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Monkey don’t

26 September 2011 By Robert Cyran, Agnes T. Crane

Warren Buffett isn’t too old to try something new. His Berkshire Hathaway conglomerate is buying back an unlimited amount of both classes of shares, at up to a 10 percent premium over book value. Investors like to copy what Buffett does, but stock repurchases are best left to the Oracle of Omaha. If shares of other companies were truly undervalued, Berkshire probably wouldn’t be buying its own.

The moment seems right for Berkshire. Its shares have suffered badly this year, falling 17 percent before Monday’s announcement. For a company that prides itself on beating the S&P 500, small wonder Buffett pulled the trigger on an option he has, at least in theory, supported for years.

Shareholders liked the decision, pushing Berkshire shares up 6 percent. What’s good for Buffett, though, might not be so for other corporate bosses. Along with his hunting companion Charlie Munger, Buffett has been touting an M&A quest for an elephant. Yet Berkshire’s $165 billion market value has made it tough to bag one big enough to help the company’s returns.

In recent years, Berkshire has found smaller but satisfying game in finance. Fat dividends from preferred stock in Goldman Sachs, General Electric and most recently Bank of America have proven appetizing. And although Berkshire will keep at least $20 billion of cash on hand, the decision to turn inward for rewards suggests the herd might be starting to look thin.

It’s something investors would be wise to keep in mind. The view that stocks are undervalued remains entrenched on Wall Street and in boardrooms. Companies are buying back stock in droves, and sometimes borrowing to do so, without giving investors objective measures to justify the decisions.

But there may yet be a strategy to mimic from Berkshire’s buyback. Since Buffett has put a price on what’s undervalued, and given his history of well-timed investments compared to the appalling track record of most corporate share buybacks, maybe other companies should consider buying Berkshire stock instead of their own.


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