Subject: Re: Vintage Warren
This is an excerpt from the 1996 annual meeting which I found at the CNBC Buffett archives....

" If you're repurchasing shares above a rationally calculated intrinsic value, you are harming your shareholders, just as if you issue shares beneath that figure, you are harming your shareholders.
That's a truism. Now, the tough part of that, of course, is coming up with the intrinsic value.
"And, for example, a good example might be Coca-Cola.
"I think a number of people might have thought Coca-Cola was repurchasing shares at a very high price, because they'll look at book value or P/E ratios. But there's a lot more to intrinsic value than book value and P/E ratios. And anytime anybody gives you some simplified formula for figuring it out, forget it.
You have to understand the business. The people who understood that business well, the management, have understood and been very forthright about saying so over the years, that by repurchasing their shares, they are adding to the value per share for remaining shareholders.
"And like I say, people who didn't understand Coca-Cola, or who thought mechanistic methods of valuation could ' should take precedence, really misjudged the value to the Coca-Cola Company of those repurchases.
So we favor ' when you have a wonderful business ' we favor using funds that are generated out of that business to make the business even more wonderful. And we favor repurchasing shares if those shares are below intrinsic value.
"And I would say that if it's a really wonderful business, we probably come up with higher intrinsic values than most people do.
"We have great respect, Charlie and I with ' I think it's developed over the years ' we have enormous respect for the power of a really outstanding business. And we recognize how scarce they are. And if a management wishes to further intensify our ownership by repurchasing shares, we applaud.
We own ' we just went over 8 percent of the Coca-Cola Company, probably, in the last three or so months, by a very tiny fraction. But we had a second purchase one time.
"But our percentage interest in the Coca-Cola Company has gone up significantly through their repurchases. And we are better off because they have bought those shares at what looked like, to some people, perhaps, high prices. And we thought they were wrong at the time, and I think now it's been indicated or proven.
"So, I urge you, if you're trying to decide on the wisdom of repurchases, or of share issuances, that you don't think in terms of book value. You don't think in terms of specific P/Es. You don't think in terms of any little model."

A comment which admittedly relies on 20:20 hindsight:

Though it's certainly an admirable line of reasoning, it's always good to matter that even for a seemingly very good firm, price matters.
So, perhaps I would suggest reading emphasis into "If you're repurchasing shares above a rationally calculated intrinsic value, you are harming your shareholders", and a bit less emphasis on "we are better off because they have bought those shares at what looked like, to some people, perhaps, high prices".

Consider:
Starting from the time of that speech, the real total return from Coke stock in the next 20 years was inflation + 1.49%/year.
The real total return right up to today (26.1 years) has been 2.53%/year. (and not because of a cheap endpoint, they're at 27 times earnings these days)
These are really, really bad numbers.

This demonstrates two things:
* KO management were, in fact, paying far too much when buying back shares.
* The buybacks were a very poor capital allocation decision on the part of Coca Cola management, showing the firm was not in fact a top-notch firm.
That's because there is no other skill more important in the management of a company.
I guess that to the extent that Coke is allegedly a good business, it's more because of the "ham sandwich" rule than because of its stellar management, then or now.

For fun, consider an alternate reality.
Imagine if Coke had simply paid more dividends instead of doing buybacks at unjustified levels for all those years, and Berkshire had used those dividends to buy back Berkshire shares...
Berkshire's valuation was also crazily high, but only for the first couple of those 26 years.
This would have been a good thing overall, simply because Berkshire was and remains a very much better business than Coke.

Jim