Elizabeth Warren vs. Warren Buffett

Sounds like a divorce. In a sense it is. Elizabeth Warren wants to divorce investors from the opportunities available when companies repurchase shares. Warren Buffet disagrees. This is a complex story. A hundred years ago companies would buy their stock heavily to push the price up in order to deceive the public into thinking something good was about to happen. The public then joined in and pushed the price even higher. Then, the company sold out and the company and associated individuals made a fraudulent profit. When the Securities and Exchange Commission (SEC) was founded, one of their rules banned share repurchasing unless a prospectus is available first and approved by the SEC. This solved most of the trading problems while some companies went to the trouble of preparing a prospectus and repurchasing shares.

In 1982 the SEC determined that a prospectus was no longer necessary because companies provided all relevant data in their quarterly and annual reports which were already being delivered to all shareholders and the SEC. To repurchase shares the SEC required that only public notice was required announcing the prospective share repurchases.

Also in 1982, probably due to the SEC’s new rules, two papers were published at Harvard. The Economic School was opposed to share repurchases and claimed that “there must be a better use of the funds than share repurchase”. The Business School concluded that “Share repurchases were the best financial tool that a company’s management can use for their shareholders”.

The battle has continued to date. Two decades ago, Warren Buffett in his polite educational manner was extoling the benefits of companies buying their shares back. He also stated that he liked investing in companies and the managers that were repurchasing. He usually bought companies and left the management intact. So, it appears that he felt the managers were smart and honest.

One decade ago, he changed his mind. Not about share reductions, but about the comments from individuals when Berkshire Hathaway began share reductions. When they attacked his wisdom and honesty he responded. “When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive)”

Current day, Elizabeth Warren obviously did not hear about Buffett’s remarks. She lambasted share buybacks as market manipulation made to inflate executive pay, calling them “poor use of excess corporate profits that could instead be reinvested in a business or workers.” Essentially the Economic school’s conclusion. In 2024 The Harvard Business School issued a new paper. A change of mind. Now they agree to the argument that there must be a better use of the share reduction funds.

They both may be right. All we know is that if our Share Reduction portfolios were one of the 25,000 mutual or exchange — traded funds companies we would have been in the top one percent in performance for the last 42 years.