April was a rough month for investors; Empire Junior Partnership; Berkshire Hathaway's share repurchases

1) April was a rough month for stocks...

In its worst month since 2020, the S&P 500 Index fell 8.8% – bringing its year-to-date losses to 13.3%.

It was the S&P 500's third-worst first four months of a year ever, trailing only 1932 (a 28.2% drop) and 1939 (a 17.3% drop).

The tech-heavy Nasdaq Composite Index fell 13.3%, its steepest monthly drop since 2008, and is now down 21.2% this year.

High-growth stocks have taken the biggest beating. Cathie Wood's ARK Innovation Fund (ARKK) – a good proxy for such stocks – crashed 29% in April, is down 50% year to date, and is down a staggering 70% since its peak in February 2021.

Normally when stocks are falling, investors flee to the safety of bonds, pushing their prices up. But not this year, as rising interest rates led the Bloomberg U.S. Aggregate Bond Index – largely U.S. Treasurys, highly rated corporate bonds, and mortgage-backed securities – to decline 3.3% in April and 9% year to date.

2) My colleagues Enrique Abeyta, Berna Barshay, Herb Greenberg, and I have collectively spent more than 100 years in the markets and have successfully navigated through numerous times of turmoil, so we're applying all of our experience to help our subscribers navigate these choppy waters.

Our Lifetime Partners are benefiting from everything we publish... but because, at $10,000, it's out of reach for many of our readers, I'm delighted to tell you that I was able to get my team to approve what I think is the best deal we've ever offered – the Empire Junior Partnership – which is far more affordable.

To learn more about it, simply click here.

I hope you'll act quickly enough to take advantage of this incredible offer!

3) My friend and former partner Glenn Tongue and I were at the Berkshire Hathaway (BRK-B) annual meeting on Saturday.

As we always do, we entered our names into the lottery at one of the 11 microphones scattered around the arena in the hopes of being able to ask Warren Buffett and Charlie Munger a question.

I've been lucky in past years and, to my knowledge, have asked them more questions than anyone – a dozen or so – over the last 25 years that I've been coming to the meeting.

This year I struck out... but Glenn was picked first, meaning he would ask the 22nd question (Buffett and Munger alternate between CNBC anchor Becky Quick and the audience).

Glenn and I brainstormed about what to ask as we munched on Dairy Queen Dilly Bars in the overflow room upstairs:

We first decided to thank them for everything they've taught us over the years, and then ask about share repurchases, which have become an increasingly important area of Buffett's capital allocation – and a value driver for Berkshire.

As you can see in this chart, since he significantly ramped up repurchases two years ago, Buffett has spent $53.2 billion, retiring nearly 10% of Berkshire's shares:

I recorded Glenn's question and their eight-minute reply here. Here's what he asked:

My name is Glenn Tongue. I'm a shareholder from New York. This is my 20th Berkshire annual meeting and I'm delighted that we can once again be here in person.

You two have brought tremendous joy to all of us over the years and, speaking personally, your wisdom has not only made me a better investor, but more importantly a better, happier person. It's a privilege and honor to thank you, so Warren and Charlie, thank you.

My question relates to share repurchases. Since you started buying back Berkshire's shares in size two years ago, the repurchases have ranged between $1 billion and $3 billion per month.

By my estimate, it appears that the buyback rate is $3 billion per month when Berkshire is trading at a 20% discount to intrinsic value, $2 billion per month at a 10% to 15% discount, and $1 billion per month at a 0% to 10% discount.

Do I have that approximately right, and do any other factors influence the rate of share repurchases?

Glenn and I thought he was asking a softball question and expected a reply along these lines:

I can't comment on how you calculate Berkshire's intrinsic value, but for sure it is always at the top of my mind when deciding whether and how aggressively to repurchase our shares.

As I've said many times in the past, the only reason we repurchase shares is to increase the per-share value of Berkshire Hathaway for its remaining shareholders.

By definition, this only happens if we repurchase stock at a discount to intrinsic value – and the larger the discount, the more value that is created, so of course I'm more eager to allocate capital to buybacks when I think there's a large gap between the share price and my estimate of our intrinsic value.

This may seem obvious, but we are very much the outlier in corporate America. The vast majority of large public companies buy back their shares, and some have done it quite well, creating enormous value for shareholders.

For example, since we bought Coca-Cola (KO) in 1988, the company has reduced its share count by 28%, which means that we now own 39% more of the company than we otherwise would.

It's been even more extreme at Apple (AAPL), which has reduced its share count by 37% since it started its repurchase program in 2012, and by 25% since we first invested in the company in 2016, meaning we own a 33% larger stake.

But most companies destroy value via their share repurchases because they do it for non-economic reasons: to "offset dilution, show confidence in their stock, send a signal to investors that their stock is cheap, juice earnings per share to hit management's bonus targets," and so forth. Nowhere does there appear to be a consideration of what intrinsic value is and where the stock is trading in relation to this.

The net result is that, on average across corporate America, companies tend to buy back the most stock when the outlook is rosy and stock prices are highest, and then pull back during times of turmoil, when stocks are cheapest. This is, of course, the exact opposite of what they should be doing, and it destroys enormous value for shareholders over time.

But to Glenn's and my total surprise, Buffett gave a very different answer, which I'll discuss in tomorrow's e-mail...

Best regards,

Whitney

P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.