Buffett buybacks: Could Berkshire tender stock?

[Swedish_Compounder]

The narrative surrounding the buyback is far more significant here. And it changed from the prior narrative.

 

As recently as in May this year, Buffett explicitly stated that they would buy only slightly above the 1.2x BV. Like 1.25 or 1.27x. During the CNBC interview, besides the “yeah we bought a little “, his admission of sorts that they should have been using “intrinsic business value all along” is what we should be discussing. He basically threw the BV yardstick out of the window. Although he’s been telegraphing it for several years through the annual letter, it’s huge that it happened. I wasn’t expecting it in 2018, more like in the next decade.

 

So.what changed? I like to believe that he and Charlie ran their own “Owner Earnings from here to judgment day discounted to present value” given the monumental jump in earnings this year. The facts have changed and they change with that.

 

 

I remember that interview you refer to. My take is that he did not want to talk up the price, but I did not interpret that as meaning that he would not buy back higher than at 1,27.

 

 

Yes, he threw the P/B yardstick out of the window and he had for a long time not valued the company based on that. It was only the repurchase critera that was tied to P/B and that confused people. I think he wanted the stock to move with as little volatility as possible, which was accomplished that way, since P/B does not move so dramatically.

 

 

I think that what changed was that they now wanted to include repurchases in their tool-box. Before, the repurchase limit was merely there reduce volatility for the stock. Now, since they have not found other ways to deploy all their cash flow for a while, they decided to distribute money to the owners, meaning that they need to value BRK properly, since they need to decided whether to pay a dividend or repurchase shares.

 

I hope this means that they will from here on always value BRK vs other opportunities when deciding what to spend money on, because I think they should have bought BRK instead of some of the acquisitions they made if chosing between the two. Probably, repurchases would have been more value creating than the PCP acquisition for example, even though that was probably not a poor acquisition. BRK was just cheaper.

 

 

[John Hjorth]

I realize now, that my post #97 in this topic actually could be considered deeply patronizing and condecending. If I have offended you, SwedishValue, please accept my apology. My post was actually not meant that way.

 

In short, personally, I would - any time - prefer BRK buybacks [at reasonable price levels], as an alternative to Berkshire holding [uS] cash & US T-Bills.

 

 

[SwedishValue]

We’re good. I didn’t find it patronizing and I appreciate our discussions.

[IceCreamMan]

The argument for Berkshire having probably bought back a large amount of stock this quarter is that Buffett is opportunistic. But on the other side of the coin, we have his past statements about not wanting to take advantage of selling shareholders; consistent with this principle might be doing just a small repurchase at first as a signal. In other words, would Buffett find it unethical or distasteful to do a large repurchase all in one quarter, after a long period without one?

[rolling]

The argument for Berkshire having probably bought back a large amount of stock this quarter is that Buffett is opportunistic. But on the other side of the coin, we have his past statements about not wanting to take advantage of selling shareholders; consistent with this principle might be doing just a small repurchase at first as a signal. In other words, would Buffett find it unethical or distasteful to do a large repurchase all in one quarter, after a long period without one?

I would bet they bought heavily.  Before the buyback date but after the announcement the stock was around 200/b share. Then it quickly bounced up and it is staying up even in general market downdays (and there have been plenty of those). My bet however is that the stock peaked at the same level or a bit above their ceiling, which in september was likely between 215-220. It would be logical for him to slowly move the ceiling up as the months passed, but it is likely he is still buying by 2nd quarter IV estimate and will only revise up after 3rd quarter results...

[gfp]

My understanding is that they are limited by rule 10b-18 to buying no more than 25% of the daily volume.  They are also not supposed to trade in the final 10 minutes before the close.

 

I would be very surprised if Warren purchased anywhere close to 25% of the daily volume of the combined share classes.  My impression is that he would feel that repurchase activity near the 25% level would influence the share price more than he desires.  It is impossible to completely eliminate your influence on the share price (witness the generally rising stock, closure of A/B share premium/discount, etc).

 

If I had to guess, I would guess that Berkshire established a 10b5-1 plan specifying a maximum price and a percentage of the trailing ADV to purchase.  I would guess that they specified somewhere around 10-15% of the Average Daily Volume, not to exceed 25% on any given day unless a large transaction was privately negotiated outside the plan (which would not be considered to be protected by the safe harbor of the plan).

