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You will never get Buffett or Munger to declare whether the market as a whole is too high or too low. They don’t look at things like that. They focus on whether there is an abundance of good businesses/shares being offered at low prices, or conversely, whether good businesses at low prices are few and far between. Here are some clues from the Berkshire Meeting.
Too much cash in Berkshire?
A questioner asked if Berkshire’s cash balances continue to rise and hit $150bn because the valuations of potential acquisitions are too high would they consider a one-time special dividend as means of returning capital to Berkshire shareholders.
Buffett starts by explaining the foundations for the decision on dividends and share buy backs. He always emphasises the primacy of long-term wealth of continuing shareholders:
“Well, if we thought we couldn’t use capital effectively we would try to figure out the most effective way of returning capital to shareholders…I think it’d be unlikely we’d do it by a special dividend.
I think it’d be more likely we’d do it by a repurchase, if the repurchase didn’t result in us paying a price above intrinsic value per share. We’re never going to do anything that we think is harmful to continuing shareholders.
So if we think the stock is intrinsically worth X, and we would have to pay some modest multiple even above that to repurchase shares, we wouldn’t do it because we would be hurting continuing shareholders to the benefit of the people who are getting out.
But we will try and do whatever makes the most sense, but not with the idea that we have to do something every day because we simply can’t find something that day.
We had a vote as you know a few years back on whether people wanted a dividend and the B shares – so I’m not talking my shares or Charlie’s or anything – but the B shares voted 47 to one against it.…… we get self-selection in terms of who joins us [as shareholders]. And I think they expect us to do whatever we think makes sense for all shareholders. And obviously, if we really thought we never could use the money effectively in the business, we should get it out, one way or another.
You’ve got a bunch of directors who own significant – very significant – amounts of stock themselves. And you can expect them to think like owners. It’s the reason they’re on the board.”
Then he said something about the current market environment: “We won’t always be in a world of very low interest rates, or high private market prices.”
Too much cash in the insurance operations?
A German shareholder, Christian Max, asked if the cash in the insurance float ($116bn by his estimation) actually needs to be there.
Buffett responded that he
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