• 12 Dec 2012 at 4:51 PM

Warren Buffett Bought Some Stock

I’ve always been fond of Warren Buffett’s schtick of being an adorable Cherry-Coke-drinking grandfather whose fuzzy sweaters hide some sharp elbows, talking up old-timey value investing while making his money on distressed sweetheart deals, and railing against derivatives while doing lots of shady ones. So I’m pleased that today he basically announced “we bought back a bunch of shares from one deceased buddy of mine, against our previously announced guidelines for how we’d buy stock, which we just amended to make this deal happen.” That seems shady!

Felix Salmon covers the shadiness here but also says this:

Buybacks are considered a good thing, on the stock market, for three reasons. Firstly, they reduce the number of shares outstanding, which means that the value of the remaining shares goes up: the company is worth the same amount, so the value per share is higher. Secondly, they provide an extra bid in the market, which helps support and drive up the share price. And thirdly, they give shareholders the opportunity to sell their shares back to the company: if they want to sell where the company is buying, they have that option.

So I submit to you that there’s a fourth reason buybacks could be considered a good thing: some stocks are a good investment, and if yours is a good investment, maybe you should buy it, instead of, like, “hoarding cash” or doing dumb M&A deals or whatever.

This sounds like a nice theory but is almost always wrong; typically, if company is all “the best investment we can find is our stock and it will only go up from here,” their stock is about to crater. But Warren Buffett isn’t a typical corporate CEO, stock-picking-abilities-wise. He’s … y’know, he’s a guy whose whole thing is being good at picking stocks, plus the Coke/grandpa stuff. And so his theory about buybacks is not primarily about EPS accretion or providing a bid in the market: it’s about buying stock at below “intrinsic value,” whatever that is.

Also he’s a guy who’s good at getting good deals. So why’d he get a bad deal here? BRK/A closed at $130,831 last night, so Berkshire paid a, um, 0.13% premium over the last sale.1 On the other hand, you can’t just go buy a billion dollars worth of stock – even Berkshire stock – at the closing price. The last 9,200 BRK/A shares that traded publicly did so at an average price of about $131,322 – and it took 18 trading days to get there.2 So Berkshire actually bought those shares at a, um, 0.25% discount to a reasonable trading level.

Those are small numbers! What would happen if Berkshire had instead attempted to buy $1.2 billion worth of stock in the market? I dunno, but it’s hard to buy almost a month’s volume worth of stock. Companies’ open-market purchases are basically restricted to 25% of volume, so Berkshire would spend at least 72 trading days – almost four months – buying this much stock in the market. A lot can happen in four months; BRK/A is up almost 6% since the start of September. And buying 25% of the volume a day, every day, will push up the stock price a lot faster – beyond even Buffett’s revised 120% of book value cap on purchases.

This is not a pretty trade, but it’s how Buffett works: buying an asset he likes, at a price he likes, from a motivated seller. It looks bad – it opens you up to charges of conflict of interest, which are probably true, and to charges of hypocrisy about estate taxes, which are also probably true, and to charges of wasting shareholder money, which are probably not true. Buffett got to do a big buyback at a decent price. He bought 9,200 shares at $131,000, and they closed at $134,000 today. He pissed people off and was up $27.6 million on the day. I like it.

Berkshire buys $1.2 billion in stock from single investor [Reuters]
Berkshire’s weird buyback [Reuters / Felix Salmon]
Berkshire Hathaway News Release [BRK]

1. It’s not 100% clear from Berkshire’s announcement that they bought the stock last night, though that stands to reason; if it’s not new news, why would you halt trading for the announcement this morning? Presumably it takes some time to negotiate a $1.2bn trade, though; if they got pretty much agreed on terms over the weekend then they got a discount to Friday’s $131,090 close.

2. Not a particularly exact science but here you go:

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Comments (14)

  1. Posted by Guesticle | December 12, 2012 at 5:11 PM

    Warren Buffett went to add that he supports dramatically higher taxes on anyone making over $250k outside of Omaha, Nebraska. He said, "It really doesn't make sense that the wealthy who have benefited from the opportunities that this country affords don't pay their fair share. I am a billionaire, and, yet, I am willing to support this tax hike."

  2. Posted by Joe G | December 12, 2012 at 5:15 PM

    If he announced he was willing to pay 120% of book the stock would have traded at or above that price based on the annoucement (just like what happened on the 110% announcement) So really the only way for BRK to buy meaningful stock was to do a simultaneous trade.

  3. Posted by Correction | December 12, 2012 at 5:42 PM

    The B shares are more liquid than the A shares. FWIW about $370mm traded yesterday so the buyback wasn't a month's worth of volume – more like a week at most.

  4. Posted by guessed | December 12, 2012 at 6:35 PM

    my favorite buffett ludicrousness is when the guy with $100b in float tells people not to use leverage.

  5. Posted by Not A Cocksucker | December 12, 2012 at 7:53 PM

    The ole' cocksucker is at it again.

  6. Posted by Nuno Campos | December 12, 2012 at 8:08 PM

    This float is a liability that as long as he registers underwriting profit "costs" him "negative" interest. Not many highly leveraged firms, as you imply BRK is, can claim their cost of debt is negative.

  7. Posted by Wire | December 13, 2012 at 5:25 AM

    "…he’s a guy whose whole thing is being good at picking stocks, plus the Coke/grandpa stuff."

    And talking about sex. Don't forget that he's really good at that, too. Kinky sonofabitch.

  8. Posted by B Quick | December 13, 2012 at 8:38 AM

    Hey!

  9. Posted by Simmer down | December 13, 2012 at 11:11 AM

    Hypocrisy about estate taxes? How is that exactly? He thinks inherited money spoils the kids, so he gives them some (personally), but not billions, and he's giving the rest away. So what if he wants the tax code to incentivize other rich people to act as he has acted? How is that hypocrisy?

  10. Posted by Equivocation | December 13, 2012 at 11:40 AM

    @Nuno. Underwriting profit is only a profit as long as no insurance events happen. Billions of this leverage can be called at any moment. So it’s very risky, particularly because Berkshire manages a pretty mismatched duration book. (investing float in equity and private equity? Come on!)

    But don’t worry. Uncle Buffett has this risk implicity underwritten by the Nebraska throught the Nebraska Life and Health Insurance Guaranty Association. His profits their losses.

    But he does play the banjo.

  11. Posted by WB lives tax Free | December 13, 2012 at 1:34 PM

    Matt's Q is backwards :What would happen if Berkshire had instead attempted to buy $1.2 billion worth of stock in the market?:

    Should be what would have happened if, LIKE SHAREHOLDERS THAT AREN'T BUDS WITH WB, the estate had to SELL on the open market? Well, the price would have been under pressure and maybe enough for him to buy back in the market at the original 110% intrinsic value, leaving the remaining shareholders better off than buying out his BFF's at the 131k. So…. he helped one at the expense of his beloved long term shareholders.

  12. Posted by Warren Warrant | December 13, 2012 at 1:51 PM

    Or it could have traded lower indefinitely.

  13. Posted by Midwest Internet Cop | December 13, 2012 at 2:30 PM

    1. He plays the Uke, not the banjo.
    2. NL&HIGA only protects Nebraska policyholders. Small % of his insurance book.

    He'll get in trouble from an HR violation long before leverage causes him a problem.

  14. Posted by nmd | December 14, 2012 at 12:42 AM

    So did Buffett have BRK.A buy his own personal hord to save his family estate taxes? Yeaaaa who else is he going to break the cardinal rule of not paying more than book?