Is It Time for Investors to Bail on Warren Buffett?

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Berkshire Hathaway stock buybackShare buybacks are usually a good thing. If a company has idle cash lying around and a stagnant stock, why not eat your own cooking?

On the surface, that appears to be what Berkshire Hathaway (BRK-A) (BRK-B) is doing this morning. Warren Buffett's legendary holding company will be repurchasing shares.

Unlike most buyback plans, Buffett isn't setting aside an exact amount for the self-nibbling. Berkshire Hathaway simply won't buy shares if it lowers the company's cash equivalent holdings below $20 billion. Buffett also won't be repurchasing stock if it is trading for more than a 10% premium to book value on the open market.

These are two important conditions -- with meatier implications than you probably think.

Throwing the Book at Buffett

Berkshire Hathaway was sporting book value of $98,716 for every Class-A share at the end of June. Given the bruising market that we've experienced this summer, book value is likely a bit lower these days.

The Class-A shares closed on Friday at $100,320, but they popped to $103,373 on Monday morning as a result of the buyout news. Given the cascading prices in some of Berkshire's key public holdings, it wouldn't be a surprise if today's pop prices the company out of its book value condition for the buyback.

Soak in the irony, but there's more to dissect here.

If Berkshire Hathaway isn't open to buying its stock at more than a 10% premium to book value, why should Joe and Jane Investor?

"In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount," the company explains in the announcement -- but why isn't it putting its money where its mouth is beyond that 10% ceiling?

Sending the Wrong Message

Investors don't buy into Berkshire Hathaway because they believe that there's nothing better than a Reese's peanut-butter-cup Blizzard, or that sharing a corporate jet through NetJets is an uplifting experience.

Folks buy into Berkshire Hathaway to benefit from the stock-picking prowess of Buffett and Charlie Munger.

Are they simply running out of ideas if they resort to self-cannibalism? Do we really need a $20 billion mattress in this low interest rate environment? Buffett and Munger are also getting up there in age, so maybe investors need to start thinking about who will be making these calls in a few years.

The world refers to Buffett as "The Oracle of Omaha," and rightfully so. The guy's been a genius over the years. However, this buyback almost seems like a subtle surrender. Most of the firm's own holdings have fallen harder than Berkshire's stock itself, so why not buy more of those cheaper companies?

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway.


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15 Comments

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daniel

how can i contact the warren buffet foundation to obtain a business loan or maybe even a grant to conduct business in the northwest territory? do you have any suggestions for this type of endeavor? thanks for your response. dkearth@aol.com

October 13 2011 at 12:18 AM Report abuse rate up rate down Reply
jerrylew1s

Always thought and still do that JPM best of all.

September 28 2011 at 4:45 PM Report abuse rate up rate down Reply
kernershort

I'm not as smart as Warren Buffet (and certainly not as rich), but it does appear to me that Warren could find a better use for that cash hoard than buying back Berkshire's shares. There must be something behind it that we're not told. Maybe he thinks Uncle Ben will deflate the dollar down so much by printing up $100 bills in the basement of the Fed that his stock will be worth more than the money?

September 27 2011 at 11:38 AM Report abuse rate up rate down Reply
billcac

Hello, I'm a Bank America Shareholder with high hopes when he bought in. What happened?

September 27 2011 at 11:34 AM Report abuse rate up rate down Reply
Michael Walsh

Buffett is a "BLOWHARD" that is trying to make everyone think that his Secretary pays more taxes than he does. Although he makes most of his money on "CAPITAL GAINS" which Obozo obviously doesn't understand.

September 27 2011 at 11:19 AM Report abuse +1 rate up rate down Reply
hlogan1863

HuffPuff has a lot of fluff. sLanted ----> do u thinK! AOL opt out SooN

Buffet has been at the buffet a little too long getting fat old and way too funny

he must eat a lot of turkey since he talks like one more & more & more

September 27 2011 at 8:56 AM Report abuse +3 rate up rate down Reply
Gerardine Folay

Why do they keep on talking about it? I also wondered why.
Just like you, I was also puzzled every time they try to conceal it when they include it
In the topic. All I know, people who are acquainted in this topic are amazingly rich.

Let’s find the answer at Google, just type “BlueGoldHunt” and click the first site.

September 27 2011 at 2:13 AM Report abuse rate up rate down Reply
wasstraus

I don't like this new portfolio setup. Please go back to the old format. Thanks

September 27 2011 at 12:29 AM Report abuse +3 rate up rate down Reply
nperez228

This article is just a waste of time. It seems that the authors thinks that he knows best. It is so easy to criticize when you are obviously not qualified to do so in an objective manner.

September 26 2011 at 10:45 PM Report abuse +1 rate up rate down Reply
awolf93456

Manurist is not an Aristotle. How many are you stuck with???? Or maybe some ot your clients are inundated.

September 26 2011 at 7:39 PM Report abuse rate up rate down Reply