3 Important Lessons from the Latest Annual Report of Warren Buffett’s Conglomerate

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Every year, the Oracle of Omaha, Warren Buffett, releases his firm’s annual report. In it, readers can find a treasure trove of information about investing. This year was no exception. So, let’s take a look at three important lessons I gleaned from the 2016 Annual Report published at the end of last month.

1. On American businesses and their futurehead here.

2. Do not fear stock market downturnshead here.

3. On share repurchases

Warren Buffett has always been a proponent of share repurchases – under a specific circumstance.

When a company buys back its own shares and subsequently cancels them, it leaves fewer shares outstanding. This then boosts firm’s earnings per share as the company’s net profit is spread over a fewer number of shares.

However, share buybacks should be done only at a share price that is below the intrinsic value of the business (this is the specific circumstance Buffett is looking for). Otherwise, share buybacks cannot create value for existing shareholders.

Yet, even if the company’s shares are undervalued, Buffett wrote in his annual report buybacks should not be done in two instances. They are:

“One is when a business both needs all its available money to protect or expand its own operations and is also uncomfortable adding further debt. Here, the internal need for funds should take priority. This exception assumes, of course, that the business has a decent future awaiting it after the needed expenditures are made.

The second exception, less common, materializes when a business acquisition (or some other investment opportunity) offers far greater value than do the undervalued shares of the potential repurchaser.”

When you study a company, and notice that it has been doing share buybacks, remember Buffett’s words. They can help you determine whether the company’s management has been allocating capital intelligently.

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