Halls of Shrewd'm / US Policy
No. of Recommendations: 2
Let's pretend Buffett called me tonight and said, KID, in exchange for 30 years of loyalty and offering sage advice, I'm going to ask you a question. What last move can I make to show appreciation to by partners?
I would say, Uncle, gift 100 billion, and have the foundations sell 100 BILLION brkb back to brkb for 1.3 xs BV, so that those shares never enter the float. How do you believe the stock would respond to that news? Thank you.
No. of Recommendations: 16
gift 100 billion, and have the foundations sell 100 BILLION brkb back to brkb for 1.3 xs BV, so that those shares never enter the float. How do you believe the stock would respond to that news?
This is simply a buyback.
Since pretty much everybody appreciates that a share is worth more than 1.3 times book, the net result would be to increase the value of remaining shares, so presumably the share price would settle a little higher at some point (even though book per share would be a bit lower). The fact that the share float did or did not change doesn't enter into it.
Here's another one for you.
Situation 1: Let's assume a half dozen of our wealthiest board members are going to sell their really big BRK stakes in the next year on the open market, to be bought by a half dozen other people out there somewhere.
Now, situation 2: assume those people all change their minds. Those shares don't trade--for all intents and purposes, this year they aren't in the float as they are not available for purchase.
Would the average stock price be higher or lower in the next year as a result? Answer: neither.
The key thing to appreciate is that capital goods and investments are very different things. The market price of pure capital goods like paintings is set by supply and demand. More supply and/or lower demand generally means a lower price. The market price of pure investment securities like stocks and bonds, on the other hand, is set by the market's appreciation of their financial return. More supply with the same investment return does not affect price. (except in a transient way sometimes during the moments of trading--way down in the rounding error)
If I put a sack of a hundred $1 bills up for sale, it will attract bids of about $100. If I put five such bags up for sale, they will each attract bids of about $100: the supply does not determine price, as there is generally an infinite demand for free money as soon as the word gets out.
This general principal is almost entirely true, but not quite perfectly so. There is a change way down in the rounding error for a few different reasons, the biggest of which is that many people THINK the size of the float should affect the price, so it affects their trading behaviour. I believe this is the reason that a voting share of GOOGL trades a bit lower than non-voting share of GOOG lately despite being worth more. Word got out that it was GOOG that Alphabet was purchasing, so people anticipate that they'll be able to sell at a higher price because there is one more bidder in the market. This mood effect seems to have started around the pandemic; the GOOGL price was rationally higher before that, not lower. A key point is that the relative value of the two hasn't changed, only the opinion of future price returns. The other reason supply and demand affects price down in the rounding error is that liquidity for anything is finite in any given time window: if there are only 100 people even considering buying today, if you dump 1000 trades worth of something to sell "at market" you'll move the price. But only so long as you keep it up, so it doesn't last. Another effect is found in purely financial securities that are very niche. If there are only a few hundred people worldwide who know about a given security and its value, additional supply could have a big effect on price when all of them already own as much as they want. That isn't a factor with large caps. And lots of things are mostly, but not purely, financial securities, so the rules may not hold. A lot of people buy Ferrari shares because they like Ferraris, not because of a rational DCF analysis. I would not speculate on what additional float would do to the price of those; the Beanie Baby rule may apply.
Jim
No. of Recommendations: 1
" This is simply a buyback.
Since pretty much everybody appreciates that a share is worth more than 1.3 times book, the net result would be to increase the value of remaining shares, so presumably the share price would settle a little higher at some point (even though book per share would be a bit lower). The fact that the share float did or did not change doesn't enter into it."
Good morning, Jim, as always, thanks for your reply. However, I have to give you two I,s in the course, incomplete and incorrect.
HOW, can you respond without mentioning that BRKB buying back 100 Billion of Buffett's shares at 1.3 xs BV, would be very accretive to IV, hence, very bullish news? Buffett has you way to focused on BV, which even he has now conceded was the wrong metric for the past 50 years. Years ago, maybe decades ago, Buffett said that if he and Charlie were locked in separate rooms their IV estimates would almost always be within 5 % of each other. The critical question is, how many xs did they agree brkb was trading at 20 percent of more below IV, yet Buffett still refused to even authorize a buyback at that time?
It's always interesting to me to see how old timers respond to certain, free market concepts, like float and supply and demand. It would be cool if RW, the Brooklyn Investor, or others opined with respect to this hypothetical. Thanks. hc
No. of Recommendations: 9
HOW, can you respond without mentioning that BRKB buying back 100 Billion of Buffett's shares at 1.3 xs BV, would be very accretive to IV, hence, very bullish news?
I did.
I said presumably the price would settle a little higher.
As with any other buybacks, it's nice, but it takes a huge move like this to make much of a difference to value per share. A few billion here or there isn't really worth paying attention to.
Let's imagine you think a share is actually worth 1.6 times book value these days, so $100bn buyback at 1.3 times book would purchase $123bn in value for $100bn in cash, adding $23bn to the total value of Berkshire.
Shareholders' equity is $649bn, so at 1.6 we're assuming the firm is worth $1039bn before the transaction. An increase $23bn is therefore an increase of only 2.2% in total value. Around 11.8% fewer shares outstanding, so value per share would rise by about 15.9%.
