Berkshire Will Not Buyback Shares! It’s Just Accounting!

via Sven Carlin:

Summary

The mania surrounding potential Berkshire buybacks has pushed the stock price up 5% but the effect is already fading.

Berkshire will not buyback stock at these prices because that would destroy shareholder value.

Buffett and Munger are just preparing for what is to come due to the recent changes in accounting policies.

On July 17, Berkshire (BRK.A) (BRK.B) announced that it will buyback shares when management believes it is trading below intrinsic value. This created a small mania. On Seeking Alpha alone, there were 5 BULLISH ARTICLESpublished. The stock also jumped 5%. However, as I am writing this, the positive effect on the stock price is already fading. I argue that Berkshire changed its buyback policy to simply to adjust to the new accounting rules.

Going forward we can expect much more variation in Berkshire’s bottom line, thanks to the fact that all unrealized gains have to be included in its net income. This could, in the case of a severe stock market crash, where BRK’s stock doesn’t fall as much, create a situation where BRK’s valuation declines to a point less than its book value. Therefore, Buffett and Munger are just adjusting to what might happen so that they can be ready to buyback stock when they think it is smart to do so.

Now that BRK’s stock is close to all time highs and the economy is in the late stage of its cycle, I don’t think Buffett will become complacent. I think this is more a preparation for what might come; a stock market crash where Buffett has lots of cash to deploy. He will then see whether it is best to buy other stocks or buyback shares of Berkshire (or a combination of both).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

 

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