Was Buffett’s Massive Share Buyback a Good Idea?

When Warren Buffett makes a stock decision, it’s not to be ignored, so when he bought back $1.2 billion in shares from a single investor Wednesday, many investors wondered just what he was up to.

The buyback of Berkshire Hathaway Inc. (NYSE:BRKA)(NYSE:BRKB) A-shares comes just one day after Buffett publicly advocated higher estate taxes, which will go into effect if the U.S. goes over the fiscal cliff. It is possible that the shareholder decided to sell due to concerns over such changing estate taxes.

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Buffet’s decision seems to be based on the book value of Berkshire shares, with the purchased Berkshire shares being valued at 117 percent of September’s book value. Berkshire’s previous threshold for buybacks was 110 percent of book value, but Buffet has raised the threshold to 120 percent.

Buffet believes that buying back shares at a low price is a wise decision and increases the share values for remaining investors, and he said he may “repurchase stock aggressively” when it is priced at or below the 120 percent threshold. The $1.2 billion buyback of 9,200 A-shares sure looks aggressive, and the subsequent 2.2 percent — now up to 3.04 percent — increase in share value seems to prove Buffet right on his beliefs.

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