Author Topic: Buffett buybacks: Could Berkshire tender stock?  (Read 148072 times)

valueinvesting101

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #160 on: October 26, 2018, 12:15:49 PM »
Positively surprised by Berkshire fall too. It is good since buyback can happen at an attractive price.

It is all speculation but it could be triggered by Index funds or charities selling stock to meet yearly spending requirements too.


SwedishValue

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #161 on: October 26, 2018, 12:20:42 PM »
When things goes sour, everything turns out to be correlated. This should be a nice opportunity for long-term shareholders.

Swedish_Compounder

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #162 on: October 29, 2018, 08:37:40 AM »
I realize that some members might be tired of the question how to value float and float increases that comes up from time to time. I just wanted to share WEB:s Words on the topic, since it shows that his opinion is that float is worth more than equity (as long as it costs less than zero and grows) and therefrom must be concluded that float increase must be worth more than profit. It is central to valuing BRK:s look-through profits, which is the reason I bring it up again.

Under question 27 on the link below is written a nice explanation:

https://buffett.cnbc.com/video/1998/05/04/morning-session---1998-berkshire-hathaway-annual-meeting.html

"27. Berkshire insurance float has a negative cost
WARREN BUFFETT: Zone 8.
AUDIENCE MEMBER: My name is Hutch Vernon. Iím from Baltimore, Maryland.
My question has to do with float. You said in the annual, and youíve said in the past, that float has had a greater value to Berkshire than an equal amount of equity.
I wondered if you could clarify that statement. Is that because the float has been generated at such a low cost relative to an imputed cost for equity, or is there something else behind that statement?

WARREN BUFFETT: No, itís because the float, which is now, weíll say, 7 billion, comes to us at a negative cost. We would not make that statement if our float was costing us a couple percent a year, even though float would then be desirable. Highly desirable.
But our float is even better than that, or it has been, and so it comes to us with a cost of less than zero. It comes to us with a profit attached.
So if we were to replace ó if we were to get out of the insurance business and give up the 7 billion of float and replace it with 7 billion of equity, we would have less going for us next year than under the present situation, even though our net worth would appear to be 7 billion higher.
And I have said, if we were to make the decision ó if we were offered the opportunity to go out of the insurance business, and that 7 billion liability would ó as part of that decision ó would evaporate from our balance sheet, so that our equity would go up 7 billion, with no tax implications, we would turn down that proposition.
So obviously we think that 7 billion, which is shown as a liability, when itís part of a ó viewed as part of an insurance business, is not a liability at all in terms of real economic value. And of course, the key is not what the float is today, and not what the cost is today.
The key is what is the float going to be 10 or 15 years from now, and what is the cost going to be 10 or 15 years ago. And, you know, we will work very hard at both increasing the amount of float and keeping the costs down somewhere close to our present level.
That makes it a very attractive business when that can be done. GEICOís a big part of doing that, but weíve got other things, other insurance operations, thatíll be important in that, too. And we may have others besides that in the future.
Charlie?
CHARLIE MUNGER: Yeah. If the float keeps growing, that is a wonderful thing indeed."

SwedishValue

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #163 on: October 29, 2018, 08:57:26 AM »
Itís one very important point that you bring up. In the light of float increase and look through earnings, one likely more closely looking at Berkshire the way Munger and Buffett are - and compared with just the reported GAAP earnings the difference is huge. Buffett spoke about the GAAP earnings compared with look through earnings on many occassions as well.

Btw, do I know you? Is the Swedish investing universe really this big? :D

Cigarbutt

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #164 on: October 29, 2018, 01:02:52 PM »
^The topic does often come up and there have been some equations suggested to discount the liability.
I wonder if the discounting exercise applies to all insurers as the underlying principle means a long term capital commitment related to underwriting discipline.

Recently reviewed transactions completed in the non-life insurance runoff area (including by Fairfax) over the last few years. Interesting because the acquirer, in these transactions, aims, in a way, to decrease the advantages related to float:

1-cost of float
The acquirer aims for a low cost of float instead of a negative cost of float.

2 and 3-discounting and growth
The acquirer aims to accelerate the runoff (active management of claims, commutations etc) and to bring the number of claims to zero.

Despite the above, it is possible to buy a runoff book of business at book value (assuming "adjustments" to reserves, strong claims management and superior investment ability) and obtain a satisfactory return. So, reserves liabilities at BH deserve a significant discount. However, unless in a last man standing scenario, growth in float should moderate and float to shareholders' equity has been decreasing and stands now at about a third.

When looking at other insurers, interesting to compare the investment leverage (float per share) and to multiply that number by a factor related to excess return expected (or absence thereof) related to superior investment ability.

