Warren Buffett's BIG $9,000,000,000 Investment

There’s no secret that over the past few years, Warren Buffett has been struggling to deploy Berkshire Hathaway's monster cash pile. He hasn't been able to find any really big investments to sink that money into. This was a focus in his 2019 shareholder letter, saying that he's looking for big investments, but he just can't find any because they're all so expensive right now. He really hasn't made a really big investment since he invested in Apple, and that was like four years ago.

However, on Saturday, Berkshire Hathaway announced their Q3 2020 earnings, and in that document revealed a big new nine billion dollar investment from the Oracle of Omaha. So what did Warren Buffett sink this nine billion dollars into? Well, let's find out.

Berkshire's Q3 earnings report did detail his new nine billion dollar investment, and it turns out this nine billion dollars was sunk into Berkshire Hathaway. Warren Buffett spent nine billion dollars in Q3 buying back Berkshire Hathaway stock. This nine billion dollars was the largest buyback in a quarter ever in Berkshire Hathaway's history, and it eclipsed the previous record, which was actually set last quarter in Q2 of 5.1 billion dollars.

Now, interestingly, the document also detailed that Buffett has also spent 4.8 billion on other stocks in the quarter. However, for that, we will have to wait only a couple of days now, where we'll get his 13F filing, which will detail exactly what he bought in the quarter. So I'll definitely be covering that. If you want to make sure that you're up to speed with what Warren Buffett has been buying, make sure you subscribe to the channel and click the notification bell so that you are updated when I make that 13F video. It's only a couple of days away now, but we just got to sit tight.

But yeah, overall, Warren Buffett spent 9 billion on share buybacks in the quarter, and interestingly, it only reduced Berkshire Hathaway's cash pile by, get this, one billion dollars. He spent 9 billion on buybacks and only reduced their cash by a billion dollars. That just shows what an absolute behemoth Berkshire Hathaway is.

So anyway, just quickly going over share buybacks, in case you're relatively new to the concept: share buybacks is literally a company buying back its own stock off of investors. In essence, it's kind of like the company just deleting shares, buying back the shares and deleting them. The fundamental reason why they do this is just to benefit their pre-existing shareholders. Because imagine this example: say a company divides itself up into 100 shares, and you, the shareholder, you own 10 of those shares, so you own 10% of the business.

We'll say the company has a lot of cash on hand. They decide to buy back 20 shares. Okay, so they buy back 20 of the outstanding shares. Well, you still own your 10 shares. However, now the company... there's only 80 shares that the company is divided up into. So it's the same company, it's just divided up into less pieces. So now, instead of owning 10% of the business, now you own 12.5% of the business. Essentially, it's made each one of your shares slightly more valuable.

Now, the thing about share buybacks is that over the past little while, they've become increasingly common. The thing is, a lot of the share buybacks that we've seen happening over the past few years have just been management teams of various companies just spending their cash willy-nilly on their own stocks. So they're just really... they're just buying back their own stock at any price, and this is questionable because yes, no matter what price you do share buybacks at, you are still benefiting your shareholders.

However, it's definitely better if you can do your share buybacks when your company is undervalued as opposed to when it's overvalued. If you were to say buy back 10 billion of your own company's stock, while the shareholders still get a benefit from that, the company itself is overpaying for that benefit. Whereas if the company spends, you know, the 10 billion dollars on share repurchases but the stock price is really undervalued, then the company is underpaying; it's getting a discount to deliver that same benefit to shareholders, so it gets to keep more cash at the end of the day.

Imagine this: you are Christmas shopping for your dad. You want to buy him this brilliant new circular saw that he's had his eye on forever. You can go to a specialty store and you might pay fifty dollars more than the recommended retail price for that circular saw, or you could go to Bunnings and pay fifty dollars less than the recommended retail price for the exact same saw because they've got some great discount happening. At the end of the day, your dad is still going to get the same benefit; he's still going to get that gift of the circular saw. Good on you, Dad, he loves it!

But the difference is you have paid less if you've gone to Bunnings and bought the circular saw, as opposed to if you bought it at that specialty shop. So it's the same benefit, but the amount that you had to pay for that benefit is different depending on what option you take. So a lot of CEOs have recently been approving these big buyback programs, but even when the stock price is really overvalued.

So yes, they are trying to just burn up their extra cash, but they're not doing it in a very effective way, or they're just trying to dupe their investors into making the investors believe that the management team thinks that the shares of the company are undervalued when, in reality, they’re not. But here's the thing: Warren Buffett's not like that. He's not the type of manager; he’s not the type of CEO that's going to just burn up his cash willy-nilly just to, you know, do buybacks and benefit shareholders at any price.

In fact, this is what he had to say about share buybacks back in the 2020 shareholder meeting for Berkshire Hathaway, which was as recently as May 2020: "We will repurchase shares when it's to the advantage of the continuing shareholder to have us do so, but you read about all these buyback programs that we're going to spend 5 billion buying it back or 10 billion. Well, that's like saying I'm going to go out and buy some business this year for 5 billion without knowing what you're going to get for the money."

