Why You Shouldn't Wait for a Discount on Berkshire Hathaway

The market knows Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) has some of the best investors in the world calling the shots. Warren Buffett and Charlie Munger are, after all, the best duo on Wall Street. Thus, it's rare that Berkshire Hathaway sells at a discount to its book value.

Even so, waiting for a discount to the current price is still a fool's (not Fool's!) game. Here's why you won't ever be able to buy Berkshire Hathaway inexpensively.

Investors actually pay attention
Of all the companies on the public market, Berkshire Hathaway has the most loyal shareholders. Berkshire owners run the gamut from active value investors to passive followers who like having Buffett manage their money. And Berkshire's annual letter to shareholders is among the most widely read documents in the financial world when it surfaces each year.

Thus, investors are tuned in to what Buffett says.

In 1999, Buffett announced in his shareholder letter than he would consider buying back Berkshire Hathaway shares. He even mentioned a price. Here's what Buffett wrote:

Recently, when the A shares fell below $45,000, we considered making repurchases. We decided, however, to delay buying, if indeed we elect to do any, until shareholders have had the chance to review this report. If we do find that repurchases make sense, we will only rarely place bids on the New York Stock Exchange ("NYSE").

He never got the chance to buy back stock in Berkshire. Much later, at the 2006 annual shareholders meeting, Buffett said the following:

A few years ago, when we were willing to buy back our stock, the fact of writing about it eliminated the opportunity.

He was referring to his comments in the 1999 shareholders letter. Once that letter came out, Berkshire shares never traded as cheap at $45,000 for the A shares ever again, even though the S&P 500 fell for two years after his letter to shareholders.

BRK.A Chart

BRK.A data by YCharts.

What Buffett's said recently
Buffett recently announced a policy of repurchasing shares for Berkshire Hathaway only at a price of 1.2 times book value or lower. Since then, the company has traded for well above 1.2 times book value.

BRK.A Price to Book Value Chart

BRK.A Price to Book Value data by YCharts.

History sure likes to repeat itself. On two occasions, Buffett has named his price to buy Berkshire Hathaway shares, and the market responded by pushing Berkshire Hathaway shares higher.

On one hand, this prevents an opportunity to snag Berkshire Hathaway at a discount. However, it also presents an opportunity for conservative investors to snap up Berkshire shares. Because Berkshire Hathaway generates more cash than it can reinvest into new ideas, it's likely that it will make more repurchases in the next 10 years than it ever has.

There is a "floor" in place at 1.2 times book value, a price at which Buffett would start buying back stock. Investors won't easily get market-beating returns from an investment in Berkshire, but at least they'll have the comfort of knowing that Berkshire's cash will likely hold up the stock in a downturn. For this reason alone, Berkshire Hathaway may be the right stock for the investor who wants stock market exposure with less risk. 

Discover the gems in Berkshire's annual letters
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.


Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 04, 2013, at 2:39 PM, BDF958 wrote:

    Short the stock over 5 year horizon and there is a 80-90 perc chance you will win.

  • Report this Comment On December 04, 2013, at 3:56 PM, FoolinSD wrote:

    I snag my BRK.B shares at ~$70 in 2011. So obviously they weren't that loyal. The main question, will be if that loyalty wavers when B/M retire/die.

    foolinsd

    a happy investor & put writer

  • Report this Comment On December 04, 2013, at 10:22 PM, spirach2 wrote:

    You're getting Berkshire at a discount right *now.*

    It's worth a good $130 right now... and it sells for $115. It's cheap now.

    So the idea that you'll never be able to buy it cheaply is ridiculous.

    And it *was* just as cheap in '09 as it was in '99, relative to BV, normalized earnings, and everything else that matters.

    Also, the idea that there's a 'floor' in place at 1.2 x BV is wrong, too, since there's no guarantee that BRK would begin buying heavily, in the event of a major plunge, as soon as it hit that level.

    The buyback clause authorizes the company to buy back shares *up to* that price; it doesn't guarantee that they *would* buy as soon as it broke that price, or even dropped much lower.

    It's always possible that they would choose not to, or would opt to grab an even better bargain in something else.

    P.S. To poster BDF958, Congrats, Man, that is one of the dumbest statements I've seen anywhere this year.

    Impressive.

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