Subject: Re: Warren should spend the cash
Don't wait for a mega-elephant. Don't wait for Berkshire stock to sell at a large discount to IV; it's selling at IV now. Repurchasing at IV will not increase IV/share, but it will effectively convert T-Bills earning 4.3% into Berkshire stock growing BV at 10%/year.

This is tautologically incorrect. The IV of a BRK share is the total discounted cash flows of all future cash flows from that stock. The IV of a BRK share held indefinitely approaches the DCF of Bershire Corp. when held for "a very long time" and then liquidated.

When Berk buys back BRK shares, either the return on the investment on that BRK share is higher than the true DCF a.k.a. the true IV of that share, or it is the same, or it is less. When BRK buys back a share of BRK for more than its DCF calculated in this way, it is losing money, on the margin, lowerin the DCF per share of the retained shares.

It seems to me counter-intuitive that there wouldn't be a 2nd order effect of having a smaller Berk easier to invest at higher returns since the elephants require to move the needle (I LURVE mixed metaphors) shrink somewhat. But I think that this effect should be included in the correct estimation of the IV/DCF of the shares, at least for marginally small changes in total company size.

Another confounding factor is that the future DCF of Berk absolutely does depend on the trajectory Berk takes on its way to the indefinite future. When we try to describe a stock by a single DCF and thererore a single IV, we are presumably implicitly saying that DCF is (the MAXIMUM DCF possible when maximized over all possible future managements of the company and all possible futures of the world economy). Not only is this impossible to predict, but it may in principle not even exist as an unpredictable number if the universe is not predetermined.

But even with these concerns, it would still be more correct to say "IV is understimated therefore we should be buying back shares now" than to say "But I think the company will get larger returns if it shrinks itself than the people calculating IV think it will."

I'm sorry, I love this nit-picking. Hopefully there is at least one other reader out there who is tickled by these thoughts, otherwise I have probably incorrectly estimated the value of the time I put into this post.

Yours,
R:)