It should be price sensitive, obviously; it should be need sensitive, obviously. But when the conditions are right, it should also be obvious to repurchase shares, and there shouldn't be the slightest taint to it any more than there is to dividends. Warrant Buffett is no slouch; he's not trying to dupe his investors into believing that he thinks that Berkshire Hathaway's stock is undervalued when it's not. He's not someone that's just going to try and get rid of excess cash that he doesn't need just to keep his shareholders happy when it's not the best thing that he could be doing for his business.

If he buys back his own stock, that means that Warren Buffett definitely thinks that Berkshire Hathaway's stock price is undervalued. You can bet your bottom dollar that if Warren Buffett is doing buybacks, he thinks that Berkshire Hathaway's stock is definitely undervalued; it's below intrinsic value. I think that is the biggest thing that we can take out of this news story is that across the span of Q3, there was a period of time that Warren Buffett genuinely believed that his company, Berkshire Hathaway's stock price, was significantly undervalued—undervalued so much so that he is willing to sink nine billion dollars.

Like that's a substantial amount of money. I know it's not the most amount of money when he's speaking in Berkshire Hathaway terms, but that's still a substantial amount of money to spend in one quarter on share buybacks. It's huge! Now the only problem is that this number just tells us that he spent nine billion dollars across sometime during Q3, so sometime during July, August, or September.

Now, the interesting thing about Berkshire Hathaway's stock price during that time is that it's very wide-ranging. It was as low as 267 thousand dollars for the A shares and as high as 332 thousand eight hundred dollars, and then as low as 178 dollars and as high as 221 dollars for the Class B shares. Now that is obviously a very wide range. However, I believe that most of the nine billion dollars would have been sunk back into Berkshire stock very early in the quarter.

So I believe that Buffett thinks that Berkshire's stock is fairly undervalued between 260 and 270 thousand dollars for the A shares and between 170 and 190 for the Class B shares. And the reason that I say that is because it wasn't even a quarter earlier, back in the 2020 Berkshire annual shareholder meeting, where one of the questions he was asked is: "Why didn't Berkshire Hathaway do more repurchases during the March stock market crash where the value of Berkshire's shares fell literally 30%?" His answer to that question was very defensive.

He essentially just stood up and said, "Well, you know, it wasn't down 30% for very long, so we wouldn't have been able to buy back very many shares." And that's true because one of the things you have to remember with Berkshire, they're trying to sink large sums of money—billions and billions and billions of dollars—into the market, even if it is just buying back their own stock.

Of course, one of the flaws with being so big is that you have to funnel in your money very slowly. If you pump money into the market too quickly, then you disrupt the average daily volume a lot. And what that does, if you're buying, is that it increases... it just pumps the buying pressure, and what that does is it spikes the share price very quickly.

So you can't buy the shares that you want to buy at the price that you were looking to buy because you’ve single-handedly just spiked the share price too much. So he's right when he says that even though the share price fell by 30%, he wouldn't have been able to sink a monster sum of money into Berkshire Hathaway stock during that time without severely disrupting the share price of his own company, and that just defeats the purpose.

So back in that time, at the time of the shareholder meeting, he'd only had maybe two weeks since the bottom of that stock market crash in March, in which time Berkshire Hathaway stock rebounded like 15% to 20%. So I think that since that time, he's now gotten much more organized, and he has again seen those share prices where he has been able to sink in a lot more money over time.

So in my opinion, that’s really the big takeaway from this news story that Berkshire is buying back 9 billion of its own stock: it gives us an insight into roughly where Warren Buffett believes his company, Berkshire Hathaway, is significantly undervalued—undervalued so much so that he does want to deploy that cash, as opposed to holding on to it. He does want to deploy it into buying back stock because it is a good deal.

So overall, does this mean that we should then go out and buy Berkshire stock? Well, no, not necessarily. Remember, this is just one piece of the very large puzzle that goes into making an investment. However, if you are someone that has Berkshire already on your watchlist, then this is a fantastic little nugget of information because it does tell you that during Q3, Warren Buffett was willing to sink nine billion dollars back into his own stock, which gives you a great indication that he thought that the stock was very undervalued, at the early parts at least, of Q3 2020.

So overall, guys, that is the video for today. I hope you enjoyed it. Of course, leave a like on the video if you did enjoy it and make sure you subscribe. We know that for a lot of the big money managers, the 13F's are coming out in just a few days, so it's going to get really exciting back on the channel again.

We've kind of had a bit of a lull in terms of stock market news over the past month or two; everything's just been so election-focused, hasn't it? But we're going to get back in, and we're going to have a look at what some of the big money managers have been buying or selling in Q3 2020. Has money been going into the market or out of the market? In Warren Buffett's case, he's been sinking big money back into the market again: 4.8 billion dollars he's spent on stocks in Q3. So there'll be a lot to talk about very soon.

So subscribe to the channel, hit the notification bell, like the video, leave a comment: what do you think about this buyback from Berkshire Hathaway? Should they have done more? Should they have done less? Do you prefer to see them hold on to their cash? I'd love to hear from you; leave a comment. But that's it for today, guys. Hope you enjoyed it, and I'll see you all in the next video.