The transaction would drop book per share quite a bit because of the $100bn of cash going out the door, so fair P/B would be 1.93 after the transaction (same valuation level as 1.6 before the transaction).
Perhaps a bit less, as there wouldn't be the firepower for an elephant during the next round of market ructions?
Jim
No. of Recommendations: 1
" Let's imagine you think a share is actually worth 1.6 times book value these days, so $100bn buyback at 1.3 times book would purchase $123bn in value for $100bn in cash, adding $23bn to the total value of Berkshire.
Shareholders' equity is $649bn, so at 1.6 we're assuming the firm is worth $1039bn before the transaction. An increase $23bn is therefore an increase of only 2.2% in total value. Around 11.8% fewer shares outstanding, so value per share would rise by about 15.9%."
I love ya brother, BUT, sometimes I really think you are Buffett playing with us all these years. I'm talking IV, NOT, BV, how accretive to IV would a huge buyback be, tho these days, brk might be trading above IV. It might be too late now, but a few years ago, IF, brkb was trading at a 20 percent discount to IV what would a huge buyback have done?
Buffett understands the importance of fees and expenses yet be bought and promoted IBM knowing the insiders of ibm were taking 2 percent or more of the company in options, pay, etc, while missing quarter after quarter for years. As you well know, I bashed that move in real time, and received much love from the usual suspects in brkville. Thank you.
No. of Recommendations: 15
I'm talking IV, NOT, BV, how accretive to IV would a huge buyback be
That's what I addressed.
If you assume that current fair value is (for example) $722k per share (1.6 times known book at the moment), then $100bn of buybacks at 1.3 times book would increase true value per share by 15.9%.
If you think the fair value per share is currently higher than $722k then the gain would be a little bit more, and vice versa.
And probably decrease is by some unknowable amount because of the loss of optionality. There are certain things that are possible with that much ready cash that aren't possible without it.
It's rather moot as there aren't $100bn of shares available for purchase at that price. And Mr Buffett isn't going to reduce the benefit to the foundations for the sake of giving more money to existing shareholders. But it is a fine demonstration that buybacks don't increase value per share very much unless they are both (a) huge and (b) done at a material discount to fair value. They do work, but only at the margin.
Jim
No. of Recommendations: 0
" It's rather moot as there aren't $100bn of shares available for purchase at that price. And Mr Buffett isn't going to reduce the benefit to the foundations for the sake of giving more money to existing shareholders. But it is a fine demonstration that buybacks don't increase value per share very much unless they are both (a) huge and (b) done at a material discount to fair value. They do work, but only at the margin.
Jim"
Thanks, have to prepare for a pickleball match, have a grand day.
No. of Recommendations: 0
No. of Recommendations: 15
check out what happens to the stock price when a, baby blue chip, does a filing.
That is the issuance of new shares, which changes the count and the value of all shares, a very different question from what we were discussing. That's not merely a change in the number of shares in the public float (as for example you would get via the registration of pre-existing founders' shares)
In many countries, once a company "goes public" all the fungible shares of that pari-passu class may be sold on an exchange, barring any restriction contract prohibiting it. But in the US, each share or group of shares within a class is registered separately. Each S1 (each registration of a block of shares, which may entail a lockup waiting period) increases the public float but does not change the number of shares outstanding nor, by extension, the intrinsic value of any share outstanding.
I assume that all of Mr Buffett's shares are registered and unrestricted and technically part of the public float, but since he doesn't generally sell many they might reasonably be considered outside the public float for practical purposes.
If a firm sells $20m in new shares, the value of all the shares is probably changed. More cash per share, lower fraction of the business owned per share, the two probably not precisely balancing in fair value.
If a firm puts $20m of existing shares into the public float that were sitting in someone's drawer, none of the shares changes in value. They just sit in a different drawer.
Jim
No. of Recommendations: 18
Jim:
Thank you for your professionalism. And patience.
-- sutton
No. of Recommendations: 0
Jim, in answer to this question,
" Hi, do you recall when Buffett said, he wasn't buying back brkb because at the price he would pay would be taking advantage of the sellers? It may have been like 20 years ago, thanks hc."
RW, couldn't remember if or when Buffett said it.
The Brooklyn Investor replied, Yes, I do remember he said that. But that was in the context of really resisting returning any capital to shareholders, dividends or not. So I guess he loosened up on that...
For what it's worth, I'm 100 percent certain he said it and I responded to that silliness at that time.
No. of Recommendations: 0
It's a complex filing bud but I suspect 130 million shares potentially entering the float isn't great news.
"Primary Offering of
Up to 8,370,686 shares of Common Stock
Secondary Offering of
Up to 134,078,598 shares of Common Stock
Up to 79,538 Warrants to purchase 79,538 shares of Common Stock
No. of Recommendations: 6
It's a complex filing bud but I suspect 130 million shares potentially entering the float isn't great news.
Again, it's not the change in share float that matters. A secondary offering causes dilution. That matters, assuming the shares are sold at anything other than true fair value.
Jim
No. of Recommendations: 0
Financial markets are reporting on the possible TikTok deal. Fb, AMZN, and several others are being mentioned. This might be a good indication if my thoughts after the election prove out, will Buffett be asked to participate? Has Buffett's position on crypto eliminated him from, the cool kids club? IF, he isn't involved in the financing of Tik Tok, his phone might not ring much the next 4 years. Just sayin.