 

They probably filed the 10b5-1 plan directly following their 10Q, allowing them to begin purchases under the plan immediately.  Buffett would receive daily trade confirms but isn't supposed to have any other communication with the broker he chose to administer the plan.  So he would know what was purchased each day and "we bought a little" is very difficult to quantify when you are talking about a half-trillion dollar market value enterprise...

 

We'll find out soon enough with the next 10Q and we can try to reverse engineer the % of daily volume they specified...

 

[alwaysinvert]

My understanding is that they are limited by rule 10b-18 to buying no more than 25% of the daily volume.  They are also not supposed to trade in the final 10 minutes before the close.

 

I would be very surprised if Warren purchased anywhere close to 25% of the daily volume of the combined share classes.  My impression is that he would feel that repurchase activity near the 25% level would influence the share price more than he desires.  It is impossible to completely eliminate your influence on the share price (witness the generally rising stock, closure of A/B share premium/discount, etc).

 

If I had to guess, I would guess that Berkshire established a 10b5-1 plan specifying a maximum price and a percentage of the trailing ADV to purchase.  I would guess that they specified somewhere around 10-15% of the Average Daily Volume, not to exceed 25% on any given day unless a large transaction was privately negotiated outside the plan (which would not be considered to be protected by the safe harbor of the plan).

 

They probably filed the 10b5-1 plan directly following their 10Q, allowing them to begin purchases under the plan immediately.  Buffett would receive daily trade confirms but isn't supposed to have any other communication with the broker he chose to administer the plan.  So he would know what was purchased each day and "we bought a little" is very difficult to quantify when you are talking about a half-trillion dollar market value enterprise...

 

We'll find out soon enough with the next 10Q and we can try to reverse engineer the % of daily volume they specified...

 

If this theory is correct then I gather there is no buyback pause during the blackout period? That would be a pretty major drawback to a more actively managed buyback program - 4 months a year where they can't make repurchases.

[gfp]

Correct.  If they are doing it the way I am guessing they are doing it, there can be steady open market purchases throughout the usual blackout periods.  You can get really specific with formulas and rules and changing price caps/floors - but I would bet they have a simple price cap, % of daily volume instruction.  Just a guess of course.

[sleepydragon]

On Friday, almost all the financials are down, and almost all the stocks in my portfolio/watch lists are down, Except BRK. So someone has to be buying. To move BRK like this, I think it needs at least $5B demand per week.

[John Hjorth]

... They probably filed the 10b5-1 plan directly following their 10Q, allowing them to begin purchases under the plan immediately. ...

 

globalfinancepartners,

 

Would such a filing have to be released on the SEC website, or can it be withheld from release on the request by the filer [here: Berkshire]? I have studied the SEC 10b-1 plan FAQ, it seems to me to be mute on that particular question. [There is no such filing from Berkshire right now on the SEC website.]

 

Your posts on this matter are highly appreciated. I learn a lot.

[gfp]

My understanding is that nothing has to be publicly disclosed in a filing when an issuer is using the plan for a repurchase. Other types of plans, for insider selling for instance, usually get mentioned in the form 4 - but the confidential details of the trading rules are usually not public.  Sometimes you can divine them through other disclosures though - a cap price can sometimes be observed if trading prices are detailed in a form 4.

 

So no, Berkshire doesn’t have to file anything but might mention it in a footnote later.

[SwedishValue]

Globalfinancepartners, this is very helpful. Thanks for the very valuable contribution!

[John Hjorth]

Globalfinancepartners, this is very helpful. Thanks for the very valuable contribution!

 

Agreed! - So we'll just have to wait to next 10-Q and see. The observation made by sleepydragon is actually quite striking. I really hope this is a material change in the buyback narrative, as longinvestor has called it. - Wait, wait, wait ...

[SwedishValue]

I just wanna have this on the record.

 

1. I believe Buffett has been repurchasing shares aggressively, in excess of 10% of daily trading volume.

 

2. I believe share buybacks will take place as long as prices are at least within 110% of the price when Buffett commented on the buybacks on CNBC (at least until 230 USD).

 

3. I think both the ”soft trading floor” and the fact that Buffett considers the stock to be significantly undervalued, to be strong reasons for a very significant long position in Berkshire.

 

I am long, for the first time ever, since shortly after the buyback treshold change.

[boilermaker75]

I just wanna have this on the record.

