Dear Friends and Family,

“All of our major holdings enjoy excellent economics, and most use a portion of their retained earnings to repurchase their shares. We very much like that: If Charlie and I think an investee’s stock is underpriced, we rejoice when management employs some of its earnings to increase Berkshire’s ownership percentage.

Earlier I mentioned that Berkshire will from time to time be repurchasing its own stock. Assuming that we buy at a discount to Berkshire’s intrinsic value – which certainly will be our intention – repurchases will benefit both those shareholders leaving the company and those who stay.

True, the upside from repurchases is very slight for those who are leaving. That’s because careful buying by us will minimize any impact on Berkshire’s stock price. Nevertheless, there is some benefit to sellers in having an extra buyer in the market.

For continuing shareholders, the advantage is obvious: If the market prices a departing partner’s interest at, say, 90¢ on the dollar, continuing shareholders reap an increase in per-share intrinsic value with every repurchase by the company. Obviously, repurchases should be price-sensitive: Blindly buying an overpriced stock is value destructive, a fact lost on many promotional or ever-optimistic CEOs.”

— Warren Buffett, Chairman of the Board, Berkshire Hathaway Inc. 2018 Annual Report, February 23, 2019

In preparing for a career in finance I attended the New York Institute of Finance. I recall one of the professors saying something that really resonated with me. He said the most difficult problem we would have in our careers was deciding when to sell a security. From day one I specialized in securities being repurchased by their issuer. If they stopped buying, then I stopped holding.

In 1982 my thinking changed. I came across a comment by Warren Buffett. He said that buying value stocks for a recovery provided a small profit, high taxes and a requirement to do a lot of research to replace securities that were sold. I realized that applying my model to options, bonds, and preferreds provided us with nice profits but not great profits. A bond bought at $800 could be called in at $1000 but stocks could provide much higher returns. And so, we specialize in Stocks reducing their shares outstanding.

There has been a lot of negative press and politically motivated discussion of buy backs. 2018 was a record year for buy backs. The tax reform bill provided additional funds for corporations to invest. Mergers, acquisitions, capital and research expenditures all take time to plan so it is not surprising that funds flowed to share repurchases. This year we should see more of the tax savings flow to these other areas. Also note that in 2018 the average company in the S&P 1500 SOLD 1.66% more shares. That’s SOLD NOT BOUGHT. Perhaps there are other reasons than buybacks for the stock market appreciation over the past 10 years.

Katz Family Financial