On July 17, Berkshire (BRK.A) (BRK.B) announced that it will buyback shares when the management thinks those are trading below intrinsic value. This created a small mania and the stock jumped 5%. However, as I am writing this, the positive effect on the stock price is already fading. I’ll argue that BRK’s buyback policy change is simply to adjust to the new accounting rules.
From 2018 we can expect much more fluctuation in BRK’s bottom line thanks to the fact that all the unrealized gains have to be included into its net income. This could, in case of a severe stock market crash, where BRK’s stock doesn’t fall as much, create a situation where BRK’s stock price falls less than the book value. In that case the stock would trade at a price to book value above 1.2 but below intrinsic value. Therefore, Buffett and Munger are just adjusting to what might happen so that they can be ready to do buybacks when they think it is smart to do so. They are just adjusting their flexibility to the potential impact of the new GAAP accounting policies.
Now, that BRK’s stock is close to all time highs and the economy is in the late stage of its natural cycle, I don’t think Buffett will get itchy with his cash. I think this is more a preparation for what might come: a stock market crash where Buffett has lots of cash to deploy. He will then see whether it is best to buy other stocks, buyback shares or do both.
Enjoy the video for a detailed explanation using examples from BRK’s annual and interim reports.