Is It Time for Investors to Bail on Warren Buffett?

Berkshire Hathaway stock buyback
Berkshire Hathaway stock buyback

Share buybacks are usually a good thing. If a company has idle cash lying around and a stagnant stock, why not eat your own cooking?

On the surface, that appears to be what Berkshire Hathaway (BRK-A) (BRK-B) is doing this morning. Warren Buffett's legendary holding company will be repurchasing shares.

Unlike most buyback plans, Buffett isn't setting aside an exact amount for the self-nibbling. Berkshire Hathaway simply won't buy shares if it lowers the company's cash equivalent holdings below $20 billion. Buffett also won't be repurchasing stock if it is trading for more than a 10% premium to book value on the open market.

These are two important conditions -- with meatier implications than you probably think.

Throwing the Book at Buffett

Berkshire Hathaway was sporting book value of $98,716 for every Class-A share at the end of June. Given the bruising market that we've experienced this summer, book value is likely a bit lower these days.

The Class-A shares closed on Friday at $100,320, but they popped to $103,373 on Monday morning as a result of the buyout news. Given the cascading prices in some of Berkshire's key public holdings, it wouldn't be a surprise if today's pop prices the company out of its book value condition for the buyback.

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Soak in the irony, but there's more to dissect here.

If Berkshire Hathaway isn't open to buying its stock at more than a 10% premium to book value, why should Joe and Jane Investor?

"In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount," the company explains in the announcement -- but why isn't it putting its money where its mouth is beyond that 10% ceiling?

Sending the Wrong Message

Investors don't buy into Berkshire Hathaway because they believe that there's nothing better than a Reese's peanut-butter-cup Blizzard, or that sharing a corporate jet through NetJets is an uplifting experience.

Folks buy into Berkshire Hathaway to benefit from the stock-picking prowess of Buffett and Charlie Munger.

Are they simply running out of ideas if they resort to self-cannibalism? Do we really need a $20 billion mattress in this low interest rate environment? Buffett and Munger are also getting up there in age, so maybe investors need to start thinking about who will be making these calls in a few years.

The world refers to Buffett as "The Oracle of Omaha," and rightfully so. The guy's been a genius over the years. However, this buyback almost seems like a subtle surrender. Most of the firm's own holdings have fallen harder than Berkshire's stock itself, so why not buy more of those cheaper companies?

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway.