting his legacy and the "exclamation mark" on his career ahead of easy and obvious, not to mention more traditional method of creating per share value.

I don't know that I would go that far.  It's a balance between buying back some of your own shares for a small discount against the hope of a future deal at what would hopefully be a much bigger discount.  A great acquisition could add substantially more to the long-term EPS than a few percent in buybacks.   However, as the years grind by without an acquisition the drag from the underperformance of cash means the acquisition in the end would have to be all the more valuable to justify the losses by waiting.

At this point, at least in hindsight, he's probably waited too long.  It's hard to imagine a $50B acquisition today having been better than just buying back $50B of stock over the past five years.  The gap between their return on equity and the return on cash has been like 9% a year, so even if they buy something returning 12% tomorrow, the few lost years of compounding will take a very long time to make up.  But no one knew in advance that this business cycle would go on this long, that M&A valuations would stay so high, or that some sweetheart deal wouldn't just fall into his lap.

Overall, I'm much more comfortable with him being a little too conservative, than to go down the value destructive path of much of the market with buybacks and M&A regardless of the price. 

John Hjorth

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #345 on: February 23, 2019, 12:17:40 PM »
... I guess we shouldn't be too surprised that he wasn't that active during this dip, as it happened and was over so quickly. If Buffett sprang into action on every 15% dip, then he would never have any cash left for when things get really bad.  I guess it was just the wrong type of dip.  If prices had stabilized at a lower level then he probably would have been a much bigger buyer. ...

aws,

Have you studied any of the data provided in this topic?
”In the race of excellence … there is no finish line.”
-HH Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates and Ruler of Dubai

aws

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #346 on: February 23, 2019, 12:55:07 PM »
... I guess we shouldn't be too surprised that he wasn't that active during this dip, as it happened and was over so quickly. If Buffett sprang into action on every 15% dip, then he would never have any cash left for when things get really bad.  I guess it was just the wrong type of dip.  If prices had stabilized at a lower level then he probably would have been a much bigger buyer. ...

aws,

Have you studied any of the data provided in this topic?

What specifically are you referring to?  I've skimmed the topic and seen a lot of speculation about maximum repurchase amounts, but that's clearly not been any limiting factor for them.  No one really knows exactly what Buffett is going to do and when.  The most useful data regarding buybacks has been the actual reports, and that shows that he's had little interest in buying aggressively. 

To me, it made sense, and I had contributed some spreadsheets showing that Berkshire market value during the dip was dropping much slower than the market as a whole, making repurchases less attractive than open market purchases of additional portfolio securities.  Then we got the 13f and saw he didn't really buy anything there, so one had to wonder if it was him putting a floor under the price with a lot of repurchases.  And today we got the answer that no, he wasn't buying much of anything in Q4.  YTD that trend has reversed and Berkshire has underperformed a lot, but now everything else is also more expensive.  Berkshire swung down less, and rebounded less, probably never putting IV that far below the bounds he would want for big buys.

All we know for sure is that he doesn't like cash getting too much more than $100B, so he will begrudgingly buy stocks or repurchase shares if he can't find a better use for the capital.  He likes Berkshire well enough in this range that it's been in to repurchase some, but has no desire to buy aggressively.  Maybe he would have bought more of everything if prices stayed 15% down for more than a week, maybe he's waiting for 20-30% discounts to do that. 
« Last Edit: February 23, 2019, 12:57:36 PM by aws »

John Hjorth

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #347 on: February 23, 2019, 01:27:48 PM »
aws,

I'm specifically referring to the attachment in this post of mine, and to gfp's very detailed elaboration in several posts in this topic about all the details in a "safe harbour" buyback plan.

To me, this can be analyzed data driven - which I have done - here, in this topic. If you look at the data, Berkshire could have bought B shares for USD 1.9 B below 205 in December 2018 [like it - at least - did in a part of October 2018]. [<- The data for what I'm writing here are in the attachment mentioned above.]

Why did that not happen?

