What Buffett Said About Stock Buybacks, Letter by Letter

In the four Berkshire letters covered here, Warren Buffett backs share repurchases when a fine business can buy its own stock for well below what the business is worth. In the 1984 letter he wrote that "no alternative action can benefit shareholders as surely as repurchases" in that situation, and in the same breath called greenmail buybacks "odious and repugnant".

This post traces what Buffett actually wrote about buybacks in four Berkshire Hathaway shareholder letters (1980, 1984, 1985 and 1994), drawn from the 1977–1997 letters in Mímir's library. Later letters fall outside that range and aren't covered here. Each quote links to the original letter.

When did Buffett say buybacks make sense?

The earliest of the four statements comes in the 1980 letter, in a passage Buffett introduced as "a short commercial". Talking about how the companies Berkshire invests in use their retained earnings, he wrote:

"if a fine business is selling in the market place for far less than intrinsic value, what more certain or more profitable utilization of capital can there be than significant enlargement of the interests of all owners at that bargain price?"

The test has two parts. The business has to be a fine one, and the price has to be far below intrinsic value. Both conditions appear again, in very similar words, four years later.

In the 1984 letter:

"When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases."

The 1984 version adds a third condition: "comfortable financial positions". A company that is stretched financially is not the case Buffett is describing.

Why did he compare buybacks with acquisitions?

Buffett's argument for buybacks is a comparison. A company with spare cash can buy part of another business, or it can buy back part of its own.

In 1980 he pointed out that buying a whole company in a competitive deal "almost guarantees the payment of a full - frequently more than full price", while the stock market works differently:

"the auction nature of security markets often allows finely-run companies the opportunity to purchase portions of their own businesses at a price under 50% of that needed to acquire the same earning power through the negotiated acquisition of another enterprise."

The 1984 letter puts the same idea in dollars:

"When companies purchase their own stock, they often find it easy to get $2 of present value for $1. Corporate acquisition programs almost never do as well and, in a discouragingly large number of cases, fail to get anything close to $1 of value for each $1 expended."

What does a buyback reveal about management?

The 1984 letter names two benefits of repurchasing below value. The first is "basic arithmetic": "major repurchases at prices well below per-share intrinsic business value immediately increase, in a highly significant way, that value." The second, he wrote, is "less subject to precise measurement but can be fully as important over time":

"By making repurchases when a company's market value is well below its business value, management clearly demonstrates that it is given to actions that enhance the wealth of shareholders, rather than to actions that expand management's domain but that do nothing for (or even harm) shareholders."

He then turned the point around. A manager who avoids repurchases when they are plainly in owners' interests is telling the market something too:

"A manager who consistently turns his back on repurchases, when these clearly are in the interests of owners, reveals more than he knows of his motivations."

What did Buffett say about greenmail?

Buffett drew a hard line between repurchases driven by price and repurchases driven by pressure. In 1984 he wrote that Berkshire's "endorsement of repurchases is limited to those dictated by price/value relationships". It excluded greenmail, "a practice we find odious and repugnant".

He described three players in a greenmail deal: the "shareholder" extortionist, the insiders who "quickly seek peace at any price - as long as the price is paid by someone else", and "the shareholders whose money is used by (2) to make (1) go away". By his account, greenmail is a payment made with money belonging to shareholders who were never asked.

Which companies did he point to as examples?

Buffett named names. The 1980 letter reports that GEICO, "through repurchases of its own stock, has reduced the share equivalents it has outstanding from 34.2 million to 21.6 million" in the two years before, "dramatically enhancing the interests of shareholders in a business that simply can't be replicated."

In 1984 he wrote that Berkshire had "prospered in a very major way - as have other shareholders - by the large share repurchases of GEICO, Washington Post, and General Foods, our three largest holdings", and noted that Exxon, the fourth-largest holding, had "also wisely and aggressively repurchased shares".

The 1985 letter tells the Washington Post story in more detail. By yearend 1974 Berkshire's holding showed a loss of about 25%, with the market pricing the stock "to well below 20 cents on the dollar of intrinsic value". Then:

"Kay Graham, CEO of WPC, had the brains and courage to repurchase large quantities of stock for the company at those bargain prices, as well as the managerial skills necessary to dramatically increase business values."

Buffett called the result "a triple dip": business value rose, per-share value rose faster because of the repurchases, and the stock price closed the gap with value.

Did Berkshire sell shares back during these buybacks?

Sometimes, and only in a specific way. The 1984 letter describes a 1983 GEICO tender offer in which Berkshire sold GEICO enough shares to be left "owning exactly the same percentage of GEICO that we owned before the tender", and a similar arrangement with General Foods, after which Berkshire's ownership "remained at exactly 8.75%".

The 1985 letter explains the reasoning. Berkshire had not sought out these deals but agreed to them "when managements initiated the idea", believing non-selling shareholders benefited "because the companies made their repurchases at prices below intrinsic business value". Berkshire sold "only to the extent that our proportional share of the business was undiminished".

How does this fit his view of capital allocation?

By the 1994 letter, Buffett folded buybacks into a broader rule for managers:

"When managers are making capital allocation decisions - including decisions to repurchase shares - it's vital that they act in ways that increase per-share intrinsic value and avoid moves that decrease it."

The same letter observes that "a really good business generates far more money (at least after its early years) than it can use internally", and that the company "could, of course, distribute the money to shareholders by way of dividends or share repurchases." The alternative he warned about was the acquisition that gives up more intrinsic value than it receives.

Read together, these four letters apply a single test. A buyback is judged by the price paid against the value received, the same way Buffett judged any other use of capital.

The short version

• 1980: Buybacks of a fine business at far below intrinsic value are among the most certain uses of capital, and often far cheaper than buying earning power through an acquisition.
• 1984: Buying below value can turn $1 into $2 of present value. It also shows whether managers put owners first. Greenmail is "odious and repugnant".
• 1985: The Washington Post's repurchases at bargain prices produced "a triple dip" for its shareholders.
• 1994: Repurchase decisions fall under the same rule as every capital decision: raise per-share intrinsic value.

These are reports of what Buffett wrote in specific letters. They aren't a recommendation about any company's shares.

If you want to look up what Buffett, Paul Graham, Sam Altman, Marc Andreessen or Naval wrote on a question of your own, you can ask Mímir. Each answer cites the original letter or essay.