Author Topic: Buffett buybacks: Could Berkshire tender stock?  (Read 147856 times)

Dynamic

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #360 on: February 25, 2019, 01:18:41 AM »
I used to think that there was a cash drag at Berkshire, but that it would be invested eventually at good rates of return.

Now, I think that there is no cash drag at times like these, because the amount of uninvested cash is remarkably close to float, an offsetting liability, albeit one that does not need to be paid back for many years as it would decline, in the worst case, at about 3% per year.

So in normal times, Berkshire's net worth is approximately fully invested and Book Value tends to compound at about 9-11% per year.

In times of market panic, where capital is in short supply, Berkshire then tends to spend a lot of the float-funded cash very rapidly on equities, and favourable preferred and warrants, taking advantage of float leverage to juice the returns without a risk of a margin call (as they did for almost the entirety of the 1970~1996 period when they could find many bargains in the stock market that would move the needle). Their credit rating also allows them to take on a modicum of debt if necessary to fund an extra large acquisition, at very cheap rates, while maintaining their $20bn liquidity cushion, and the firm's enormous cash flow will pay off such debt in short order.

This seems appropriate when it's no longer possible to operate a deep-value portfolio of small cap bargains, and for this phase of its life, now as a mega-conglomerate, where Berkshire is hoping to moderately out-pace the SP500TR each decade, with lower risk, I'm happy with it.

To be clear, 2018 was not a serious bear market ripe for massive investments. The market barely fell below the levels at which they closed 31/12/2017 (itself the end of a boom year in the markets), having been flat to falling in Q1, having risen sharply in the 2nd and 3rd quarters, then falling back close to 20% in the 4th quarter to leave the market about 4-5% below where it started 2017 (and 4-5% lower than a pretty high level, is still high). Prices of a lot of things got pretty expensive in Q3, and while a few names went on sale at prices that we small investors could jump at, most large caps were not deeply undervalued for very long at all, so Berkshire had very little time to accumulate significant positions at compelling prices, unlike some private investors. If the S&P index since 2010 or so has returned rather more than the growth in the businesses, it would require quite a significant drop, to bring relative values back to 2010 levels on average.

I'm thinking there's a good chance of at least a moderate recession in the next year or two, possibly even out as far as 2022, though it won't stop me buying when I think things are well priced. If market prices were to fall sufficiently in the next 2-3 years, I could see Berkshire deploying some seriously significant amounts of its float-funded cash. Berkshire needs a sustained reduction in general prices to deploy such large sums with a high margin of safety, and some point in the next 2-4 years might very well provide such an opportunity.

As to buybacks, sure, I think there could a reasonable amount coming soon, probably keeping cash fairly close to float when combined with purchases of other stocks. But I don't think the time of large 'elephant' acquisitions or sweetheart financing and reputation-lending deals has passed (like BAC and GS warrants/preferreds that pay off handsomely after the Global Financial Crisis). But I think it may take a while for the private equity bubble and general stock market valuations to play out and offer decent chances of such opportunities.

In the meantime, Berkshire's Intrinsic Value continues to offer more than acceptable growth, and the stock appears to remain almost permanently valued at a fair to good discount to IV, so I'm very happy to keep it as a mainstay of my portfolio and usually my default "far better than cash with a modest downside risk" option for new funds that I accumulate unless something particularly promising appears on my radar. Even if Berkshire were to drop 10-15% after I park my cash there, it's likely to be a short-lived drop, and otherwise I'm likely to earn around 10% annualised while waiting for my next high conviction opportunity (e.g. something without about 40-50% margin of safety).
« Last Edit: February 25, 2019, 03:39:59 AM by Dynamic »


John Hjorth

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #361 on: February 25, 2019, 02:26:11 AM »
Carrying a post by obtuse_investor over here from the "Annual Letter 2018" topic:

To all who are disappointed in the buyback volume last quarter: please be patient.

Buffett has been playing a multi decade game; and he is still playing it. He isn’t going to let his mortality stop him. ...

”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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John Hjorth

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #363 on: February 25, 2019, 05:14:16 AM »
Thank you for sharing, gfp,

To me, this explains a lot of what we have discussed here on CoBF within the last two weeks about Berkshire's capital allocation. An elephant in sight, that got away, in short. Just too bad - one cannot win them all.
« Last Edit: February 25, 2019, 10:21:00 AM by John Hjorth »
”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

cubsfan

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #364 on: February 25, 2019, 10:55:00 AM »
Some color on the decisions made in Q4-

https://www.cnbc.com/2019/02/25/buffett-says-he-was-close-to-making-a-very-large-acquisition-in-the-4th-quarter-but-it-fell-apart.html

I love this guy:

--When pressed for further details on the mystery deal, Buffett says, "I'll give you a hint. It's on this planet."

SwedishValue

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #365 on: February 25, 2019, 01:14:05 PM »
I -really- feel that someone asking Mr. Buffett about the possibility of a tender offer would be justified. It is a matter in which his personal view on the matter can have huge implications for an outsider trying to value Berkshire. It is possible that he believes a tender offer would be unjustifiably "coercive", potentially luring retail investors into tendering stock at a price that looks like a good deal but really is a much better deal for continuing shareholders. It is also possible Buffett would approve of a tender, but find the likelihood of it happening to be tiny for different reasons. It is also possible that Buffett actively considers it an option, among others, for deploying excess capital.

Am I alone in thinking this question deserves more attention than the usual questions regarding GE/KHC/KO/AAPL/Bitcoin? To me, depending on the answer given by Buffett to the above question, I would alter my personal valuation of Berkshire by several % (ergo, if he believes a tender offer immoral, I would increase the likelihood of Berkshire ending up with 200+ BN in cash to be much higher than if he communicated that he believed a tender offer both is possible and reasonable to happen at some point).

How can we get this question across to Mr. Buffett?

Spekulatius

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #366 on: February 25, 2019, 01:43:13 PM »
Thank you for sharing, gfp,

To me, this explains a lot of what we have discussed here on CoBF within the last two weeks about Berkshire's capital allocation. An elephant in sight, that got away, in short. Just too bad - one cannot win them all.

Yes, the CoBF lynch mob can put the pitch fork back into the shed. It’s too bad that he couldn’t fire off the elephant gun and he missed the opportunity to add to equities, but things can happen. Warren will now more likely return money to shareholders via buybacks unless he has another elephant in his crosshairs, which seems unlikely in the near term.
Life is too short for cheap beer and wine.

rb

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #367 on: February 25, 2019, 02:14:33 PM »
Must have been some elephant if he stopped buying while sitting on 100+ billion in cash.

AdjustedEarnings

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #368 on: March 07, 2019, 06:58:37 AM »
Price is below $200 again. I can almost imagine them buying...$300k of stock today... sarcastic obviously. But point being, I doubt we're going to have any large buy backs this quarter. What do you all think?

alwaysinvert

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #369 on: March 07, 2019, 07:04:22 AM »
Price is below $200 again. I can almost imagine them buying...$300k of stock today... sarcastic obviously. But point being, I doubt we're going to have any large buy backs this quarter. What do you all think?

Well, we know that there weren't any up to February 14, so even if they are buying hand over fist after that, the total amount for the quarter is unlikely to be impressive.