Berkshire Hathaway CEO Warren Buffett recently ended a six-year streak of stock buybacks for the company. While the company regularly participates in stock buybacks, it did not do so during the third quarter, according to Securities and Exchange Commission filings.
Despite having over $325 billion in cash reserves, Buffett opted not to use that cash to buy back shares, suggesting that he believes the stock is too expensive.
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Buffett’s approach to stock buybacks is straightforward: he only buys back shares when he considers them a “bargain.” According to Berkshire Hathaway’s regulatory filings, he looks for a stock price below the company’s intrinsic value – a conservative measure considering the long-term worth of Berkshire’s assets. Analysts believe the absence of buybacks sends a clear message to the market: Berkshire’s stock is overvalued at its current price.
Berkshire Hathaway‘s Class A shares are trading around 1.6 times their book value, representing the company’s assets once debts are subtracted. In the past, Berkshire has avoided buybacks when the stock traded above 1.2 times its book value, but that guideline was dropped in 2018.
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Buffett’s conservative investment philosophy remains firm even with a more flexible policy. Robert Korajczyk, a finance professor at Northwestern’s Kellogg School of Management, explained to CNN, “He’s been very clear that they would never buy back shares if they thought that the firm was overvalued.”
In addition to ending its buyback streak, Berkshire increased its already significant cash holdings by selling stocks in the third quarter. Some analysts took this as a cautionary move due to concerns about the current market environment.
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NYU Stern School of Business professor Aswath Damodaran told CNN that Buffett’s decision to hold cash suggests Berkshire is taking a conservative stance, likely due to high stock prices. “It’s a signal that they feel cautious about where the market is,” Damodaran said. “They’ve become cautious because they think the market is richly priced.”
Buffett frequently emphasizes patience and caution in investing, especially in overheated markets. Known for his simple advice, Buffett has reminded investors of the importance of waiting for opportunities that align with their long-term goals. One of his well-known principles is to “be fearful when others are greedy and greedy only when others are fearful.” This approach aligns with his decision not to pursue buybacks when Berkshire’s stock is performing well but appears expensive.
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For investors following Buffett’s lead, his recent actions underline the importance of valuation and the benefit of holding cash when the market feels overvalued. Buffett’s strategies, which often prioritize value and conservative growth, can provide insights for those looking to make calculated, patient investments that align with their financial goals.
Consider talking to a trusted financial advisor if you’re looking for guidance tailored to your unique circumstances. They can help you map out a plan toward your long-term goals.
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