 

1. I believe Buffett has been repurchasing shares aggressively, in excess of 10% of daily trading volume.

 

2. I believe share buybacks will take place as long as prices are at least within 110% of the price when Buffett commented on the buybacks on CNBC (at least until 230 USD).

 

3. I think both the ”soft trading floor” and the fact that Buffett considers the stock to be significantly undervalued, to be strong reasons for a very significant long position in Berkshire.

 

I am long, for the first time ever, since shortly after the buyback treshold change.

 

Just for the record, BRKB is my largest position, about 40% of my portfolio. Most was acquired in 2008, but using puts I added in the range of $184-$198 in May and June.

[nickenumbers]

On Friday, almost all the financials are down, and almost all the stocks in my portfolio/watch lists are down, Except BRK. So someone has to be buying. To move BRK like this, I think it needs at least $5B demand per week.

 

I have been thinking about sleepydragon's observation from a couple different angles.  And I think there is a very high probability that he is right..

 

Do you guys think there is any flight/movement to "value"?  One of the economists that I like from Prudential thinks that it is coming in the market cycle.  But, I haven't really seen it yet..  Except BRK is rising.  But the increase in BRK could also be directly caused by BRK share repurchase.

 

"When we hear hoof sounds we should think horses [bRK buy backs], we should not think zebras  [illuminati secret buyers.]"

[nickenumbers]

I just wanna have this on the record.

 

1. I believe Buffett has been repurchasing shares aggressively, in excess of 10% of daily trading volume.

 

2. I believe share buybacks will take place as long as prices are at least within 110% of the price when Buffett commented on the buybacks on CNBC (at least until 230 USD).

 

3. I think both the ”soft trading floor” and the fact that Buffett considers the stock to be significantly undervalued, to be strong reasons for a very significant long position in Berkshire.

 

I am long, for the first time ever, since shortly after the buyback treshold change.

 

Right on SwedishValue for going on record, and that is where you money is invested too.

 

I think WEB and CM will continue to purchase with available cash if the share price continue to rise as long as the IV is well above the share price.  So, if BRK in a year is at $250, and BRK has grown IV by another 15%, the margin between the IV and share repurchase price is still good potentially.

 

This is our current reality, and numbers as SwedishValue has outlined.  Fingers Crossed.

 

Also, we have new variables entering the share price calculus, that we have never had before.  That is real cash/share buybacks and fewer shares outstanding for BRK.  How long does BRK purchase, how much do they purchase, at what prices do they purchase?  What happens to the share price when the rate of repurchase becomes public?  What does WEB say publicly about the repurchase?  What does WEB and CM say at the SH meeting 5/2019?

 

Great time to be a Brk shareholder.

[gfp]

There are several factors in addition to repurchase activity that could be pushing BRK up relative to the market. One is the rise in interest rates and Berkshire’s unique positioning relative to interest rates (float based businesses become more valuable along with money, but most insurance companies hold large bond portfolios that get marked lower - Berkshire’s traditional long bond portfolio is comically small relative to total assets).

 

Another is simple technical analysis reasons, which also relates to violated option strikes, where Brk held above its recent breakout. Might sound like Mumbo Jumbo, but covered calls are a factor at Brk, where everyone holds at a gain, most with large gains they are not eager to be called on and realize.

 

But stock repurchases are undoubtably a factor as well

[Guest longinvestor]

I just wanna have this on the record.

 

1. I believe Buffett has been repurchasing shares aggressively, in excess of 10% of daily trading volume.

 

2. I believe share buybacks will take place as long as prices are at least within 110% of the price when Buffett commented on the buybacks on CNBC (at least until 230 USD).

 

3. I think both the ”soft trading floor” and the fact that Buffett considers the stock to be significantly undervalued, to be strong reasons for a very significant long position in Berkshire.

 

I am long, for the first time ever, since shortly after the buyback treshold change.

 

Right on SwedishValue for going on record, and that is where you money is invested too.

 

I think WEB and CM will continue to purchase with available cash if the share price continue to rise as long as the IV is well above the share price.  So, if BRK in a year is at $250, and BRK has grown IV by another 15%, the margin between the IV and share repurchase price is still good potentially.

 

This is our current reality, and numbers as SwedishValue has outlined.  Fingers Crossed.

 

Also, we have new variables entering the share price calculus, that we have never had before.  That is real cash/share buybacks and fewer shares outstanding for BRK.  How long does BRK purchase, how much do they purchase, at what prices do they purchase? What happens to the share price when the rate of repurchase becomes public?  What does WEB say publicly about the repurchase?  What does WEB and CM say at the SH meeting 5/2019?

