2006: Why isn't Berkshire buying back shares?

AUDIENCE MEMBER: Hello, Mr. Buffett, Mr. Munger. My name is William Schooler (PH), and I’m a shareholder visiting from Spicewood, Texas.

I would like to thank you both for being so generous to the public with your ideas.

Last year, I read “Poor Charlie’s Almanack” and came across a passage on share repurchases.

It reads, quote: “When Berkshire has gotten cheap, we’ve found other even cheaper stocks to buy. I’d always prefer this. It’s no fun to have the company so lacking in repute that we can make money for some shareholders by buying out others,” end quote.

Last year, you bought stock in some great businesses trading at fair prices, such as Walmart and Budweiser, but did not attempt to buy our own shares.

Would shareholders be correct to infer from this decision that you both felt Walmart and Budweiser were trading at a deeper discount to their intrinsic values than Berkshire was?

And would it be possible to buy as much Berkshire in the open market as you did Walmart without running up the share price?

WARREN BUFFETT: Most of the time, we would not be able to buy an amount that would be material, in terms of increasing the value of the remaining Berkshire shares. But that doesn’t mean it would never happen.

But it — if you look at the trading volume on Berkshire — and, [CFO] Marc [Hamburg], you might put that up, if we can, in a second — we probably have less opportunity than most companies if our stock is selling — should be selling — below intrinsic value to have anything meaningful happen.

We would also have — if we regarded some other company as worth X, a good business, and we could buy it at 90 percent of X, we might be doing that now, whereas we wouldn’t have done it many years ago.

But we might require a somewhat greater margin, in terms of buying Berkshire shares, simply because our view on that might be less — we probably have more knowledge on it, but we might be less objective than on some other things.

We think that when we buy — if we were to buy in Berkshire shares — and, if you remember, four or five years ago I announced we would if the price stayed the same — that the case ought to really be compelling, and if it’s compelling, we ought to do it. It was compelling at that time.

But simply the act of writing about it — you know, a little bit of a Heisenberg principle — the act of writing about it, in effect, eliminated the opportunity to do it, which is fine.

Because we do not — we are not looking to make money off of buying from shareholders at a depressed price.

On the other hand, if the price is sufficiently depressed, we will announce again that we intend to do it, and then we’ll see whether we actually get a chance to do it. Charlie?

CHARLIE MUNGER: Yeah. The whole climate in the country is different now.

It used to be that almost every company that bought in shares was buying them in at an obvious bargain price. Now I think a lot of share buying is designed to, sort of, prop the stock price.

In other words, it’s not bargain-seeking. It’s more like Sam Insull.

WARREN BUFFETT: Yeah. Forty years ago, 30 years ago, it was a very fertile field for making money to look at companies that were aggressively buying in their shares, the most extreme case probably being Teledyne.

But those people were buying overwhelmingly — Gurdon Wattles was doing it at the companies he controlled — those people were motivated simply by the fact they wanted to buy the stock below what it was really worth and — significantly below — and you could make money with that group, and we did a little of that at the time.

I would say in recent years, that motivation has been swamped by people who either think it’s fashionable to buy in shares, or by people who really like the idea of trying to prop their stock up somewhat.

And the SEC has certain rules, in terms of the way you conduct your repurchases to prevent daily, sort of, propping up.

But I think there’s a lot of motivation that our stock has got to be cheaper than other people’s stock, and we’ve got a wonderful company, and we’re just going to buy the stock come hell or high water, and that is not the way we would go about repurchasing shares.

We’ve got — well, we had up there, I think — some figures that showed the turnover of Berkshire shares compared — in a year — compared with a few others I picked out.

I think Berkshire has the lowest turnover, by some margin, of any major company in the United States.

And I put Walmart up there because the Walton family owns about the same — in fact, they own more — of Walmart than I do of Berkshire.

So, this is not a function of simply the fact that we’ve got concentrated holdings with the Buffett family.

This is a reflection of the fact that we’ve got a really unusual shareholder body in that they think of themselves as owners and not as people who are moving around with little pieces of paper every week or month.

We have the most — in my view — we have the most what I would call honest-to-God ownership attitude among our 400,000 or so shareholders of any company — of any big traded company — in the United States.

People buy Berkshire to own it, and hold it, and that’s reflected in our turnover. That does mean if, for some reason, the stock gets cheap — real cheap — that we would not be able to buy a lot of stock in.

But we don’t want — we are not looking to buy out our partners at a discount. If it sells there and we tell them we’re going to buy it, we’ll buy it. But that’s not a way that we’re trying to make money.

Charlie, any more?

CHARLIE MUNGER: No. I’ve said my piece.