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Yes, I know he's said it in the past, but that was then. This is now. BRK has too much ammo and too few elephants, and the problem will only get progressively worse. When he was smaller and lived in a target-rich environment, there was no way he'd give up his ammo for parity pricing. But today? Can you envision a deal showing up that WB wants to do but can't because it's too big? He has more than enough money for any future deals. And should some crazy scenario present itself that requires additional capital, he'll get creative as he has done so many times in the past.

But wouldn't he tell us if he's changed his criteria?

He'll probably eventually tell us, but there's no rush. It's not like it's the central thesis for investments in Berkshire. Buyback thresholds have changed in the past and will probably continue to evolve in the future.

So would WB buy back stock at a 5% discount to IV? I bet he would and has been. Would he buy back at a 1% discount? I don't know, but I think he should. I think he should buy right up to parity. The reason is I believe a very big problem coming up is returning capital to shareholders. We've had many discussions about the problem with dividends, but what do you do when you have a large and growing cash pile, a fully or overvalued stock price, and too few investment opportunities? WB should be buying back stock all the way up to IV to delay/reduce this inevitable problem.

This matters because if it's true, you can no longer look at his peak repurchase price and add 10% to get a minimum value on WB's belief on IV.

I don't recall Buffett saying anything about 10% off. Do you have a link? Thanks.

I think he gave an example of a company repurchasing at a 10% discount. I don't believe he ever said that's what he would do.

He has said many times that IV is in a range, and competent analysts will come up with different numbers, even Warren and Charlie would have significantly different numbers.

I expect he buys back when they have excess cash, and the price is within a conservatively calculated range. That range might be +/- 20%.

I expect he buys back when they have excess cash, and the price is within a conservatively calculated range. That range might be +/- 20%.

I think this is correct. He has repeatedly said that he does not use or advocate a mechanistic approach to such valuation or decision around repurchase.

I use 10% from my impression of his value seeking traits based on observing him as a shareholder for more than 25 years. I would consider a safe bet that he would not buy anything in size at a price where he didn't think it was selling for at least a 10% discount to his conservative assessment of value. This includes his own shares.
Obviously Intrinsic value is a range and it fluctuates so at best it can be a crude heuristic. In my case it simply indicates that since Buffett is a buyer of his own shares at the current price, it is unlikely they are overvalued despite the run up in the last few months.

I don't recall Buffett saying anything about 10% off.

In 2018, he said BRK would buyback shares when both he and Charlie believed the stock was below a conservatively calculated IV. But nothing about a 10% discount to IV, so I stand corrected. My point remains that he may be getting more aggressive in his repurchasing. I can't imagine him ever paying above IV, but he may be trying to calculate IV more closely and be willing to pay much closer to that value, particularly when his cash balances are high.

ppant,

Great to see you posting - albeit only on occasion.

I think this board is well worth supporting and expanding. I hope others like you are lurking and will join the conversations. We need others to join in.

A number of great posters were a real help to me and my understanding of BRK in the past. Let's try to pass on what we can.

I echo Texirish's comments. I am a huge fan of ppant and would love to see more of his posts.

Thanks, ppant, for all your insights over the years.

Thanks for the kind words Texirish and rochish.

I will try to participate more on this board. I had been busy for a while and fortunately Berkshire is one investment where a gap in discussion and analysis doesn't necessarily hurt results.

I have been reading the interesting discussions here and glad to see the standard continues to be high.

https://finance.yahoo.com/news/warren-buffett-defe...

He mentions the 90 cent dollar in this article. I tried to cut and paste the section of the article then go back and get the link but doesn’t seem to work. My post disappears when I come back.

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. Obviously, repurchases should be price-sensitive: Blindly buying an overpriced stock is value-destructive, a fact lost on many promotional or ever-optimistic CEOs," he wrote.

He mentions the 90 cent dollar in this article...
=======
"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."


He used to say shares should trade below 1.1x book, then he said it was 1.2x book, and most recently he has just said they need to be below intrinsic value, conservatively calculated. The above is just an example ("at, say, 90¢ on the dollar") of a situation where a repurchase would make sense; I think he could have also given an example of 99¢ on the dollar, and this would have still been consistent with the present criterion.

The 'conservatively calculated' is where the big question mark is: How does he do this calculation, and how conservative is it? I think the 'how' part is likely to be the 5 groves system that he has suggested we use. And I think it is clear from that system that there is already some built in conservativis. For instance, the fact that he gives no value to underwriting profits which have been very substantial over the years. But that's probably as far as we can go with what he has said to shareholders.

"How does he do this calculation, and how conservative is it? I think the 'how' part is likely to be the 5 groves system that he has suggested we use. "


and it needs to be well understood by those executing buybacks when Warren is no longer in the house.

The 'conservatively calculated' is where the big question mark is: How does he do this calculation, and how conservative is it?

I have always thought of it this way: as he notes, there is a pretty wide range of possible value estimates, and his and Charlie's estimates would always have differed.
So I assume the price paid would have to be below the bottom of the range of all plausible estimates, then at least a little bit lower still to make it worthwhile.

Jim

The 'conservatively calculated' is where the big question mark is: How does he do this calculation, and how conservative is it?

To Echo Jim's point, he actually laid it out pretty clearly in the 2003 AGM.


