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Warren should spend the cash & T-Bills before he steps down. I don't think he will because he wants to leave such decisions to the new CEO. However no one is as skilled at investments, acquisitions, stock repurchases, etc. as Warren is. No new CEO will be able to resist the temptation to make a major acquisition with $342 billion in cash and T-Bills on the books, and almost all major acquisitions by corporations go poorly. The cash and T-Bills are only earning 4.3%. 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. Spend the cash now, before stepping down as CEO. Everybody will say, "Trust Warren," but Warren will not be in control much longer. Yes, he will still be Chairman of the Board, but his time to make major executive decisions, like spending $300 billion, will very soon be gone.

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.


I completely agree with what I think is your suggesttion : use most of the cash on the balance sheet to repurchase shares. From now to the end of the year, Buffett would have plenty of time to do a big Dutch auction and retire about a quarter of the outstanding shares, at a roughly reasonable price. This would be really leaving his successor with a clean slate, without the need to decide what to do with the big cash pile, just a more concentrated version per share of everything Berkshire is already.

I don't really agree that Berkshire is currently selling at intrinsic value, nor that repurchasing at the current price would not increase IV/share. If you think about it, if it's a good idea, it is because it would increase the long-term value of the company (increasing the return of a quarter of the company from 4% to 10%, say), so that means the intrinsic value (defined as the discount sum of all future cash flows would increase.

Think back to 2011, when Buffett announced that he would repurchase shares at up to 1.1x book value, when Berkshire shares were trading at about $67 per B-share and the book value was $64.60. The idea that the intrinsic value of Berkshire was, say, 1.6x book value, i.e. $100 per B-share, turned out to be crazy, since Berkshire's book value, an overly conservative measure of intrinsic value, had already reached $104 by the end of 2015, and was $142 by the end of 2018. Of course, no one knows the future, but in retrospect, using any P/B less than 2 at the end of 2011 would have underestimated the discounted future value of Berkshire, even if it had been liquidated 6 years later.

I think this is probably still the case now. If Berkshire can maintain a 2-3 percentage point advantage over the rest of the stock market in the next 10 years, then it is still undervalued at 1.6x book, and repurchasing shares now will end up being a good deal, at the very least compared to alternative purchases in Berkshire's universe of high market cap companies. I think with a much safer set of assets and with the prudent, honest, and competent management in place, there is a very good case for purchasing shares even at the current, unusually high price, just like buying Costco 20 years ago, when I declined because of the 'high' 30x earnings price, would have been a great idea.

dtb

BRK has two interesting opportunities sitting right in front of it.

First, it appears to be a given that UP is going to make an offer for Norfolk-Southern. Greg should talk to CSX and reach an agreement on a deal. It won't be cheap but the reality is that BNSF will have no choice but to buy it. An analyst predicted that BRK would have to pay 25X earnings. Do it and do it quickly while UP is still in negotiations.

Second, speculation is that Kraft-Heinz is going to split the company in a scenario that makes me think of good bank/bad bank. Heinz and a few other higher margin businesses will supposedly become a separate company. Can BRK craft a deal where it can buy Heinz and those businesses using their current stock ownership and cash? If ever there was a time to pay a premium for an asset this is it. They would be done with the other Kraft businesses and have 100% ownership of an iconic business that has proven to have staying power....a one of a kind asset.

For years many here have dreamed of buying an elephant. A quality large cap business selling at a low price. Dream on..it's not going to happen. BRK needs to look more at See's candy type scenarios where you're buying a great business at a fair price and these days it is a fair price + a premium. Otherwise it's time to go all in on repurchases and/or a dividend.

" Otherwise it's time to go all in on repurchases and/or a dividend."


Buffett isn't going all in brkb at 1.7ish XS BV. One dollar a quarter dividend is appropriate, buybacks will have to wait.


Seems odd how many want an aggressive buyback, now?

ucmtsu.

