Buffett's repurchase might imply something about the market and economy

By DAVID MOON, Moon Capital Management, LLC
October 2, 2011

A week ago, Berkshire Hathaway, Warren Buffett’s $178 billion investment vehicle, announced that its board had approved a share repurchase plan for the company, potentially spending $30 billion to buy back company stock. It was a major reversal of policy for Buffett, who has previously criticized buybacks and the boards that approve them.

The stock jumped eight percent on the news.

Buffett’s decision implies several things about Berkshire Hathaway. Most telling, however, is what it might reveal about Buffett’s thinking on the economy and the overall stock market.

Buffett’s portfolio contains a number of private businesses, like Dairy Queen, Fruit-of-the-Loom and NetJets, in addition to east Tennessee's Clayton Homes and 21st Mortgage. The portfolio also includes public common stocks such as Coca Cola, Conoco Phillips, American Express, Johnson & Johnson and Proctor & Gamble.

The press release said that Berkshire Hathaway was willing and had board approval to purchase shares at a price not in excess of 10 percent of its book value. That suggests Buffett considers Berkshire Hathaway stock a more attractive investment than cash – at least up to that price.

But it also implies that Buffett considers his own stock a better bargain than most other investment alternatives, not just cash. He is obviously having difficulty finding attractive, large investments in this market.

The class A shares of Berkshire closed at $108,449 this past Monday, the day of the announcement. Its book value is currently $98,716 per share, implying a maximum Buffett purchase price of $108,588.

The class B shares, "Baby Berkshires," have identical economic interests as the class A shares, and trade at 1/1,500th of their price. The implied maximum purchase price for the B Class shares is $72.

He obviously thinks that his current portfolio will grow at an annual rate that approaches 10 percent annually – and this is a positive. If Buffett believed that the world economies and investment markets were going to crash or remain mired in morass, he would simply hold onto his $30 billion and wait for better buying opportunities.

But even if Buffett doesn’t expect worldwide financial collapse, it seems that he expects the world financial markets to return less than ten percent annually - the implied equity return of the Berkshire portfolio.

Some people might consider the expectation of world-wide stock returns less than 10 percent as pessimistic or depressing, but Buffett is not eschewing stocks – not at all. If he were pessimistic, he wouldn't buy his own shares, effectively investing more money in Coca Cola, Clayton Homes and his entire portfolio of businesses.

Up to 40,000 people attend the Berkshire Hathaway annual meeting, mainly (or exclusively) to hear Buffett's pontifications. Successful hedge fund manager Ted Weschler paid more than $5.25 million to have two lunches with the Oracle of Omaha. (Note to job seekers: Buffett hired Weschler shortly after the second lunch.) While Buffett ruffled feathers with his recent op-ed piece recommending higher tax rates on the highest of income individuals, his opinions are clearly widely respected – both by individual investors and highly sophisticated professionals.

Buffett isn't infallible, but he is certainly worth listening to.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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