Mr. Buffett, Mr. Munger, I’m Tim Medley from Jackson, Mississippi. My question is an allocation of capital one. You’ve indicated that one thing you like in companies is a willingness on the part of management to repurchase its own shares. I wonder if you would talk for a minute about your own frame of reference on repurchases when it appears that the current price of the stock is rich in relation to its intrinsic value. And some have said that, with the right company, ongoing repurchases of stock should be made, irrespective of the price. So, would you speak for a moment, as to how you think it pencils out when the current price of the stock is rich in relation to its intrinsic value? WARREN BUFFETT
Yeah. If you’re repurchasing shares above a rationally calculated intrinsic value, you are harming your shareholders, just as if you issue shares beneath that figure, you are harming your shareholders. That’s a truism. Now, the tough part of that, of course, is coming up with the intrinsic value. And, for example — a good example might be Coca-Cola. I think a number of people might have thought Coca-Cola was repurchasing shares at a very high price, because they’ll look at book value or P/E ratios. But there’s a lot more to intrinsic value than book value and P/E ratios. And anytime anybody gives you some simplified formula for figuring it out, forget it. You have to understand the business. The people who understood that business well, the management, have understood and been very forthright about saying so over the years, that by repurchasing their shares, they are adding to the value per share for remaining shareholders. And like I say, people who didn’t understand Coca-Cola, or who thought mechanistic methods of valuation could — should take precedence, really misjudged the value to the Coca-Cola Company of those repurchases. So we favor — when you have a wonderful business — we favor using funds that are generated out of that business to make the business even more wonderful. And we favor repurchasing shares if those shares are below intrinsic value. And I would say that if it’s a really wonderful business, we probably come up with higher intrinsic values than most people do. We have great respect, Charlie and I with — I think it’s developed over the years — we have enormous respect for the power of a really outstanding business. And we recognize how scarce they are. And if a management wishes to further intensify our ownership by repurchasing shares, we applaud. We own — we just went over 8 percent of the Coca-Cola Company, probably, in the last three or so months, by a very tiny fraction. But we had a second purchase one time. But our percentage interest in the Coca-Cola Company has gone up significantly through their repurchases. And we are better off because they have bought those shares at what looked like, to some people, perhaps, high prices. And we thought they were wrong at the time, and I think now it’s been indicated or proven. So, I urge you, if you’re trying to decide on the wisdom of repurchases, or of share issuances, that you don’t think in terms of book value. You don’t think in terms of specific P/Es. You don’t think in terms of any little model. But you think in terms of what would you really, A, pick businesses you can understand and, then, think what you really would pay to be in those businesses. And that’s what counts over time, is whether the repurchases are made at a discount from that figure. And I would say with the companies that we own shares in, we — our interest in GEICO went from 33 or so percent to 50 percent over a 15-year or so period, simply through repurchases. And we benefitted significantly. So, did every other shareholder, I might add, that stayed with the company. And we benefited in no way disproportionate to them. But that was a very wise action on their part. And there too, they were all — usually buying that stock at at least double book value. And you could compare it to other insurance stocks and say, “Well, that’s too much to pay.” But GEICO wasn’t an insurance company that was comparable to other insurance companies. It was a very different sort of business. And they were very wise, in my view, to be following that course of action. Charlie? No?
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"If you’re trying to decide on the wisdom of repurchases, or of share issuances, that you don’t think in terms of book value. You don’t think in terms of specific P/Es. You don’t think in terms of any little model. But you think in terms of what would you really, A, pick businesses you can understand and, then, think what you really would pay to be in those businesses. And that’s what counts over time, is whether the repurchases are made at a discount from that figure." ~Warren Buffett