Buffett hypocritical moves

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3 "hypociritcal" moves made by Warren Buffett. Shareholders should thank him. Investors should learn from them.

3 "hypociritcal" moves made by Warren Buffett. Shareholders should thank him. Investors should learn from them.

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  • 1. You Should Thank Buffett for These 3 Hypocritical Moves
  • 2. #1: Stock Splits From 1983 Berkshire Hathaway Shareholder letter: “We often are asked why Berkshire does not split its stock. The assumption behind this question usually appears to be that a split would be a pro-shareholder action. We disagree” Image Source: The Motley Fool
  • 3. Hypocritical? In 2009, Berkshire Hathaway’s “B” stock was split. Each “B” share became 50 shares after the split was complete. Image Source: Public Domain
  • 4. Why you should thank Buffett The 2009 split was done in order to accommodate shareholders of Burlington Northern Santa Fe Railways, which Berkshire was acquiring in a $34.5 billion stock, cash, and debt deal. In five years, BNSF Railways has already generated $14.3 billion in net income. Image Source: BNSF Railways
  • 5. #2 Share Buybacks Buffett has long supported share buyback programs at companies that Berkshire has held stock in, while being reticent to buy back Berkshire shares. From the 1990 shareholder letter: “When Coca-Cola uses retained earnings to repurchase its shares, the company increases our percentage ownership in what I regard to be the most valuable franchise in the world.” Image Source: Coca-Cola
  • 6. #2 Share Buybacks (cont.) From the 2011 shareholder letter: “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.” Image Source: Argonne National Lab
  • 7. Hypocritical? Buffett has never been opposed to buying Berkshire shares back, but under some very specific conditions: •Shares must be at a strong discount to intrinsic value (specifically below 120% of book value). •Berkshire’s liquidity won’t be significantly reduced by share buybacks •They represent the best return for shareholders versus potential acquisitions or investments Image Source: Public domain
  • 8. Why you should thank Buffett Berkshire shares have outperformed the S&P 500 since buyback program commenced
  • 9. #3 Using stock to buy companies Buffett has long been opposed to issuing Berkshire stock to use as currency to make acquisitions. Buffett has typically said this is because Berkshire’s shares are worth more than market value. Image Source: Flickr
  • 10. Hypocritical? Remember the BNSF transaction? Berkshire issued enough new shares to dilute investors a whopping 5.5% in order to come up with the shares for BNSF investors.
  • 11. Why you should thank Buffett It gets back to the result of the BNSF transaction. Since acquiring BNSF, the $14 billion in BNSF profits are enough to cover: •$10.5 billion IBM stake. -or- •$12 billion Heinz stake ($8 billion of which pays a 9% return) -or- •Just add to the $40+ billion on the balance sheet Image Source: Public domain
  • 12. It’s not hypocrisy… …it’s mental flexibility. Warren Buffett has very few “hard and fast” rules, and he’s willing to change course in order to get the best return for Berkshire shareholders. As much as anything else, this is why Berkshire Hathaway has grown per-share earnings nearly 20% annually since 1970, and been one of the greatest investments of the past century.
  • 13. Warren Buffett says this new technology a "real threat“ to Berkshire