For years many here have dreamed of buying an elephant. A quality large cap business selling at a low price. Dream on..it's not going to happen.

Would just disagree with this part. Boom, Bust, Boom = capitalism. We will get the bust, we always do. Patience.

I completely agree with what I think is your suggesttion : use most of the cash on the balance sheet to repurchase shares
...
If you think about it, if it's a good idea, it is because it would increase the long-term value of the company (increasing the return of a quarter of the company from 4% to 10%, say), so that means the intrinsic value (defined as the discount sum of all future cash flows would increase.

There is a circularity problem here which is quite subtle, but a big one.

Yes, Berkshire is a pretty good long term investment, even if the valuation level is a little higher than usual. So even if it's not particularly cheap, buy!

But the sole *reason* that it is a pretty good investment over time is because management has the discipline never to allocate capital at low rates of return, which a repurchase today would probably be. The only reason they can get away with a high cash allocation is that the cash that HAS been allocated to date *has* been allocated at high (above average) rates of return. They wait for fat pitches. That is the secret sauce, and the only one.

As soon as Berkshire caves in to buying Berkshire stock (or anything else) when it's not at a discount, it is no longer a firm that it worth buying without a discount itself. The value case arises directly from the patience. Erode the patience, and you also erode the rationale for eroding the patience.


My own very heavily smoothed estimate of value per share is up $26.7k in the four quarters year in today's dollars, which is a trailing earnings yield of only (inflation + 3.5%) on the current price. Maybe my value estimate is not a good one so that is too pessimistically low, so put in your own. But either way it doesn't seem to be the sort of investment that has a rate of return that would interest head office. Thank goodness.

My wild guess? It would take another ~12% price drop for the value proposition to even start to interest management and the buybacks to begin to resume. That target is of course rising over time as more business results come in, both with value growth and inflation, say 10%/year.

Jim

But the sole *reason* that it is a pretty good investment over time is because management has the discipline never to allocate capital at low rates of return, which a repurchase today would probably be. The only reason they can get away with a high cash allocation is that the cash that HAS been allocated to date *has* been allocated at high (above average) rates of return. They wait for fat pitches. That is the secret sauce, and the only one.

Thanks Jim, once again, for refocusing people on what's important concerning buybacks.

Warren himself asked the board to set the conditions for buybacks. They were only to be done if - in his and Charlie's estimates - they were to be done below a "conversative estimate" of IV. This wasn't to guide him. It was to set a standard for the future. He had enough voting power to do whatever he wanted. But he wanted to set a firm guideline for the future. He's talked about this many times.

Now I presume it is Warren and Greg. and Greg going forward. But it's a guide against a "do something" action. It sets the limits on when to buyback BRK stock.

Now isn't the time. Or particularly close.

Sounds awfully like the cheery consensus, “swings you bum, swing”.

Keep in mind that Buffett jr. will have the one-time responsibility of showing the next CEO the door. Well, Senior is still around and won’t even take the next CEO to his seat if he gets it wrong on the easiest and most knowable capital allocation task. Buying back shares.

One of the things I most like about Berkshire is that cash is not spent just to spend cash, but to buy things that have good returns. Not everything works out (investing is hard) but the track record is excellent. I hope that the after Buffett management keeps the financial discipline and uses the cash for the best opportunities, not the meh ones.

If you think about it, if it's a good idea, it is because it would increase the long-term value of the company (increasing the return of a quarter of the company from 4% to 10%, say), so that means the intrinsic value (defined as the discount sum of all future cash flows would increase.

There is a circularity problem here which is quite subtle, but a big one.

Yes, Berkshire is a pretty good long term investment, even if the valuation level is a little higher than usual. So even if it's not particularly cheap, buy!

But the sole *reason* that it is a pretty good investment over time is because management has the discipline never to allocate capital at low rates of return, which a repurchase today would probably be. The only reason they can get away with a high cash allocation is that the cash that HAS been allocated to date *has* been allocated at high (above average) rates of return. They wait for fat pitches. That is the secret sauce, and the only one.

