Subject: Re: Warren should spend the cash
I completely agree with what I think is your suggesttion : use most of the cash on the balance sheet to repurchase shares
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If you think about it, if it's a good idea, it is because it would increase the long-term value of the company (increasing the return of a quarter of the company from 4% to 10%, say), so that means the intrinsic value (defined as the discount sum of all future cash flows would increase.

There is a circularity problem here which is quite subtle, but a big one.

Yes, Berkshire is a pretty good long term investment, even if the valuation level is a little higher than usual. So even if it's not particularly cheap, buy!

But the sole *reason* that it is a pretty good investment over time is because management has the discipline never to allocate capital at low rates of return, which a repurchase today would probably be. The only reason they can get away with a high cash allocation is that the cash that HAS been allocated to date *has* been allocated at high (above average) rates of return. They wait for fat pitches. That is the secret sauce, and the only one.

As soon as Berkshire caves in to buying Berkshire stock (or anything else) when it's not at a discount, it is no longer a firm that it worth buying without a discount itself. The value case arises directly from the patience. Erode the patience, and you also erode the rationale for eroding the patience.


My own very heavily smoothed estimate of value per share is up $26.7k in the four quarters year in today's dollars, which is a trailing earnings yield of only (inflation + 3.5%) on the current price. Maybe my value estimate is not a good one so that is too pessimistically low, so put in your own. But either way it doesn't seem to be the sort of investment that has a rate of return that would interest head office. Thank goodness.

My wild guess? It would take another ~12% price drop for the value proposition to even start to interest management and the buybacks to begin to resume. That target is of course rising over time as more business results come in, both with value growth and inflation, say 10%/year.

Jim