The discounting exercise for BH (balancing float assets and reserve liabilities) also helps to evaluate how much cash could be converted to stock investments if stars align. I would say about 30 to 40% of cash float could be used pretty much overnight.

Swedish_Compounder

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #165 on: October 30, 2018, 01:06:16 AM »
That is the core of the matter. There is no other major insurer like BRK. Therefore, the same methods can not apply. What Buffett says is that their float should not be discounted at all, since it is expected to grow and it comes at a negative cost.

He also makes the example that he would not be willing to give up his float for good if receiving the corresponding amount in cash. Thus, the float is worth more than the corresponding cash amount (in Berkshires case).



IceCreamMan

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #166 on: November 01, 2018, 11:38:32 AM »
Touching back on a previous topic, what's the explanation for Berkshire's stock price rising 5% the day after the buyback threshold was loosened, but declining slightly the day Buffett said in an interview that he recently bought back "a little" stock (for the first time since 2012)?

July 18: S&P +0.22%, IAK +1.09%, BRK-B +5.27%
August 30: S&P -0.44%, IAK -0.62%, BRK-B -0.72%

Even if the market interpreted the buyback policy change to mean that Berkshire was likely to buy back stock soon, or if the new policy was perceived as more significant than actual buybacks, I would have still thought that confirmation of buybacks from Buffett would mean something, too.

SwedishValue

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #167 on: November 01, 2018, 12:27:13 PM »
I've seen firsthand stocks blip up when Buffett mentioned he's bought them. Like with Apple. Instant market reaction. Buffett said his buyback remarks under opening hours, and the stock didn't even blip. It blew my mind back then and it still does today.

I think the market has a materially different view to me regarding the meaning of the buyback announcement.

I guess it's likely we know more saturday, or monday, or in the months to come.

As has been pointed out in this thread many times before: Buffett can barely offset the cash that Berkshire brings in by the amount he can spend on buybacks in the public market.

Also, an update for the volume traded in October:

111 558 790 B-shares were traded, which means that the maximum 25% threshold would give buybacks amounting to 5,7 Billion USD can have been made from B-shares.
8 600 A-shares were traded, which means that the maximum 25% threshold would give buybacks amounting to 2/3 Billion USD can have been made from A-shares.

All in all, the theoretical max for October is around 6,4 Billion USD.

nickenumbers

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #168 on: November 01, 2018, 01:25:47 PM »
I've seen firsthand stocks blip up when Buffett mentioned he's bought them. Like with Apple. Instant market reaction. Buffett said his buyback remarks under opening hours, and the stock didn't even blip. It blew my mind back then and it still does today.

I think the market has a materially different view to me regarding the meaning of the buyback announcement.

I guess it's likely we know more saturday, or monday, or in the months to come.

As has been pointed out in this thread many times before: Buffett can barely offset the cash that Berkshire brings in by the amount he can spend on buybacks in the public market.

Also, an update for the volume traded in October:

111 558 790 B-shares were traded, which means that the maximum 25% threshold would give buybacks amounting to 5,7 Billion USD can have been made from B-shares.
8 600 A-shares were traded, which means that the maximum 25% threshold would give buybacks amounting to 2/3 Billion USD can have been made from A-shares.

All in all, the theoretical max for October is around 6,4 Billion USD.

SwedishValue,

I follow all of your points and I appreciate the math regarding the max cash that BRK could buyback [pittance] relative to their GIGANTIC pile of cash.  Your ultimate conclusion is unclear to me?  What does the share buy back, cash reserves and stock price mean to you?

Thanks for the clarity!
The fastest Cheetah still waits for the lame baby antelope.  ..patience..

SwedishValue

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #169 on: November 01, 2018, 01:50:17 PM »
I have a few conclusions for myself, feel free to disagree.

First, Buffett has - on so many occassions - talked about the punchcard approach of investment. It is imperative that if one gets a good idea, you should make it a big one. Thus, I think itís likely Buffett will use his buyback mandate in a very aggressive manner.

Buffett buying back shares means he thinks Berkshire is significantly undervalued. My default position is to always agree with Buffett - especially on matters of valuation and matters of Berkshire. This should be his sweet spot, so Buffett being wrong about the intrinsic value of Berkshire now that he is buying back stock, is not realistic.

Buffett buying back up to 25% of the daily trading volume should put some soft floor on the trading level of Berkshire. This also has the implication that the shareprice is likely to converge to intrinsic value faster than it would have without Buffett buying back.

Keeping track of possible buyback volume and comparing to reported volume will give a good indication as of how aggressive Buffett has been. All the news articles Iíve read that mention buybacks argue for much lower volumes than I think is likely.

All in all, I think itís a good time to be long Berkshire - also for Ēspecial short-term reasonsĒ.