Berkshire’s Buyback Program

by Manshu on September 27, 2011

in Investments

A friend of mine had gone to the US to work when I was in college and one day I told him that he can buy stock in Warren Buffett’s company – Berkshire Hathaway, and that will take care of all his stock market related investments.

He asked his boss about it who told him that you need at least $50,000 to invest in it. I was a little confused when I heard that because I didn’t know that one share cost that much!

This was more than ten years ago, and the stock trades at more than $100,000 now!

That’s because Warren Buffett has never paid out a dividend, bonus or stock split or reduced the face value – things that are seen very often by other companies who want to increase liquidity, and the stock price as well.

He does have a Class B of Berkshire Shares that trade at a significantly lesser price of around $70, and that was also after a lot of small Berkshire shareholders wanted him to split the shares so that they could gift them or inherit them to their children.

Even these shares were priced much higher, and when they were introduced they had 1/30th value of the Class A shares, but only 1/200th of the voting rights. That means that until recently – the Class B shares traded at over $3,000.

Then last year when Buffett wanted to buy Burlington Railroad he had to split the Class B shares into 50 – 1 and thus the class B shares now trade around the $70 range.

With this backdrop, the world was surprised when Berkshire announced a stock buyback program for Berkshire Hathaway today.  What I found most interesting is that Berkshire has got about $47 billion of cash, and at current market capitalization and exchange rate – India’s biggest company – Reliance Industries is worth some $50 billion in all!

So, Berkshire is a very big company with cash reserves which can be matched by just a handful companies, and they have capped the buyback to a limit of cash reserves of $20 billion which is serious money in itself!

I read a lot of stuff about this today that made absolutely no sense at all, and I think people who wrote it were motivated more by their biases than facts.

However, I did read one article by the Pragmatic Capitalist that was devoid of all hyperbole, and presented two simple takeaways from this news which are that Buffett thinks Berkshire is selling a lot less for what it’s intrinsically worth, and relatively speaking – the rest of the equity market is not as attractive.

I can’t really think of anything else beyond this and rather than thinking too much about this decision, and what it could mean for the direction of the markets, the fate of stocks or in fact the fate of the man himself – people are better off accepting that not every action needs to have a complicated or sinister reason behind it, and these two simple factors could just be what prompted the man to take the decision.

{ 8 comments… read them below or add one }

Raja September 27, 2011 at 7:05 am

“However, I did read one article by the Pragmatic Capitalist that was devoid of all hyperbole, and presented two simple takeaways from this news which are that Buffett thinks Berkshire is selling a lot less for what it’s intrinsically worth, and relatively speaking – the rest of the equity market is not as attractive.”

So, here is my doubt. BRK being such a well run company, with such able managers and so much of good history and reputation is selling for significantly less than what it is worth (intrinsic value). Whereas out of the sea of companies that sell on their exchanges and are privately held, all are ‘relatively speaking’ pricier and quoted for higher price by the Mr. Market ?
Of course there have been no negative news in particular about BRK for such irrational price, isn’t it ?
Something is beyond my understanding here. Is Mr. Market that irrational ?

Regards
Raja

Reply

Manshu September 27, 2011 at 7:15 am

Yes, it is quite possible for the market to price something far lower than it’s worth, and the one thing that I have said earlier and will repeat now in this context is looking at a price of any stock and look at the yearly high and low and what a big margin there is at any given year. Even for Berkshire their yearly low is about 99k and yearly high is about 132k. Did their business really change that much to hammer the stock that much?

And this is a stable company – you can look at other stocks like Apple, Microsoft or most other stocks.
Personally I think that the EMH is going to be debunked a few years down the line. It never made any sense to me when they taught it to me and made less sense after all this years. Mr. Market is not all that rational or efficient as he is made out to be 🙂

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Manshu September 27, 2011 at 7:36 pm

Hey Raja – what about the gold scene in Taiwan? Any interesting stories? 🙂

Reply

harinee September 27, 2011 at 8:57 am

Hi
You must be delighted your gold predictions coming true with the super crash this week! Well considering the depths to which everything is crashing banks seem to be the only safe place or better still hold on to the cash!

Reply

Raja September 27, 2011 at 9:39 am

hi Harinee,

Excuse my intrusion into this comment chain, but i couldn’t stop myself 🙂 call it the itch of a new breed of value investor 🙂

I never quite understand the need to get into defensives/’safe place’ when we think the market is crashing/going to crash. Isn’t it much better to be buying things which we think are already cheaper, instead of buying something which one expects to not get any cheaper (continue to be expensive/not fall significantly)…everything is ‘relatively’ of course 🙂

As per me, it’s a conspiracy by TV talking heads, who keep asking ppl to get into defensive’s when they expect the market to fall. That way retail investor’s money will be locked and they won’t be able to buy cheaper things…Conspiracy of rich ..kind of…

Your second option is much better in my opinion…
Keep cash, it never bites 🙂 and invest when you feel time is appropriate in things which you think are much cheaper than they should be…

Regarding Gold.. i now fondly recall the time some 5-7 years back.. when a new ICICI Bank branch had opened close to our office in electronics City, B’lore and every time we visited the branch there was a sales pitch to buy gold coins/bars. Of course they were priced at a premium to market rates but the price was close to 5-7k (??) per 10 gms. I still hold the token 10g coin which i bought under sales pressure 🙂

Reply

Manshu September 27, 2011 at 7:32 pm

I was glad to see gold drop and break the notion that some people had about it moving in only one direction and that’s up, but I also realize it’s about 16% up YTD so it’s not really a crash or anything 🙂

Reply

Arvind September 27, 2011 at 2:52 pm

lucid ! 🙂

Reply

Manshu September 27, 2011 at 7:33 pm

Thanks! 🙂

Reply

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