We read and listen to a lot of stupid things written by people who work at places who should know better. Sadly, they are often in charge of billions of dollars vs. just pontificating about it. So, one more time, with feeling, on share repurchase.
“The real thing is to buy stock — repurchase shares — only when you think you’re doing it at a price where the remaining shareholders have had — are worth more the moment after you repurchased it than they were the moment before.
It’s very much like if you were running a partnership and you had three partners in it and the business was worth 3 million, and one of the partners came and said, “I’d like to buy back my share of the partnership for a billion” — I started out with millions, so I’ll stay with millions — “for $1.1 million?” And we said, “Forget it.” And if he said, “1 million?” we’d probably say, “Forget it,” unless — and if he said, “900,000,” we’d take it because, at that point, the remaining business would be worth 2-million-1, and we’d have two owners, and our interest in value would have gone from a million to a million and fifty-thousand.
So, it’s very simple arithmetic. Most companies adopt repurchase programs and they just say, “We’re going to spend so much.” That’s like saying, you know, “We’re going to buy XYZ stock, and we’re going to spend so much here.” “We’re going to buy a company.” “We’re going to spend whatever it takes.”
We will buy stock when we think it is selling below a conservative estimate of its intrinsic value. Now, the intrinsic value is not a specific point, it’s probably a range in my mind that might have a band maybe of 10 percent. Charlie would have a band in his mind, and it would probably be 10 percent. And ours would not be identical, but they’d be very close. And sometimes he might figure a bit higher than I do, a bit lower.
But we want to be sure, when we repurchase shares, that those people who have not sold shares are better off than they were before we repurchased them.
And it’s very simple.” – Warren Buffett
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