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Whitney Tilson’s Original Take on Buybacks, as Decision to Increase in Berkshire Ensues

December 13, 2012 | About:
Relative to Guru Whitney Tilson’s announcement yesterday announcing to buy more shares of Warren Buffett’s Berkshire Hathaway, immediately following the widespread news of Berkshire’s stock repurchase, it is safe to take a trip down memory lane and look back on what Tilson’s repurchasing beliefs entail.

In a Wall Street Journal article published in February, titled The Pros and Cons of Stock Buybacks, Tilson said, “It never ceases to amaze me—and, when a company we own does the wrong thing, infuriate me—how few companies think sensibly about this topic and thus buy back stock for all the wrong reasons: to prop up the price, signal "confidence," offset options dilution, etc.”

Tilson, who joins many investors who advocate Warren Buffett’s value investing insights, and who heads hedge fund firm, T2 Partners Management, maintains Berkshire as one of his top holdings.

As of the end of the third quarter, Tilson owned 90,382 Berkshire B shares (BRK.B), representing 4.6 percent of his portfolio. In the second quarter, he only had a little bit under 5,000 shares, making his latest Berkshire transaction in the third quarter a 1,790 percent increase.

Figures pertaining to how many shares he plans to add to his Berkshire stake have not been reported.

Given his long position in the company, Tilson cites Warren Buffett in the WSJ article, bringing forth the importance of intelligent repurchasing:

Warren Buffett, in his 1999 letter to Berkshire Hathaway shareholders, perfectly captures the key elements of a smart share repurchase program:

‘There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds—cash plus sensible borrowing capacity—beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated.’

In other words, once a business has a strong balance sheet, then it should first take its excess cash/cash flow and reinvest in its own business—if (and only if) it can generate high rates of return on such investment. Then, if it still has cash/cash flow left over, it should return it to shareholders, who are, after all, the owners of the business—it's their cash. But this raises the question of whether cash should be returned via dividends or share repurchases.” (Read the rest of the article at The Pros and Cons of Stock Buybacks)

Accompanying Tilson’s elation to hearing Berkshire’s repurchase news, was also an update to his Berkshire Hathaway presentation slides, which placed Berkshire 26 percent below what the firm claimed an intrinsic value of $180,000, which T2 partners showed was a multi-decade low. (View the presentation at Whitney Tilson Update on Berkshire Hathaway)

Reported by CNBC, Tilson wrote in a note to clients reacting to the buyback: “Buffett just put a floor on the stock of $134,000…Go figure. Needless to say, I'm even happier having this as my largest position — and added to it this morning the moment I saw the news.”

Berkshire Hathaway Class B stock is up 0.01 percent in this afternoon’s trading. However, both A and B shares have a GuruFocus rating of 1 star in Business Predictability, 6 out of 10 in Financial Strength and 8 out of 10 in Profitability and Growth.

To read more on related topics, visit the following GuruFocus articles and submissions:

Warren Buffett and Share Repurchases – The Facts

Warren Buffett Finds Berkshire Share Valuation Attractive, Completes Buyback

Whitney Tilson Update on Berkshire Hathaway

Whitney Tilson On Why He Thinks Berkshire Hathway is Still Super Cheap

T2 Partners – March Investor Letter

Whitney Tilson – I Don’t Want a Dividend From Berkshire Hathway, Let Warren Invest the Money

Warren Buffett Annual Shareholder Letter for 2011 is Out

Notes on Warren Buffett’s 2011 Letter to Shareholders

About the author:

Dianne Tordillo
Dianne Tordillo is staff writer for GuruFocus.com. She reports on a variety of financial news, primarily dealing with investor portfolios and stock trades. Her articles also highlight insider trades, as well as the many useful features of GuruFocus.

Visit Dianne Tordillo's Website


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