I have a basic question about the financial effect of buybacks for BRK shareholders. I understand that buybacks increase the value of outstanding shares because buybacks result in fewer outstanding shares sharing the same profits going forward.

It's not QUITE that simple: Consider the most basic valuation of a company as a multiple of its earnings, plus a constant for how much spare cash it has on hand (not being used to produce the earnings in part 1). Whenever a buyback happens, the share count drops and the earnings per share rise, but cash goes out the door. If the stock is trading at true fair value, these two effects precisely cancel out and there is no change in value per share. (the amount of value per share coming from earnings rises, and the amount of value coming from spare cash falls the same amount).

My question is how to calculate the value of the buyback to me as a shareholder. For example, when BRK spends $5B to buy back A shares, what effect does that have on the value of my B shares? What information would I need to calculate that?

Estimate the difference between the true value of a share and the price paid per share for the buyback. Multiply that gap benefit by the number of shares purchased: that is the total amount of value garnered by doing the buyback. Divide that total value creation by the *new* share count, and that is the size of the benefit per share accruing to continuing shareholders.

If you work through some examples, you will quickly realize that a lot of buybacks are overhyped. It's a really material effect on value per share if the reduction in share count is material, AND the discount to fair value is material. Massive buybacks at fair value don't affect share value at all (though they might be a better idea than more destructive uses of the cash). And buying back a small percentage of outstanding shares at a big discount to fair value just doesn't move the needle.

It's certainly real gain if the shares are bought at any discount at all, but quite a bit smaller effect than most observers realize. They tend to forget the billions of dollars in cash leaving the bank account...and, needless to say, every buyback done above true fair value makes each continuing share worth less than it would have been otherwise. The best you can say for those buybacks is that it's possible they reduced the "in hand net of taxes" value of a continuing share in the hands of a shareholder less than some other uses of the cash, like dumb acquisitions or investments in business development that isn't very profitable.

Jim