Previous Post on Berkshire Hathaway BuyBack

A few days ago it was reported that Berkshire Hathaway bought back $1.2 Billion dollars worth of CLASS A Berkshire Hathaway(股票代號: BRK-A).  The purchase was not done on the open market, and it was all purchased from a single long time investor.  For comparison purpose, the company has spent only $126 Million dollars for the net purchase of shares the last four quarters combined.

Berkshire Hathaway has announced raising its maximum target price of Class A shares to 120% of Book Value.  Previously the most Berkshire Hathaway was willing to pay was 110% of Book Value.  Obviously Book Value is a number updated at most quarterly because it is a balance sheet item.

There is a speculative possibility that Warren Buffett sees an improving economy through the lens of his collections of businesses.  Aside from insurance and investment, Berkshire has a number of housing related businesses.  I am not sure about the rest of the country, but in the San Francisco bay area, especially the silicon valley, I notice a dramatic positive attitude shift towards housing, and prices are appreciating rapidly.  This could mean the company is becoming even more undervalued.  The Net Present Value of purchasing its own share could be more favorable than many other investment projects that the company has looked at.  Buying a dollar for fifty cents is the primary motive of any value investor.

However, I think, once again, this recent vote of confidence on its own share is just a cover up.  This could be part of the succession transition plan.  By reducing the float in circulation, this move probably serves to further solidify future management and board control of the company through Class A share, which is worth 1500 times a Class B share but 10,000 times the voting rights of a share of Class B.  This large purchase of not-from-the-open market signals the company’s concern of “CONCENTRATION OF POWER” outside the company insiders.  In stead of Buying Back on the open market from a variety of retail investors whose individual proxy impact is negligible(Why? Because each share Class A costs $130,000.00 yeah! More than the average “ANNUAL” salary!), Buy Back from one large shareholder, who has the potential ability to influence proxies against management’s wish, in essence eliminates future troubles such as proxy fight.

This is not an attempt to undermine Berkshire Hathaway as an iconic company.  On the contrary, Berkshire Hathaway will remain an economic powerhouse for years to come.  As long as the management and board serve with the best interest of all the shareholders in mind, shareholders will benefit from the insights and expertise of the managers.  A corporation is rarely a place for democratic rule.

Most traders and investors are short sighted.  We are wrapped up as a whole in the daily price movement of a stock.  It is true that the SHORT TERM RETURN of a stock can come from capturing share price fluctuation.  However, LONG TERM RETURN can only come from the long term actual profit the underlying business generates.

Berkshire takes it one step further whenever it can,  it buys whole business and skip the waiting for the profit reflection on a stock price.  This way Buffett and company have direct access to the profit generated and apply that capital to make more investments that churn out more cash.  The current Free Cash Flow after paying for debt service is about $17 Billion a year.  The company has about $46 Billion on its balance sheet.  That is a lot of ammunition, and the company is yearning for the next big investment.

With Berkshire’s business model and Buffett and company’s sharp investment acumen and unwavering mentality, this is how INTEREST COMPOUNDING can truly work to make people wealthy.

I am long term bullish.  A price floor may have been temporarily established at 120% of current book value due to buyback.  However, always proceed cautiously and buy with a margin of safety.

We welcome comments and thank you for your supports.  Have a Safe and Happy Holidays!

 

 

“Price is what you pay, and value is what you get!”  ~~Benjamin Graham, Warren Buffett’s teacher

 

Last week, we got a preview of the long anticipated letter to the shareholders of Berkshire Hathaway by the legen-wait-for-it-dary investor Warren Buffett. Allow me to summarize it, and hopefully share with our readers the wisdom of the Oracle of Omaha. (BTW, I would suggest everyone who considers him or herself a serious value investor, to at least buy one Brk-B share so that you are eligible to attend the annual shareholder meeting in the city of Omaha, Nebraska, and witness Mr Buffett’s midas touch on value investing.(Mr. Charlie Munger comes with purchase:-)!)

From Warren Buffett’s point of view as a “simple buy and hold value investor”

Buy productive assets.  Assets that keep on giving in terms of earnings, dividend crops,offsprings, rent, etc. During
any extended period, the overall performance of such asset always outperform currency based asset such as u.s. treasuries right now, and lifeless asset such as gold, especially right now. The class of assets he prefers “now” is equity, and he calls it “pile 1″ in his article.

It does not mean that he does not invest in “pile 2″ in his article such as gold, silver, treasury bonds, junk bonds, or financial derivatives such as options. Buffett will only invest if such assets are “mispriced“(價格因某種原因(inefficiency of the market or excessive fear)而沒有達到它真正的巿場價值). One must first, however, be educated well to see such opportunity, and ones’ emotion must not be led by the herd(不能有羊群心理). To seize opportunity, one must strike while fear is prevalent, and refrain from acting on greed when everyone else is most 大膽(not afraid). He is not claiming that the U.S. treasury or gold is in a bubble or the bubble will soon burst, he just simply would rather not guess when the music stops for this game of musical chair, “bond and gold price speculation 2012 edition”, while at the same time, there is a great asset class of quality U.S. equity out there that is relatively cheaper than treasuries or gold.

Return is measured by him based on purchasing power(nominal的購買能力,意即如果昨天他投一元,他隔天要的回報並非1.5 or 2元,而是昨天一元能買到的東西如果今天值二元,他要的回報一定要遠遠超過今天的二元). 換一句話就是我們blog 一直強調的high net present value. 另外一點,to buy productive assets 也是邁向真正財富自由的正途.

Conclusion: choose pile 1 over pile 2 to outperform long term, and invest in pile 2 only if mispriced.

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