Berkshire Hathaway 2009 Annual Meeting Audience Question # 26

The last time Berkshire announced a share buyback, it became “self-defeating”

Warren Buffett:

Let’s go to Carol.

Carol Loomis:

I got lots of question sent in to me about the possibility of Berkshire buying its own shares. And here’s what one said:

“You recently described Berkshire’s policy regarding share repurchase as self-defeating, because before repurchase, you said, you would write a letter to shareholders explaining why we are going to do it.

“You said the letter would, by necessity, tell investors that the stock price was at a substantial discount to intrinsic value, which would cause the stock price to rise.”

“The letter would be, in essence, a buy recommendation, though as a matter of policy, you don’t make those.”

“In the past, you have emphatically endorsed share repurchase by other companies and criticized managers who would not buy when the price was right.”

“You have said no alternative action can benefit shareholders as surely as repurchases. Your previous views suggest little patience for a manager with a self-defeating policy.”

“You’ve said when you have a manager who consistently turns his back on repurchases when these are clearly in the interest of owners, he reveals more than he knows of his motivations. So… and the market correctly discounts assets lodged with him.”

“Would it not be rational to conclude that the market will appropriately discount Berkshire’s share price unless and until you abandon your self-defeating policy and engage in repurchases of shares?”

Warren Buffett:

Yeah, incidentally, the… and this important, actually… the comments I made about repurchasing, overwhelmingly, those go back a lot of years when stocks generally were… frequently were… cheap in relation to intrinsic value. I did not make that…

You haven’t seen me writing about that in the last 10 years or so. Because I would say most of the repurchasing done in recent years, I’ve thought has been foolish, because people have been paying too much.

And companies got, in many cases… they would never acknowledge this… but they were buying because they were basically liked… they were trying to give out a buy recommendation when it wasn’t justified.

In the ’70s and early ’80s, Charlie and I would frequently urge people to repurchase shares because it was so much more attractive than other things they could do with their money.

The only time we felt strongly that Berkshire should repurchase its shares was in roughly 2000, whenever it was, that we thought it was demonstrably below intrinsic business value. And we wrote we would do it, and it did become self-defeating.

There’s clearly a point where if we thought it was demonstrably below… conservatively estimated… intrinsic business value and we notified the stock holders we were going to do it, we would do it. I think again, it would largely be self-defeating.

I don’t think that situation exists now. I think… I won’t give any buy or sell recommendations. But I think it ought to be quite compelling.

Like I say, I don’t… I think, probably 90 percent of the repurchase activity I’ve seen in the last five years, I did not think was serving the cause of the shareholder.

I thought it was being done because management thought it was the thing to do, and their investor relations department told them it was the thing to do, and they were actually buying stock at kind of silly prices.

And that was not the case when Charlie and I looked at Teledyne or the Washington Post or Cap Cities Broadcasting doing it many years ago. But I haven’t seen situations like that in recent years.

Charlie?

Charlie Munger:

I’ve got nothing to add to that, either.

Warren Buffett:

Number… it’s interesting how many companies were buying in their stock at twice present prices that aren’t buying it now. I mean, there are lots of those.

We will never buy in our stock at a silly price. We may make a mistake by not buying it at a cheap price. But we’ll never make a mistake, I don’t think, by buying it at a silly price.

And we think a significant percentage of corporate America has done that in recent years, including a few stocks that we’ve owned ourselves.

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