No. of Recommendations: 15
To Echo Jim's point, he actually laid it out pretty clearly in the 2003 AGM.
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... we would only buy stock in if we thought the stock was selling significantly below intrinsic value.
And there’s no magic figure for intrinsic value. Intrinsic value is a range. Charlie would name a different number than I would name, but our ranges would be quite similar, if we were to write them down on a piece of paper now. But they wouldn’t be identical.
So we leave a — we would leave a significant margin of safety and would want to buy at a — what would be a clear-cut, to us, discount from the lower levels of intrinsic value we might calculate.
If that is laying it out clearly, I must be obtuse - it doesn't really tell me anything about the 'how it's calculated' or the 'how conservative does it have to be' questions. Clearly, in 2003, he mentioned the idea, but he did nothing about it, It was in answer to a question about buybacks at Berkshire, which had never happened up to them, and the answer was hypothetical: "we would leave a significant margin of safety... from the lower levels of intrinsic value that we might calculate." It was only 8 years later, in 2011, with $48b of cash piling up on the balance sheet, that he announced a new policy of buying back shares as long as they were trading beneath 110% of book value, he said this:
At certain times in the past, I have erred in not making repurchases,” Buffett told shareholders in a letter published in 2000. “My appraisal of Berkshire’s value was then too conservative or I was too enthused about some alternative use of funds.”
Then at the end of 2012, when 110% proved too conservative, he upped the limit to 120%, buying out about $1b worth of shares from a longstanding shareholder.
It wasn't until 2018 that the board loosened up the policy to give full discretion to Buffett, requiring only that shares be beneath intrinsic value, as Buffett and Munger see it:
The earlier share repurchase program provided that the price paid for repurchases would not exceed a 20% premium over the then-current book value of such shares. Under the amendment adopted by the Board of Directors, share repurchases can be made at any time that both Warren Buffett, Berkshire’s Chairman and CEO, and Charlie Munger, a Berkshire Vice Chairman, believe that the repurchase price is below Berkshire’s intrinsic value, conservatively determined.
Presumably, this still works via the séances that Buffett has imagined using to communicate his wishes to the board after his death, and which are now required to get Munger to sign on to a repurchase.
And in 2019, in the annual letter accompanying the 2018 annual report, Buffett offered a new way of thinking of Berkshire's intrinsic value:
I believe Berkshire’s intrinsic value can be approximated by summing the values of our four asset-laden groves and then subtracting an appropriate amount for taxes eventually payable on the sale of marketable securities.
In that discussion, he refers to earnings, be they from wholly owned businesses or from equity holdings, but he doesn't say what multiple he might use in valuing these.
On the very next page, he talks about intrinsic value:
Earlier I mentioned that Berkshire will from time to time be repurchasing its own stock. Assuming that we buy at a discount to Berkshire’s intrinsic value– which certainly will be our intention– repurchases will benefit both those shareholders leaving the company and those who stay. True, the upside from repurchases is very slight for those who are leaving. That’s because careful buying by us will minimize any impact on Berkshire’s stock price. Nevertheless, there is some benefit to sellers in having an extra buyer in the market. For continuing shareholders, the advantage is obvious: If the market prices a departing partner’s interest at, say, 90¢ on the dollar, continuing shareholders reap an increase in per-share intrinsic value with every repurchase by the company.
So we have hints about the how, and the reference to a 90c dollar MAY be a hint about how conservative, but it's mostly just up to Buffett's discretion.
dtb
