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Old 12-03-2012, 05:11 PM
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Here is a passage from Warren Buffetts annual (2011) shareholder letter ....... a little off topic and a little on topic as it gets into some of Buffetts and BH thought process for share repurchases, buying/selling strategies, etc ...... basically, regardless of what he does with his position it would be a well thought out move and as with most things there are too many variables in place to answer the basic premise of this thread

Share Repurchases
Last September, we announced that Berkshire would repurchase its shares at a price of up to 110% of book value. We were in the market for only a few days – buying $67 million of stock – before the price advanced beyond our limit. Nonetheless, the general importance of share repurchases suggests I should focus for a bit on the subject.

Charlie and I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated.

We have witnessed many bouts of repurchasing that failed our second test. Sometimes, of course, infractions – even serious ones – are innocent; many CEOs never stop believing their stock is cheap. In other instances, a less benign conclusion seems warranted. It doesn’t suffice to say that repurchases are being made to offset the dilution from stock issuances or simply because a company has excess cash. Continuing shareholders are hurt unless shares are purchased below intrinsic value. The first law of capital allocation – whether the money is slated for acquisitions or share repurchases – is that what is smart at one price is dumb at another. (One CEO who always stresses the price/value factor in repurchase decisions is Jamie Dimon at J.P. Morgan; I recommend that you read his annual letter.)

Charlie and I have mixed emotions when Berkshire shares sell well below intrinsic value. We like making money for continuing shareholders, and there is no surer way to do that than by buying an asset – our own stock – that we know to be worth at least x for less than that – for .9x, .8x or even lower. (As one of ourdirectors says, it’s like shooting fish in a barrel, after the barrel has been drained and the fish have quit flopping.) Nevertheless, we don’t enjoy cashing out partners at a discount, even though our doing so may give the selling shareholders a slightly higher price than they would receive if our bid was absent. When we are buying therefore, we want those exiting partners to be fully informed about the value of the assets they are selling.

At our limit price of 110% of book value, repurchases clearly increase Berkshire’s per-share intrinsic value. And the more and the cheaper we buy, the greater the gain for continuing shareholders. Therefore, if given the opportunity, we will likely repurchase stock aggressively at our price limit or lower. You should know, however, that we have no interest in supporting the stock and that our bids will fade in particularly weak markets. Nor will we buy shares if our cash-equivalent holdings are below $20 billion. At Berkshire, financial strength that is unquestionable takes precedence over all else.

This discussion of repurchases offers me the chance to address the irrational reaction of many investors to changes in stock prices. When Berkshire buys stock in a company that is repurchasing shares, we hope for two events: First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and second, we also hope that the stock underperforms in the market for a long time as well. A corollary to this second point: “Talking our book” about a stock we own – were that to be effective – would actually be harmful to Berkshire, not helpful as commentators customarily assume.

Let’s use IBM as an example. As all business observers know, CEOs Lou Gerstner and Sam Palmisano did a superb job in moving IBM from near-bankruptcy twenty years ago to its prominence today. Their operational accomplishments were truly extraordinary. But their financial management was equally brilliant, particularly in recent years as the company’s financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders. The company has used debt wisely, made value-adding acquisitions almost exclusively for cash and aggressively repurchased its own stock.

Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%. Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us. Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares. Our quiz for the day: What should a long-term shareholder, such as Berkshire, cheer for during that period?

I won’t keep you in suspense. We should wish for IBM’s stock price to languish throughout the five years.

Let’s do the math. If IBM’s stock price averages, say, $200 during the period, the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding afterfive years, of which we would own 6.5%.

If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100 million greater under the “disappointing” scenario of a lower stock price than they would have been at the higher price. At some later point our shares would be worth perhaps $1 1/2 billion more than if the “high-price” repurchase scenario had taken place.

The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocksrise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.

Charlie and I don’t expect to win many of you over to our way of thinking – we’ve observed enough human behavior to know the futility of that – but we do want you to be aware of our personal calculus. And here a confession is in order: In my early days I, too, rejoiced when the market rose. Then I read Chapter Eight of Ben Graham’s The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock prices. Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one of the luckiest moments in my life.