 

Great time to be a Brk shareholder.

 

 

I have posted on COBF before (don't remember which thread under Berkshire) but it is my speculation that the net buyback $ will approximate Warren Buffett's peak personal stake in the company. 30%+. It may take well over a decade and the market has to cooperate by allowing attractive repurchases. It will be a fitting way to seal his legacy by retiring all of his ownership. This was his painting anyway.

[Cigarbutt]

I have posted on COBF before (don't remember which thread under Berkshire) but it is my speculation that the net buyback $ will approximate Warren Buffett's peak personal stake in the company. 30%+. It may take well over a decade and the market has to cooperate by allowing attractive repurchases. It will be a fitting way to seal his legacy by retiring all of his ownership. This was his painting anyway.

Interesting speculation.

Need the following assumptions:

-limited outside re-investment opportunities

-cooperating market

-capital deployment discipline

 

Unusual scenario but not unheard of:

https://brianlangis.files.wordpress.com/2017/07/grants-article-1148.pdf

[Guest longinvestor]

I have posted on COBF before (don't remember which thread under Berkshire) but it is my speculation that the net buyback $ will approximate Warren Buffett's peak personal stake in the company. 30%+. It may take well over a decade and the market has to cooperate by allowing attractive repurchases. It will be a fitting way to seal his legacy by retiring all of his ownership. This was his painting anyway.

Interesting speculation.

Need the following assumptions:

-limited outside re-investment opportunities

-cooperating market

-capital deployment discipline

 

Unusual scenario but not unheard of:

https://brianlangis.files.wordpress.com/2017/07/grants-article-1148.pdf

 

Thanks for the Singleton piece.

 

As to assumptions, I am not sure of the first assumption, limited outside re-investment opportunities. Today, cash is some 20% of market cap; Cash continues to pour in and should the market cap double over a decade, the cash coffers will likely be 3x; Plus, Buffett has expressly stated that the entire investment portfolio should be treated as "available for sale".  There is room for both outside reinvestment and buybacks.

 

I pointed out the second assumption, cooperating market. My "well over a decade" qualifier was meant to allow as much time for the market to cooperate. Folly will happen, sooner or later.

 

Finally, the one lid that held up repurchases was the public pronouncement of a readily calculable 1.?? x BV. Now everyone can do their own calculation of IV. Don't expect them to pony up any formulae to estimate IV to the second decimal place. I can already see the hit pieces coming "Buffett manipulates market to buy back stock". You heard it first here ;)

 

[rolling]

On Friday, almost all the financials are down, and almost all the stocks in my portfolio/watch lists are down, Except BRK. So someone has to be buying. To move BRK like this, I think it needs at least $5B demand per week.

 

I have been thinking about sleepydragon's observation from a couple different angles.  And I think there is a very high probability that he is right..

 

Do you guys think there is any flight/movement to "value"?  One of the economists that I like from Prudential thinks that it is coming in the market cycle.  But, I haven't really seen it yet..  Except BRK is rising.  But the increase in BRK could also be directly caused by BRK share repurchase.

 

"When we hear hoof sounds we should think horses [bRK buy backs], we should not think zebras  [illuminati secret buyers.]"

I just received an e-mail saying his client's strategists are shifting to value.

I would add that instead of looking for Berkshire rising, we should be looking at "who is falling less" - in general market declines everything ends up going down.

[Cigarbutt]

There are several factors in addition to repurchase activity that could be pushing BRK up relative to the market. One is the rise in interest rates and Berkshire’s unique positioning relative to interest rates (float based businesses become more valuable along with money, but most insurance companies hold large bond portfolios that get marked lower - Berkshire’s traditional long bond portfolio is comically small relative to total assets).

Would add another minor point.

Mr. Buffett has described that, for some time, his bids are not competitive in this environment. Looking at Bloomberg this AM, the spectrum of treasuries yields from 3 months to 2 years have increased by 115 to 138 basis points over the last 12 months. Nothing earth shattering but, using the gravity argument, higher interest rates would tend to put downward pressure on deal valuation from Mr. Buffett's perspective and the cash optionality value has increased a little as he is getting paid slightly more in order to wait for the fat pitches. I see this aspect as another factor contributing to higher cash balance and, by consequence, to increased pressure into the buyback default option.

