Buffett’s Buyback Math – why 120% of book value is the magic number for Berkshire

In 2012 Warren Buffett indicated he would buyback Berkshire Hathaway (BRK.A) stock up to 120% of its book value, but have you wondered why 120% is the right yardstick and not 110% or 130%? There have been a few posts explaining why 120% might sound reasonable premised on assumptions around estimated book growth and future multiples, however these arguments are unconvincing in my view.

I believe the ‘magic’ 120% of book value is a simple back-of-the-envelope calculation which makes an adjustment for Berkshires capital structure. Continue reading