In the end, the success of our IBM investment will be determined primarily by its future earnings. But an important secondary factor will be how many shares the company purchases with the substantial sums it is likely to devote to this activity. And if repurchases ever reduce the IBM shares outstanding to 63.9 million, I will abandon my famed frugality and give Berkshire employees a paid holiday.

Last edited by Finger Laker; 12-03-2012 at 05:22 PM..
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Old 12-04-2012, 04:18 AM
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Originally Posted by Ariadne22 View Post
The trades are done incrementally in an orderly manner over time so as not to disrupt the market and cause the stock to lose value. It is certainly not in the interests of whomever owns the stock to have the shares lose value.

Same with buying large positions. Done incrementally over a period of time so as not to artificially drive up the price.

Or, like mathjak says, go to the market makers and find a buyer or buyers.
Just curious, whats to stop someone who has enough stock that they would have to sell it incrementally from dumping all of it at once so they could rebuy it cheaper later?
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Old 12-04-2012, 07:35 AM
Location: Sunnyside
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Originally Posted by bxlefty23 View Post
Just curious, whats to stop someone who has enough stock that they would have to sell it incrementally from dumping all of it at once so they could rebuy it cheaper later?
if you had 1 million shares of Stock A currently trading at $10. If you sold 100k at $10, 100k at $9, 100k at $8, 100k at $7, 100k at $6, 200k at 5$... etc until it's all gone. if you then bought it back at the low price of 1 dollar, you would then have to have the stock price go back up in order for you to make money. You would also need to have a seller to sell to you at $1... so in order to buy a million shares again, you would get 100k at $1, 100k at $2, 100k at $3, 100k at $4, 200k at $5... and etc until you get your 1 million shares again... and what happened... you made no money and came out equal.

If you buy in increments at the low price, there is also no saying that it will shoot back up to the higher price. If the stock has been remaining flat at $10 for a few years, who's to say it just won't remain flat at $1.
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Old 12-04-2012, 11:39 AM
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Originally Posted by celcius View Post
Buffett's shares are being gifted to the Gates Foundation, not sold. Big difference. The transfer does not go through the stock exchange and therefore will have no effect on price whatsoever. He negotiates with them in private just the number of shares - not the price - and his custodian performs the clearing and transfer of shares to the foundation's endowment. It's a donation, so no money trades hands.

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Old 12-04-2012, 09:23 PM
Location: TX
795 posts, read 1,309,598 times
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Originally Posted by bxlefty23 View Post
Just curious, whats to stop someone who has enough stock that they would have to sell it incrementally from dumping all of it at once so they could rebuy it cheaper later?
Jail time. That's classic securities fraud.
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Old 12-11-2012, 03:41 PM
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Best Buy might be one to look at. The founder and former CEO owns 20% of the stock.
The rumors have been around for many weeks that he wants to take the company private. In the beginning of this talk, he was going to offer $24-$26. Now, as time goes by and he scrambles to find financing the stock went down under $12.00. It's recovered a little with renewed hopes of a deal at lower prices, maybe $17-$18.
Mr. Schulze is by far the largest shareholder.

"We also suspect that it would be difficult for him to cash out of his 20% stake in Best Buy so he has decided to "double-down" on the company by potentially taking it private."
(From Seeking Alpha)
This is an interesting insider and what he will do, and can do.
Would he, as the largest shareholder, sell because the ship is sinking?
The stock was $27 back in April. He's lost alot of money himself.
If the company can not survive on it's own his choices are:
1. sell his 20%, which might cause everyone else to run for the door.
2. buy the other 80% that he does not already own.
3. ride his shares as they head to zero and to bankruptcy.
Concerning the other comment, yes, if it were only humans and slow motion, it could be shown that buyers willing to pay more (since seller's want to sell higher) move the stock up, and vice versa.
Someone asked what causes a stock to go up and down. And that was the simple explanation to them at the time. The reasons that cause a buyer to pay more, or a seller to take less, are numerous.
Panic, fear, greed, geo-political, on and on.
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