Sunday, October 02, 2011

Buffett rationalizes repurchases

In this interview with Andrew Ross Sorkin, Warren Buffett explains his logic for repurchases.  His logic supports my thesis from an earlier post that Buffett is really making a statement about how to do buybacks - not as an annual and ongoing "return of cash" (as another Strategic Investor favorite, CL, does) but rather as a choice among investment alternatives.  Buffett wants to buy large companies with good prospects at low prices: BRK qualifies and so long as the price remains attractive relative to intrinsic value, he is a buyer.

A similar approach was explained by Lee Raymond, the man who made ExxonMobil.  Having done many deals building the world's largest non-goverment run energy company, people asked him why he suddenly stopped doing deals.  Mostly, the critics argued that the acquisition of Mobil had been too difficult for XOM.  Raymond countered that there were no deals worth doing: he noted that "we looked around and the cheapest oil we could find was our own, so we bought back stock".  You can read more of the interview here.

Buffett, I think is saying the same.  Sure there are opportunities, and from time to time a business that meets his criteria will become avaiable.  In the meantime, there is a business that meets his criteria which he can purchase as common stock - and unlike other stocks he buys, he has an opportunity to use the treasury shares in private market transactions when the stock more closely reflects intrinsic value, to acquire firms.

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