In the past, BRK has a rule that whenever price of BRK falls below 1.2 times book value, Mr. Warren Buffett can use company’s cash to buy back BRK shares. Recently, this rule was removed. The share was traded around 1.4 times book value then.
Immediate reaction from the market was very positive, the share price went up 5% and people are speculating that a share buyback program will soon be introduced as a form of returning money to shareholder in a tax efficient way (as oppose to issue a special dividend).
Personally I think this is a positive development overall, but not for the reasons above. Having a “1.2 times book value” rule is not necessarily the best way to provide clarify to the market and instead, may cause some artificially drawn “line-in-the-sand” on share prices. There is no magic about the number 1.2 and the company should not set a rule around it. Nowadays the new form of economy (especially technology companies) are all “capital-lite” kind of companies. They don’t carry lots of real estate or materials or inventories on their balance sheet.
Many of companies are providing services and their software or platform are not going to be captured by book value. Their biggest capital is probably their staff and talent (think Airbnb who don’t own homes, Uber who don’t own cars, Twitter who don’t own user created contents etc). If BRK is going to be reflect such new reality, the 1.2 times of book value should be revised or abandoned.
That being said, I am not holding my breath in an immediate share buyback plan that the Street is hoping for. As a long term shareholder, I like to spend cash more on lucrative new acquisitions that provide future strong growth opportunities than buying departure shareholders out of their position and own a bit more of current businesses (not complaining!)
Hope things become cheaper sooner before Mr. Buffett has to buy the companies’ own shares.