My article yesterday addressed the myth promulgated by the financial media that Warren Buffett, the once avowed hater of share repurchases, had turned on a dime with his recent activity. I quoted decades of investor letters that showed that this was blatantly incorrect; unfortunately, the financial media has taken a cue from the political world – a place where facts are secondary to mind-numbing opinions and endless noise from the “experts.”
On Wednesday, Gary Kaminsky, CNBC's Capital Markets Editor, was asked for his opinion on Berkshire’s buyback (NYSE:BRK.A)(BRK.B) - and while he may not have known what he was talking about, that didn’t stop Kaminsky from letting all the fine viewers of CNBC know how he feels:
“You guys covered this yesterday at great lengths, and I hoped to look at some of the newspapers today - the Wall Street Journal* was the only newspaper [that was] somewhat critical about this. Because look, Warren Buffett is going to be buying back stocks – remember, he was never going to buy back stock, he was never going to split the stock, he was never going to put the stock in the S&P 500. If this is not hypocritical to the maximum level… he has changed - a long time ago, never believed in buybacks, never would split a stock into the B shares, and would never go into the S&P 500… that's just some of the hypocrisy.”
* The same column that I discussed in yesterday’s Gurufocus article, found here
After this, Mr. Kaminsky continued on to discuss the tax code and how hypocritical Warren had been in helping a fellow billionaire avoid a hefty tax bill (unfortunately this was also incorrect due to laws that have been in place for decades). But that’s a discussion for a different website — this is about buybacks.
Some may remember an article I wrote awhile back (here) when Berkshire first announced the share repurchase authorization in 2011; at that time, this is what I wrote (ironically, it was also addressing some idiotic comments from Kaminsky):
“In the CNBC piece, Mr. Kaminsky lays out his views on capital allocation, saying that buybacks are last in line among organic growth (I’m assuming that means reinvestment in the business), dividends, and acquisitions (“the only thing worse than buybacks is sitting on the cash”). He says this is based on “history, what equity investors want managers to do with capital.”
As noted in Warren’s quote, this is simple arithmetic: Major repurchases at prices well below per-share intrinsic business value immediately increase, in a highly significant way, that value. When Kaminsky talks about “history,” he is likely referring to companies that indiscriminately buyback shares regardless of price, which is the exact opposite of what Berkshire is doing. In regards to acquisitions, they are known to often lead to value destruction, not creation (in 2004, McKinney found that only one-fourth of acquisitions have a positive return on investment). In reality, buying back stock at a price substantially below intrinsic value should be at the top of the list, not the bottom.”
As was the case then, Kaminsky has been loose with his words when quoting Buffett (and has no idea what he’s talking about when it comes to capital allocation). By the way, here is Buffett’s take on the stock split, discussed in the 1992 shareholder letter:
“We hold to the view about stock splits that we set forth in the 1983 Annual Report. Overall, we believe our owner-related policies — including the no-split policy — have helped us assemble a body of shareholders that is the best associated with any widely-held American corporation. Our shareholders think and behave like rational long-term owners and view the business much as Charlie and I do. Consequently, our stock consistently trades in a price range that is sensibly related to intrinsic value.
Additionally, we believe that our shares turn over far less actively than do the shares of any other widely-held company. The frictional costs of trading - which act as a major "tax" on the owners of many companies - are virtually non-existent at Berkshire.(The market-making skills of Jim Maguire, our New York Stock Exchange specialist, definitely help to keep these costs low.) Obviously a split would not change this situation dramatically. Nonetheless, there is no way that our shareholder group would be upgraded by the new shareholders enticed by a split. Instead we believe that modest degradation would occur.”
Importantly, here’s the key section from the 1983 report on that “no-split” policy: “We will try to avoid policies that attract buyers with a short-term focus on our stock price and try to follow policies that attract informed long-term investors focusing on business values. Just as you purchased your Berkshire shares in a market populated by rational informed investors, you deserve a chance to sell - should you ever want to - in the same kind of market. We will work to keep it in existence.”
I wonder what “we will try/work” means? This is something that Gary cannot understand — nuance. Buffett can’t stand stock splits for purely cosmetic reasons — much like he can’t stand buybacks and share issuance that spit in the face of sound capital allocation/strategy (for example, JNJ’s use of equity in the purchase of Synthes).
Let’s remember why the “B” shares were split — it wasn’t some evil scheme to screw over the minority shareholders or to make Berkshire look “cheaper” (and yes, there are people who think a $20 stock is automatically cheaper than a $40 stock — a key motivator for many share splits). The deal was commenced so that Berkshire could acquire Burlington Northern — a deal which looks better for Berkshire’s long-term shareholders with each and every passing quarter. If Gary wanted to question the rationale for selling a portion of Berkshire to buy BNSF, that would be a discussion well worth having (and the type of conversations that would make me watch CNBC much, much more than I do now); the fact is that he wants to lash out at Buffett (why, I don't know), and he hopes that something, anything, might stick.
As Buffett continued to say in 1983, “One of our goals is to have Berkshire Hathaway stock sell at a price rationally related to its intrinsic business value. The key to a rational stock price is rational shareholders, both current and prospective.”
The purpose was to have equity returns align with value creation, leaving investors unaffected by the gut-wrenching volatility that leads so many individuals to poor investment decisions at exactly the wrong time; doesn’t it seem a bit odd that Kaminsky is so worked up about this?
I would simply close with the following: The Internet is full of nuts writing whatever they want (some people might group me in there), and the established media is supposed to be (or used to be) a source of factually accurate information; stations like CNBC, and particularly contributors like Gary Kaminsky (who never quotes anything Buffett has said or wrote in these rants), are an example of why you must take everything you read and hear in today’s media with a grain of salt.
About the author:
I think Charlie Munger has the right idea: "Patience followed by pretty aggressive conduct."
I run a fairly concentrated portfolio, with 2-5 positions accounting for the majority of my equity portfolio. From the perspective of a businessman, I believe this is sufficient diversification.