Monday, December 27, 2010

Buffett on Stock Buybacks: Berkshire Shareholder Letter Highlights

Warren Buffett wrote the following in the 1984 Berkshire Hathaway (BRKashareholder letter:

"When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases."

If a company's own stock is selling at a discount to a conservative estimate of value, buying back stock is a very low risk way to enrich remaining shareholders.

Other shareholder enhancing moves mostly involve more risk.

Having said that, here's one situation to think about that sometimes gets too little consideration.

Unfortunately, it's possible that a buyout offer comes in at a nice premium to market value but a discount to intrinsic value. If enough owners are okay with the gain that will have occurred compared to the recent price action, the deal may be approved. The quality of a company's board of directors naturally comes into play in such a scenario. If too few have conviction about longer run prospects, the deal may get approved. When too many owners of shares are in it for the short-term or, at least, primarily to profit from price action, the chance of this happening increases.

Well, those that became owners because of the plain discount to intrinsic value and the company's long run prospects will likely get hurt in this scenario.

Adam

Long BRKb

Related post:
Buy a Stock...Hope the Price Drops?
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