Warren Buffett is probably the most-watched investor in the world, and every year, investors parse through the letter he sends to shareholders of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B). Many of the topics Buffett discusses are valuable not just for Berkshire investors, but also for anyone who wants useful insight on how to invest better.
Lately, one topic that's caught on among Berkshire's shareholder base is how Buffett and his team choose to buy back shares of the insurance-led conglomerate. In the letter that just came out last weekend, the Berkshire CEO gave his latest update on what's happening with buybacks. He also made it clear that investors should not expect repurchases to happen in connection with one very specific situation: to prop up the stock during a major crash.
A brief history of Berkshire stock buybacks
Buybacks at Berkshire Hathaway aren't anything new. As early as 2000, Buffett told shareholders that the company would consider repurchasing shares if major shareholders wanted to make an offer. By 2011, Berkshire created a more formal policy for guiding repurchase decisions, saying that the company would consider buying back stock whenever the share price fell below 1.1 times its book value. Shortly thereafter, when a major shareholder's estate reached out in 2012 to see if Berkshire wanted to buy back a large block of stock, Buffett agreed -- and formally boosted its repurchase limit to 1.2 times book.
That bright-line rule made it clear when Berkshire could do buybacks, but it didn't lead to very many opportunities for the company to do so. In 2018, therefore, Berkshire changed gears again, choosing no longer to focus on book value as a guide and instead authorizing Buffett and his team to repurchase stock whenever the share price was below intrinsic value.
What Buffett's saying now
This year's installment of Buffett's letter to investors didn't give a huge amount of detail on buybacks, but it did provide some information. The Oracle of Omaha said that Berkshire spent about $5 billion on repurchasing shares during 2019, amounting to roughly 1% of the company's outstanding stock. In doing so, Buffett described the stock's valuation during the year as having been "modestly favorable at times."
However, Buffett once again made it clear that shareholders shouldn't expect Berkshire to prop up the stock at any level. As a student of history, the Berkshire CEO knows quite well how fruitless such efforts proved to be during the stock market crash of 1929. The speed with which declines can come in markets today would make similar efforts now equally unlikely to succeed, even if Buffett wanted to try to stop it.
Moreover, conditions right now don't seem to be so favorable that Berkshire is chomping at the bit to buy back stock. Neither Buffett nor co-chair Charlie Munger "feels any urgency to buy an estimated $1 of value for a very real 95 cents."
Will Berkshire keep buying back stock?
That said, Buffett did note that if prices fall and make Berkshire stock a better value, then the company would get more aggressive about doing buybacks. Moreover, the Oracle of Omaha left the door open for major shareholders with $20 million or more in stock to contact Berkshire's offices if they want to sell.
For shareholders who had perhaps hoped that a more aggressive stance on buybacks would help the stock recover from an underperforming year in 2019, Buffett's conservative approach was somewhat disappointing. But the way that the Berkshire CEO described the situation regarding stock repurchases showed, once again, just how disciplined he is, and long-term investors should appreciate the way in which he and his team approach decisions like this.