 

[John Hjorth]

I have posted on COBF before (don't remember which thread under Berkshire) but it is my speculation that the net buyback $ will approximate Warren Buffett's peak personal stake in the company. 30%+. It may take well over a decade and the market has to cooperate by allowing attractive repurchases. It will be a fitting way to seal his legacy by retiring all of his ownership. This was his painting anyway.

 

Here, I'm focusing on a part of a post made in this topic by longinvestor. I really want to understand longinvestor's line of thinking. The exchange, that longinvestor is referring to here [i assume], took place on June 30^th 2018 in the topic "Berkshire - cheap?", posts #195 to #202.

 

Here I'm nitpicking the heck out it - I'm simply bending it in neon, as my understanding now of longinvestor's line of thinking & proposal as I understand it now [longinvestor, please correct me, if I still don't get it correctly]:

 

1. Mr. Buffett - at his own discretion, based on what he personally considers fit, based on what ever [, including Berkshire stock market price] - decides to donate USD X billion worth of Berkshire stock to 1 - 4 foundations, as a one time gift, - and execute on it - on top of the 2006 pledge with amendment, as an "extra" - converting A shares to B, and to give them away. [with no promise to do it again next year etc. [, but he might perhaps do that actually ... - again, at his own personal discretion]].

 

2. The board of Berkshire and management bodies of the 1 - 4 foundations negotiate a private buyback deal for the shares just donated by Mr. Buffett, with every person in those management bodies being disaqualified because of conflicts of interests outside the negotiation room: Mr. Buffett, Mr. Gates & and his wife, & Mr. Buffett's descendants for the three family foundations. [Again, depending on which foundations involved.]

 

Did I get it right this time, longinvestor?

[Guest longinvestor]

I have posted on COBF before (don't remember which thread under Berkshire) but it is my speculation that the net buyback $ will approximate Warren Buffett's peak personal stake in the company. 30%+. It may take well over a decade and the market has to cooperate by allowing attractive repurchases. It will be a fitting way to seal his legacy by retiring all of his ownership. This was his painting anyway.

 

Here, I'm focusing on a part of a post made in this topic by longinvestor. I really want to understand longinvestor's line of thinking. The exchange, that longinvestor is referring to here [i assume], took place on June 30^th 2018 in the topic "Berkshire - cheap?", posts #195 to #202.

 

Here I'm nitpicking the heck out it - I'm simply bending it in neon, as my understanding now of longinvestor's line of thinking & proposal as I understand it now [longinvestor, please correct me, if I still don't get it correctly]:

 

1. Mr. Buffett - at his own discretion, based on what he personally considers fit, based on what ever [, including Berkshire stock market price] - decides to donate USD X billion worth of Berkshire stock to 1 - 4 foundations, as a one time gift, - and execute on it - on top of the 2006 pledge with amendment, as an "extra" - converting A shares to B, and to give them away. [with no promise to do it again next year etc. [, but he might perhaps do that actually ... - again, at his own personal discretion]].

 

2. The board of Berkshire and management bodies of the 1 - 4 foundations negotiate a private buyback deal for the shares just donated by Mr. Buffett, with every person in those management bodies being disaqualified because of conflicts of interests outside the negotiation room: Mr. Buffett, Mr. Gates & and his wife, & Mr. Buffett's descendants for the three family foundations. [Again, depending on which foundations involved.]

 

Did I get it right this time, longinvestor?

 

You’ve thought through a detailed scenario of which shares are likely to be bought back. I have not.

 

My thoughts are not that detailed other than the long held heavy ownership interest of Mr Buffett (31% at peak) is an important component of the Berkshire culture. At one extreme it has allowed them a free hand at painting this picture but at the other hand as his ownership is being liquidated it could open up dilution of ownership including the possibility of activism. As Berkshire prepares for the future without Buffett the share buyback is integral to the transition. Cunningham talks about this in his book Berkshire beyond Buffett and has chronicled some 10% ownership interest of “insiders”. Should this coterie hold on while Berkshire buys back gobs of stock the insider ownership will swell to approximate Buffett’s peak ownership. In fact Cunningham released the book about the Berkshire shareholder this May and I attended the book launch event on the eve of the meeting. Cunningham said that Berkshire’s culture surviving includes the long term shareholders and their ownership continuity and engagement. My thoughts are an extension of Cunningham ‘s