No. of Recommendations: 13
Don't wait for a mega-elephant. Don't wait for Berkshire stock to sell at a large discount to IV; it's selling at IV now. Repurchasing at IV will not increase IV/share, but it will effectively convert T-Bills earning 4.3% into Berkshire stock growing BV at 10%/year.
I completely agree with what I think is your suggesttion : use most of the cash on the balance sheet to repurchase shares. From now to the end of the year, Buffett would have plenty of time to do a big Dutch auction and retire about a quarter of the outstanding shares, at a roughly reasonable price. This would be really leaving his successor with a clean slate, without the need to decide what to do with the big cash pile, just a more concentrated version per share of everything Berkshire is already.
I don't really agree that Berkshire is currently selling at intrinsic value, nor that repurchasing at the current price would not increase IV/share. 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.
Think back to 2011, when Buffett announced that he would repurchase shares at up to 1.1x book value, when Berkshire shares were trading at about $67 per B-share and the book value was $64.60. The idea that the intrinsic value of Berkshire was, say, 1.6x book value, i.e. $100 per B-share, turned out to be crazy, since Berkshire's book value, an overly conservative measure of intrinsic value, had already reached $104 by the end of 2015, and was $142 by the end of 2018. Of course, no one knows the future, but in retrospect, using any P/B less than 2 at the end of 2011 would have underestimated the discounted future value of Berkshire, even if it had been liquidated 6 years later.
I think this is probably still the case now. If Berkshire can maintain a 2-3 percentage point advantage over the rest of the stock market in the next 10 years, then it is still undervalued at 1.6x book, and repurchasing shares now will end up being a good deal, at the very least compared to alternative purchases in Berkshire's universe of high market cap companies. I think with a much safer set of assets and with the prudent, honest, and competent management in place, there is a very good case for purchasing shares even at the current, unusually high price, just like buying Costco 20 years ago, when I declined because of the 'high' 30x earnings price, would have been a great idea.
dtb