To me, the answer to that is not about some "general considerations", but about data analysis, combined with straight thinking based on logic, taking existing and ruling regulation into consideration.
”In the race of excellence … there is no finish line.”
-HH Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates and Ruler of Dubai

gfp

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #348 on: February 23, 2019, 02:04:23 PM »
This was surprising to me and it is a choice Warren made.  In October they were only active for 6 days, buying both classes of shares at around $30.6 million per day on average.  Then they stopped on October 19th - with prices the same as when they were buying.  And they stayed out fo the market the rest of October, when prices declined as low as 197.29 / b share. 

Then they started buying again 12/13 through Christmas Eve, which is 8 trading days.  Surprisingly they only purchased A shares during this period, at an average of about $29.2m worth per day.  Why on earth they would not purchase B - shares during this period is a mystery to me, unless these were purchased in blocks that were offered directly to Berkshire and this is just the number that happened to be offered. 

It seems like there was not an active safe harbor 10b5-1 plan during most of the quarter, or if there was it had a lower cap price after 10/18 and didn't trigger any purchases afterwards.  The December purchases seem like they were made outside of the plan, if one existed after 10/18.

I suppose Warren knows market participants will try to reverse engineer his buying and it could end up, over time, with a situation similar to the 1.2x rule that kept him from being able to do much.  So he changes it up a bit.

It could also be that he wanted to get the Annual Report out and now he won't feel as bad about 'taking advantage' of exiting shareholders  - his former partners.  But that seems like wishful thinking.  We'll see over time.  Maybe he got bearish like everyone else in December and thought better opportunities would come in 2019.  Not very Buffett-like, but we saw Apple freeze up on buying as well.  People seemed to get spooked.

Why on earth wasn't he buying any shares on 12/26?  I can only guess that it's because none were offered to him with a phone call, and there was no active 10b5-1 plan 'automatically' buying on Berkshire's behalf (or there was one but the cap price was lower).

We'll see..  I was certainly off in my expectations

Viking

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #349 on: February 23, 2019, 05:57:04 PM »
So in the beginning of the letter he says he is changing how the value of Berkshire is reported in his letters.

Quote
Long-time readers of our annual reports will have spotted the different way in which I opened this letter. For
nearly three decades, the initial paragraph featured the percentage change in Berkshire’s per-share book value. It’s
now time to abandon that practice

He then goes on to say this about buybacks:

Quote

When a company says that it contemplates repurchases, it’s vital that all shareholder-partners be given the
information they need to make an intelligent estimate of value. Providing that information is what Charlie and I try to
do in this report. We do not want a partner to sell shares back to the company because he or she has been misled or
inadequately informed.

Call me crazy, but that sounds to me like reluctance to buy back in size when he was providing investors with per-share book value as the metric to be used to calculate intrinsic value.

I think this is him telegraphing that he is now open to large buybacks, now that potential sellers have been "warned".

Wisowis, i think you have nailed it. In the past Berkshire has pretty much NEVER bought back much stock; even when the shares were dirt cheap. However, i think this will now change in the future. More importantly, i think Buffett finally is ok with Berkshire making significant purchases of shares. But for this to happen, Buffett first felt he needed to do a couple of things:
1.) remove the handcuffs he has self imposed: In the past Buffett has said BRK might buy back stock when it trades at a certain price level to book value (1.2 then 1.4). In this letter he shreds this commitment. He says BV is no longer a good measure to use when valuing BRK; this is a massive change for Buffett and BRK. Now Berkshire will buy shares when they feel they are cheap and shareholders will find out when quarterly results are published; no longer being constrained to only re-purchase when the stock drops below a pre-specified price to book amount is a big benefit to BRK.

And what is cheap? Whatever Berkshire decides.

2.) provide current shareholders with an updated way to properly value the company: he spends a great deal of the current letter doing this and he lays it out quitewell. I am sure there is a reason for this.

Buffett did not repurchase in Q4 because he first wanted to communicate Berkshire’s new philosophy in the Feb shareholder letter, which was probably written before the Dec meltdown. Buffett always looks longterm; the stock will get cheap again and now he will have no self imposed constraints on when to buy back shares.

And, perhaps most importantly, Buffett has now gone out of his way to ‘warn’ or ‘inform’ investors. If they sell and Berkshire subsequently buys back a big amount of shares and this leads to a higher share price they cannot blame Berkshire for not being transparent.
« Last Edit: February 23, 2019, 06:07:51 PM by Viking »