As soon as Berkshire caves in to buying Berkshire stock (or anything else) when it's not at a discount, it is no longer a firm that it worth buying without a discount itself.


I'll see that circularity and raise you one more circle.

Keeping what now amounts to 30% of the company ($347b) in cash that returns next to nothing after tax and inflation makes the company a low return investment, meaning shares shouldn't be repurchased. Buying back more Berkshire shares is essentially just buying more of all the good (and bad) investments Berkshire has already made. Getting rid of the cash and reducing the share count puts it back on the path of being a high return company in which repurchasing shares makes sense.

Grok helped me find Buffett's comment, made at the annual meeting in 2017 when cash reserves were approaching $100b, in which he said that he would have to consider dividends or repurchases if the cash pile reached $150b:

"If we don't think we can allocate the capital into things we like, we'll make a decision, it might include both, but it could be repurchases, it could be dividends... It would be dificult to justify not returning some of it to shareholders."

dtb

made at the annual meeting in 2017 when cash reserves were approaching $100b, in which he said that he would have to consider dividends or repurchases if the cash pile reached $150b

And then he put $40B into Apple, thankfully. There will probably be opportunities to buy good companies, including Berkshire, at good prices. And if the market keeps giving us $1.60 for $1 in cash it is hard to complain.

First, it appears to be a given that UP is going to make an offer for Norfolk-Southern. Greg should talk to CSX and reach an agreement on a deal. It won't be cheap but the reality is that BNSF will have no choice but to buy it. An analyst predicted that BRK would have to pay 25X earnings. Do it and do it quickly while UP is still in negotiations.

I know a few things about railroads. They are hard to build, because rights-of-way are tougher to come by these days. I know that they are highly unionized. And I know they are highly regulated.

(Disclosure: I also know a little about Lionel train sets, having had one when I was 9, HO train sets, having had one when I was 16, and Z-gauge, having had one when I was 40. But I don’t think any of that counts. ;)

A NS and UP merger would create the first and only coast to coast railroad which (in theory) could lead to many efficiencies, not the least of which is routing so many West Coast deliveries (from Asia) to the East where most people live. I have looked at the maps of the Big 6 railroads, but frankly can’t divine anything meaningful from it, perhaps others can?

https://tinyurl.com/mrb26x56 (Tiny url link leads to Wikipedia because the original link does not render correctly here for some reason.)

It occurs to me that there are major switching centers in Chicago, New Orleans, and Memphis, so much of the traffic would have to be switched and routed there anyway, but keeping the stuff on your own trackage really ought to be cheaper, at least in my mind (although maybe as common carriers it wouldn’t?) but I’m sure there are some (dreaded word) synergies to be had.

However I have to say it would be most unlike Warren to “pay up” for an acquisition, even a complementary one, so I would be surprised if this were to happen. From my reading of the various maps it would appear there is little overlap in territory between UP and NS, so at least that shouldn’t cause too many regulatory headaches pursuing a merger. I’m sure there are others, of course.

BNSF NI was $5B last year, out of Berkshire’s $90B. Big but hardly overwhelming. That said, it’s a lovely highly moated business, and assuming we keep shipping stuff from China/Asia to people in the US, and US foodstuffs to people in Asia, one with a long life span ahead. Driverless trucks may be nibble at a few edges, but the volumes are so vastly different in what they are able to carry that it’s hard to see an end - ever - to railroads. Asteroids and nuclear war excepted, of course.

Then again, there is that huge cash pile.

As for Kraft/Heinz, the less said the better, in my view, so I won’t.

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:)

Texirish:
... buybacks ... were only to be done if ... they were ... done below a "conversative estimate" of IV.

Remarkably, that seems likely the same standard they use for buying ANY investment.

Some rules were made to be broken. But not this one, apparently.

R:)

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