Berkshire Hathaway 2013 Annual Meeting Audience Question # 42

Book value has a reasonable tracking utility in valuing Berkshire

Warren Buffett:

OK. Cliff.

Cliff Gallant:

I want to ask you about share repurchases. How hard a floor should shareholders think about the 1.2 times book value buyback multiple?

Are there circumstances under which you would not be buying back at 1.2?

Warren Buffett:

Yeah. Well, generally speaking, book value has got nothing to do with the price at which you should purchase your shares; intrinsic business value does. And the correlation between intrinsic business value and book value throughout the investment universe is… you know, there’s virtually no correlation.

So book value is unimportant to most companies. It actually has… it has a reasonable tracking utility at Berkshire.

Our intrinsic business value is very considerably above book value, and we have signaled that… we’ll say it right here, we’ve said it before… but in addition, we’ve signaled that by saying that we would repurchase our shares as long as we had a substantial cash balance, met all the needs of our operating companies, at 120 percent of book value, and if we got the opportunity to buy it there, we would probably buy a whole lot of it.

The calculus is very much what I put in the report. You know, you take care of your business with money first, and if you can buy additional businesses at something where you add to the per-share value of the business, you do that.

If you can repurchase your shares at a significant discount from intrinsic value, it like buying dollar bills at 90 cents or 80 cents or whatever it may be, and it’s a very sure way of improving per-share value.

It’s been very difficult for us to do it because every time we announce it, people say, “Well, if it’s… if he thinks it’s worth more than 120 percent of book,” you know…

Charlie Munger:

Yeah. Those cheapskates are willing to pay that.

Warren Buffett:

Yeah, right. Well, if at least one cheapskate is willing to pay that, the…

And, you know, they’re right. And we don’t really… we’ve got mixed emotions on it.

We don’t really like the idea of running a company where it makes most of its money by buying its partners out at a discount, but if partners want to sell out at a discount, we also like the idea of buying and making, you know, sure money that way.

We haven’t done much of it. Most of the time our stock has sold in a reasonable range in relation to intrinsic business value. We would think that probably a fairly significant percentage
of the time in recent years it sold at at least some discount. There were a few years when we thought it sold for more than intrinsic business value.

But if it, in our opinion, the directors’ opinion, the stock is selling at a significant discount and we’ve got the money around and we’ve got the stock offered to us in a reasonable quantity, we will buy it, and then… and there could be circumstances… it’s unlikely… but there could be circumstances where we’d buy a whole lot at a price that would be attractive for the stockholders who stayed in.


Charlie Munger:

Nothing to add.

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