Berkshire Hathaway Bought Back Its Shares at $310,000 – $315,000 Per Share in August, 2018
In a Berkshire Hathaway news release on July 17, 2018, Berkshire’s Board of Directors announced an amendment to its share repurchase program. The earlier share repurchase program provided that the price paid for repurchases would not exceed a 20% premium over the then-current book value of such shares. Under the amended plan, share repurchases can be made at any time that both Warren Buffett and Charlie Munger believe that the repurchase price is below Berkshire’s intrinsic value, “conservatively determined”.
“The current policy whereby share repurchases will not be made if they would reduce the value of Berkshire’s consolidated cash, cash equivalents and U.S. treasury Bills holdings below $20 billion will continue. Berkshire will not initiate any share share repurchases under the amended program until it publicly releases its second quarter earnings, currently scheduled after the close of the markets on Friday, August 3, 2018.”
On August 30, during an interview on CNBC, Warren Buffett stated that “we’ve bought back a little” (shares of Berkshire Hathaway). Therefore, these shares were purchased between Monday, August 6 and Thursday, August 30 (Buffett: “We’re buying stocks this morning.”) Between August 6 and August 30, Berkshire Hathaway traded approximately between $310,000 and $315,000 per share (approximately a 45% premium to its June 30 book value of $217,677). A purchase price in this range implies that Buffett and Munger probably estimate that Berkshire’s intrinsic value is at least a 55% premium to its book value, or at least $335,000 per share, allowing for a “margin of safety”. On Friday, August 31, Berkshire closed at $315,800.
Hi, I’m trying to see if anyone else shares my views about Berkshire Hathaway. Sometimes I feel like it’s the greatest company out there, but then I also feel like it is too good to be true. Warren Buffett’s likeable and trusting personality has projected the image of Berkshire Hathaway as an upstanding corporation. However, despite the nicety of management portrayed at the annual meeting, and anywhere else in the media, Berkshire Hathaway seems like it’s one of the murkiest businesses in the United States, and it’s all because of accounting. As an accounting student, I’m questioning why Buffett openly slams GAAP accounting and expresses his preference to investing in unreportable earnings over reportable earnings in his owner’s manual. I’ve done some research, and I think the underlying cause of the transparency issues of Berkshire Hathaway is its consolidated financial statements and the way insurance behaves under GAAP. Does anyone think that the share repurchase is to boost investor confidence because people believe whatever Buffett says about intrinsic value, but it’s covering something else? Or is this all pessimistic speculation and I’m missing something?
Even with consolidation accounting causing some issues, a major problem arises with the rules, or in this case, lack thereof, for reporting insurance, specifically Buffett’s “baby” GEICO. Berkshire Hathaway is not doing anything improper with its disclosures or accounting, but because insurance companies have different accounting rules from financial services companies like Berkshire Hathaway, a lot of its insurance-related risks do not show up in SEC filings. Berkshire has not joined other large financial service companies in making detailed reporting after the 2008 crisis, and its insurance sector may not be as profitable as Buffet leads investors to believe. The problem is that through a series of complex transactions involving transfers of losses from other insurers, Berkshire Hathaway contains a big concentration of legacy insurance liabilities, mostly related to asbestos and environmental claims.
The annual report gets into the derivatives used in the insurance sector, but it is slim. It only describes purposes that are typical in the insurance industry for protection, such as underwriting private passenger automobile insurance. Does anyone else believe that Berkshire may have more insurance derivatives than it leads investors to believe, and these are resulting in major cash flow issues? Do you think this is why they don’t pay dividends? Because it consolidates, it seems as if all that cash is available; but in reality, some of the cash is tied up in a subsidiary, like it’s National Indemnity Company subsidiary (NICO) that it runs its insurance loss transfers through, but those losses are nowhere to be found in the SEC filings because publicly traded insurers do not have to disclose details to the SEC regarding loss transfers. Or is that amount just a drop in the bucket?