Warren Buffett…. He is the Chairman and CEO of Berkshire Hathaway, and he is considered by many to be hands down the greatest investor of all time. It should come as no surprise that he runs one of the most closely followed investment portfolios in the entire world. His investment decisions have the power to move markets with thousands of smaller investors following his every move. His portfolio is currently valued at over $300 billion and consists of some of the best stocks in the world (Apple, Amazon, Coca-Cola, and Bank of America) just to name a few. Buffett has been quietly buying 10s of billions of this stock with surprisingly very little attention. Anyone who follows Buffett knows that he only buys a stock when he can buy that stock for less than what that stock is truly worth. Buffett is no different than the rest of us. He loves getting a good deal. Make sure to stick around to the end of this video to learn about how you can apply the lessons of this Warren Buffett purchase to your own investment portfolio.
As a long time Berkshire Hathaway shareholder myself, I love this investment Warren Buffett decided to make. However, with that being said, this big investment doesn’t even show up in his stock portfolio. He spent $31.3 billion on this stock but it is only known to people who closely follow his company, Berkshire Hathaway. That is because his biggest investment of the past 12 months hasn’t been a traditional equity investment in an outside company or the purchase of an entire company. The over $30 billion in purchases have been Berkshire Hathaway’s own stock. That’s right. Warren Buffett’s favorite stock over the past year has been his own. You know we are in a crazy market when the greatest investor of all time can’t find an investment he likes better than repurchasing his own company’s shares.
Here is what Buffett had to say in his most recent annual letter about why he decided to repurchase shares of Berkshire Hathaway:
“Last year we demonstrated our enthusiasm for Berkshire’s spread of properties by repurchasing the equivalent of 80,998 “A” shares, spending $24.7 billion in the process. That action increased ownership in all Berkshire’s businesses by 5.2% without requiring you to so much as touch your wallet.Following criteria Charlie and I have long recommended, we made those purchases because we believed they would both enhance the intrinsic value per share for continuing shareholders and would leave Berkshire with more than ample funds for any opportunities or problems it might encounter. In no way do we think that Berkshire shares should be repurchased at simply any price. I emphasize that point because American CEOs have an embarrassing record of devoting more company funds to repurchases when prices have risen than when they have tanked. Our approach is exactly the reverse.”
There are two main reasons Warren Buffett is repurchasing shares: the first being that in Buffett’s opinion Berkshire Hathaway stock was trading at a significant discount to its intrinsic value at the time of repurchases. Put in a more simple way: Berkshire stock was worth more than what Buffett paid for it, meaning that the remaining shareholders of Berkshire Hathaway were better off as a result of the repurchase. The second reason is not as clearly apparent and wasn’t even mentioned in Buffett’s comments. Buffett has said in the past that his favorite use of cash for Berkshire Hathaway is buying stocks and entire businesses. However, with Berkshire Hathaway having a market cap of nearly $650 billion, Buffett hasn’t been able to find a large acquisition that really “moves the needle,” as he likes to put it. The company is just so big that only really large acquisitions can have a substantial impact. This fact, coupled with high valuations for potential acquisitions that Buffett doesn’t want to pay, has meant that there hasn’t been many acquisitions. So, as a result, a lot of cash has been sitting on the company’s balance sheet, way more than what is necessary to run the company. While Berkshire’s stock may not have been overwhelmingly cheap, repurchasing shares was better than just leaving that cash on the balance sheet in Buffett’s opinion.
Before we go any farther, it is important to understand what exactly share repurchases are and why a company would do them. The best way to do this is to use one of Warren Buffett’s most famous investments, Coca-Cola, as an example. In 2020, Coca-Cola’s profit was nearly
$8 billion. That’s definitely a lot of money. Coca-Cola management had a few different choices with what they could do with that money. The first thing would be to reinvest those profits in the business. That could come in the form of new products, additional advertising, or building a new headquarters. Another option for that money would be something commonly referred to as “inorganic growth.” That is where a company goes out and buys another company in order to grow their own business.
source