2012: How attractive are buybacks above 1.1x BV versus acquisitions?

JAY GELB: Thank you. My question is also on share buybacks.

Warren, in last year’s annual letter, you said not a dime of cash has left Berkshire for dividends or share repurchases during the past 40 years.

In 2011, Berkshire changed course and announced a share repurchase authorization.

What I’d like to focus in on is, what is Berkshire’s capacity for share buybacks, based on continued strong earnings power? How attractive is deploying excess capital and share buybacks compared to acquisitions, even above 1.1 times book value? And what are your latest thoughts on instituting a shareholder dividend?

WARREN BUFFETT: The 1.1 is a figure that we feel very comfortable with. So, we would probably feel comfortable with a figure somewhat higher than that, but we wanted to be dramatically — or very significantly — undervalued to do buybacks, and we want to be very sure that every shareholder that sells to us knows that we think that it’s dramatically — or significantly — undervalued when we do it.

But we have a terrific group of businesses.

The marketable securities that we own, we think, are going to be worth more in the future, but we carry them at what they’re selling for today. So they’re not — that’s not an undervalued item, you know, in the balance sheet.

But some of the businesses we own are worth far more money than we carry them, and we have no significant business that’s worth any significant discount from the carrying value.

So we would — from strictly a money-making viewpoint — we would love to buy billions and billions and billions of dollars’ worth of stock at — we’ll move that up to tens of billions — at 110 percent of book.

You know, I don’t think it will happen, but it could happen. You never know what kind of a market you’ll run into.

And if we get the chance to do it, as long as we don’t take our cash position below 20 billion, we will — we would buy very aggressively at that price. We know we’re making significant money for remaining shareholders.

The value per share goes up when we buy at 110 percent of book, and therefore — and it’s so obvious to us that we would do it on a big scale if given the chance to, and if it did not take our cash position down below a level that leaves us comfortable.

Charlie?

CHARLIE MUNGER: Well, some people buy their own stock back regardless of price. That’s not our system.

WARREN BUFFETT: Well, we think it’s — we think a lot of the share repurchases are idiotic.

CHARLIE MUNGER: I was trying to say that more gently.

WARREN BUFFETT: You’ve never done it before. (Laughter)

The — it’s — I mean, it’s for ego. I’ve been in a lot of board rooms where share repurchase authorizations have been voted, and I will guarantee you it’s not because the CEO is thinking the way we think at all.

They like buying their stock better at higher prices, and they like issuing options at lower prices. You know, it’s just exactly the opposite than the way we would think.

We will only do it for one reason, and that’s to increase the per-share value the day after we’ve done it.

And if we get a chance to do that, we both, you know, in a big way, we’ll do it in a big way.

I don’t — strictly operating as a financial guy, I would hope we get a chance to do a lot of it. Operating as a fiduciary for hundreds of thousands of people, I don’t want to see them sell —

CHARLIE MUNGER: We hope the opportunity never comes.

WARREN BUFFETT: Yeah. But if it does, we’ll grab it.