AUDIENCE MEMBER: Right. My question pertains to the allocation of a company’s free cash. And the question is, under what circumstances would Berkshire consider parting with its money for a share buyback program, as opposed to retaining it for future acquisitions? Thank you.



Our preference — and we stated this 20 years ago, even to — is to buy businesses. We are — we want to add businesses of a quality with managers of a quality equal to those we already own, at prices that make sense. And that’s our number one preference.

If we thought Berkshire was significantly undervalued and we thought the likelihood of using the money to buy businesses — the probability was low — we would be buying stock in — we probably wouldn’t be able to buy a lot of stock in, but 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.

To Echo Jim's point, he actually laid it out pretty clearly in the 2003 AGM.
====
... 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

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.

As is the case for every other CEO on earth with decisions about capital allocation.

All Buffett is doing is making clear that the calculation of intrinsic value depends on the the individual - by giving examples of himself and Charlie coming up with different assessments based on their assessments of different factors.

It's not his job to provide a mechanical formula for others to apply.

The subject under discussion in the thread was the implications of a repurchase at a specific price and any implications that can be drawn from this specific fact to the intrinsic value as assessed by Buffett.

The next CEO may have a different approach to allocating capital once Buffett moves on. That is after all what the CEO's job is. Investors then will be free to draw their own conclusions about how comfortable they are with any new CEO's approach.

I am personally more than OK with this assuming it is done rationally and is based on an objective assessment of the circumstances at a particular time. The last think I would want a new CEO to be doing is to have Buffett pulling the strings beyong the grave (to be morbid for a second).

"He used to say shares should trade below 1.1x book, then he said it was 1.2x book, and most recently he has just said they need to be below intrinsic value, conservatively calculated."

I don't think the 1.1 and 1.2 were really about the value of the shares.

I think those were set back when Buffett still had his hang-up about share buybacks as him taking advantage of the sellers. The 1.1 and 1.2 price/book thresholds were just a point where the value was so ridiculous that he couldn't pass it up. His announcing the thresholds beforehand helped him assuage the guilt he felt as an insider taking advantage of sellers. It is quite obvious that his thinking about buybacks has evolved over the years, not just in terms of value, but also in terms of ethics. I think those buyback thresholds were just evolutionary stages in his thinking about the ethics of buybacks more than they were stages in his valuation of Berkshire.

I think those buyback thresholds were just evolutionary stages in his thinking about the ethics of buybacks more than they were stages in his valuation of Berkshire.


Well stated Umm. I agree.

Also the continuing inflow of cash and the ongoing lack of elephants might be a factor.

"So we have hints about the how, and the reference to a 90c dollar MAY be a hint about how conservative"

I argued after Buffett's repurchases in Q3 and Q4 of 2018 that the P/B that Buffett paid provided a reasonable way to estimate Buffett's estimate of IV, and now after 75 more reported repurchases and two, telling months in which Buffett did not repurchase stock (April and May of 2022), I am even more convinced that the repurchase P/B provides a reasonable estimate of IV.

For several years now my estimate of IV, using different valuation models and different assumptions within each model, have given IV between 1.5x BV and 1.7x BV. I have chosen to use 1.5x since that was more conservative. However Buffett's repurchases have now forced me to use a best guess for IV that is higher than 1.5x BV. Warren has repurchased stock as high as 1.5x BV, using either beginning BV for the quarter or ending BV for the quarter. Also, as pointed out in this thread, the most reasonable estimate of his required discount to IV seems to be 10%, not 5% as was using previously. That implies an IV of 1.5x BV/0.9, or 1.67x BV.

It is quite obvious that his thinking about buybacks has evolved over the years, not just in terms of value, but also in terms of ethics. I think those buyback thresholds were just evolutionary stages in his thinking about the ethics of buybacks more than they were stages in his valuation of Berkshire.


Yes, an evolution in thinking about the ethics, which he oddly used to explain why Berkshire didn't repurchase shares, while applauding when companies he owned repurchased their shares.

But I suspect even more than this, apart from just the fact that the cash keeps building up without good things to buy with it, is that he prefers buying things and making Berkshire bigger rather than just optimizing the returns for shareholders. Buying more companies makes Berkshire more diversified, more robust (given the fact that it is an insurance company, after all) and it also makes Berkshire a more influential company. Buffett enjoys celebrity, but it is the celebrity that comes from having built a big, successful company that is a model for corporate behaviour, rather than just the celebrity of being humongously rich. You wouldn't give away 5% of your shares every year if you just wanted to be the richest guy on Earth (and he would probably still be the richest had he never given any money away.)

But once you've started repurchasing shares, and have used tens of billions of dollars to repurchase shares at less than 120% of book value, you might as well change the goal and try to optimize shareholder returns after all, as that marker for success has not suffered from the buybacks so you can still win that game.

dtb

It's a mystery to me that these great "teachers", Buffett and Munger, won't disclose their valuation methods. Unlike WB's mentor, Ben Graham, who laid out his thoughts clearly and with far more real erudition than the late great Munger. Maybe Charlie put his method in his will, but I doubt it.
Bottom line, they could have contributed to the theory of finance, but chose or choose not to for fear of losing their competitive edge.
It would be fun if Buffett writes his in his will and it turns out to be something like "discount rate = 10Y treasuries - inflation + 5%".
(I know CM said they don't use discount rate, but without any disclosure why should I believe him?)

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