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Take the Free Put on Berkshire Stock

Oracle of Omaha, Warren Buffett, is nothing if not clever. By offering to buy back his holding company’s stock, Berkshire Hathaway (BRKA), for the first time in history, he is in effect offering investors a free put. And the way he is going about this, it will not cost him a penny.

This is no idle threat. Berkshire boasts a gargantuan $77 billion in cash and equivalents on the balance sheet. Buffett prefers to keep at least $20 billion in cash at all times in case a prospective elephant comes into his sites. That still leaves $57 billion for stock buy backs in a company with a market cap of $165 billion. Buffet has said that he will pay no more than a premium of 10% over book value.

Unlike you and I, Buffett likes to buy whole companies instead of shares in listed firms. That’s how he swallowed whole the railroad, Burlington Northern, last year for $40 billion. The company is believed to have doubled in value since then, powered by a massive cash flow.

Buffett’s last try at bottom picking in 2008 worked out fairly well, when he bought $50 billion worth of  blue chip stocks like Goldman Sachs (NYSE:GS), General Electric (NYSE:GE), and Dow Chemical (DD) for pennies on the dollar. His timing may be early from the point of view of shorter term traders like myself, but they usually turn out well.

Although many describe Berkshire Hathaway as a quasi-index fund, Buffett’s cumulative return since 1964 is 500,000%. Buying one of the world’s best quality, cash flow rich portfolios run by the world’s smartest investor at a big discount with a free put sounds like a deal to me. Many of his holdings are wholly owned and unavailable to investors any other way. Buy the shares, and you’ll get some free See’s Candies at the next shareholder meeting as well, another firm that Berkshire owns.