4% T-bill changes buyback calculation

  • For more than a decade, hyper-low interest rates distorted market valuations and tested the patience of value investors, including Warren Buffett.
  • The present 4% rate available in short Treasuries changes the basic equation; it’s easier for value investors to wait patiently for a good long-term entry point.

The ideal situation for buybacks lasted for two years. Buybacks were around $5 billion in 2019, most the 4th quarter, almost $25 billion in 2020, almost $27 billion in 2021. Then in 2022, buybacks regressed to $5 billion for the first three quarters. In operational terms, Berkshire hadn’t changed. What changed was the rise of Treasury Bill rates from almost zero to 4%. It became a much tougher choice to take cash out of T Bills rising toward 4% in order to continue to reduce Berkshire shares outstanding.

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when you are creating narratives, you need to be careful about your examples. MCD is at all time high and its PE is 35. If ZIRP is responsible for 25 PE, how are you going to explain this? When you have your basics of your narrative incorrect, the rest is also incorrect. I think raising rates may be the reason why Berkshire didn’t buyback, but it has nothing to do with the reason he is talking about, and I suspect it may be due to either Berkshire is looking at some certain opportunities or hoping the volatility in the currency market, crypto, and equity could offer them opportunities similar to great financial crisis. I don’t think WEB is so excited about 4%, that he want to lock it for the next 30 years.

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You don’t have to lock in rates for 30 years.

Even 2 month bills have 4% rate.

https://www.ustreasuryyieldcurve.com/

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Yes, I am aware of that. Do you think WEB is excited that in short-term 2 months he can get 4% annualized rate? When you buyback, that is a long-term investment on Berkshire stock. Any comparison has to be related to similar term, return.

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I think they are looking at lower prices in the near future while the cash earns 4+%. Your comment reminds me of how the board was pounding the table at $300, telling me I was silly to wait for a lower entry point, which may never happen. By being patient I initiated a position at $265. If BRK never had gone low enough for me, I had plenty of other options to chose from, and in fact it has not been my only buy.

Any investment I make is long term, as I am investing money I don’t need in the short term, but that doesn’t mean I need to rush the purchase and it’s OK to keep the powder dry while waiting for a good entry point, particularly now that staying liquid actually earns a bit.

IP,
who has never let cash burn a hole in the pocket, though not afraid to spend it when a bargain presents itself

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Unless WEB spells out we may not know why he didn’t aggressively buyback. But the author’s thesis that 4% return is exciting that WEB is not actively buying back doesn’t hold. BTW, congratulations on picking up Berky @ $265.

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I agree, I very strongly agree. Anyone who knows anything about WEB, knows that he prefers money to be deployed rather than just sitting there. There is no way, no way at all, that he is “excited” about a 4% return on their pile of cash. The only thing he might be excited about is that perhaps 4% rates will cause some of the things on his short list to decline in price such that they reach a point at which they are worth buying. And then he will buy. That’s also the reason to use less of the cash for buybacks, to conserve it for that moment in time when other investments are ripe for the picking. That is his history, for 5+ decades, so why would anyone thing otherwise.

Also, if you read the article, that doesn’t appear to be his thesis.

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Higher interest rate means higher discount rate, hence lower stock price. 4% return vs 1% does increase threshold of buying any stocks.

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Agree. It’s Real return that matters so 4% rate given current inflation is not too exciting for him imo. WEB typically wants a 10% return. With 900B in assets, 12% cash/cash equivalents position seems reasonable and conservative imo. WEB has become even more conservative from a risk standpoint in recent years with this QE experiment so I am fine with his judgment and patience. Seems they have allocated over 50B net in equities in 2022 so they have been pretty busy, esp. in energy. Great to have some dry powder although even more buybacks would have been nice in September.

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