Buffett 2020 — The math of repurchases "grinds away slowly, but can be powerful over time"

By mid-2018, Berkshire Hathaway had finished building its Apple position. The total cost: $36 billion, representing a 5.2% ownership stake in the company. 1

In 2020, Berkshire sold a portion of those shares, pocketing $11 billion in cash.

Yet by December 31, 2020, Berkshire owned 5.4% of Apple — more than it did before the sale.

That arithmetic contradiction is the subject of one of the more instructive passages in Buffett's 2020 letter. It is also a live demonstration of an ownership-compounding mechanism that works without requiring the investor to commit an additional dollar — and that most shareholders, checking their positions against a cost basis, would never notice.

Apple spends heavily buying back its own stock. As Apple retires shares, the total count of shares outstanding falls. Each remaining share — including the ones Berkshire still holds — represents a slightly larger fraction of the company than it did the year before.

Berkshire sold Apple shares in 2020 and still ended up with a larger percentage stake because Apple was simultaneously shrinking the denominator. The shares Berkshire held became a bigger slice of a smaller pie.

Buffett's phrase for this is characteristically understated: "Despite that sale — voila! — Berkshire now owns 5.4% of Apple. That increase was costless to us, coming about because Apple has continuously repurchased its shares." 1

The mechanism is silent and automatic. No new capital changes hands. No analyst model picks it up as a "purchase." The ownership grows in the background while the investor's brokerage account shows a flat or declining share count.

The Apple example involves one layer of buyback activity. The 2020 letter describes two layers operating simultaneously — and the compounding of the two is more dramatic than either alone.

In 2020, Berkshire spent $24.7 billion repurchasing its own shares — 80,998 Class A equivalents, or roughly 5.2% of shares outstanding. 1 This was the largest buyback in Berkshire's history by a wide margin, approximately five times the $5 billion spent in 2019.

Berkshire share repurchases: 2019 vs. 2020. 1

Every Berkshire share that disappears means that continuing shareholders own a slightly larger slice of everything Berkshire holds — including its Apple stake. So when Apple's buybacks raise Berkshire's percentage ownership of Apple, and Berkshire's buybacks raise each remaining Berkshire shareholder's ownership of Berkshire, both effects pass through to the Berkshire shareholder.

Buffett quantifies the result: "Because we also repurchased Berkshire shares during the 2.5 years, you now indirectly own a full 10% more of Apple's assets and future earnings than you did in July 2018." 1

Ten percent more of one of the world's most valuable companies — not from writing a check, but from two buyback programs running in tandem over two and a half years. That is what Buffett means when he writes that "the math of repurchases grinds away slowly, but can be powerful over time." 1

He closes the section with Mae West: "'Too much of a good thing can be… wonderful.'"

The 2020 letter's buyback section is not purely celebratory. It includes a critique that Buffett has been making for decades, here stated as flatly as he has ever put it.

"American CEOs have an embarrassing record of devoting more company funds to repurchases when prices have risen than when they have tanked. Our approach is exactly the reverse." 1

The behavior he describes — buying high and going quiet when prices drop — is the opposite of the rational case for repurchases. If a stock is worth $X and trades at $0.80X, buying it back at $0.80X immediately accretes value to continuing shareholders. If it trades at $1.20X, buying it back destroys their wealth. The arithmetic is not ambiguous.

Yet most institutional repurchase programs cluster at price highs, for a combination of reasons: earnings are stronger, management feels confident, and buybacks at elevated prices look like endorsements of the current stock price rather than cheap capital allocation. Boards and investors rarely penalize CEOs for buying expensive; they notice and complain when buybacks pause during downturns.

Buffett's stated constraint is that Berkshire will repurchase shares only when doing so both enhances per-share intrinsic value for continuing shareholders and leaves Berkshire with "more than ample funds for any opportunities or problems." 1 The $24.7 billion spent in 2020 — a pandemic year, with stock prices meaningfully below their prior peak — is an application of that rule. The spending was large not because Berkshire felt flush but because the price was right relative to intrinsic value.

The dual-buyback mechanism Buffett describes in the 2020 letter is worth tracking across any long-term equity position, not just Berkshire's Apple stake.

If you hold a company that earns well, reinvests retained earnings productively, and consistently buys back shares at prices below intrinsic value, your ownership percentage of that company's future earnings grows every year without requiring any action on your part. The 10% additional Apple exposure that materialized for Berkshire shareholders between July 2018 and year-end 2020 was not the result of a new capital decision — it was the arithmetic product of two well-run programs working in parallel.

The investor's practical question, following Buffett's logic, is twofold: Does the company I own buy back shares consistently at rational prices — or does it concentrate activity at peaks? And does the holding company, if there is one, do the same? When both answers are yes, the ownership percentage compounds quietly in the background. When both answers are no, the dilution and mis-timing work against the shareholder just as silently.

The Berkshire/Apple example across 2.5 years produced a 10% ownership gain that cost shareholders nothing. That is not an investment insight so much as it is arithmetic. But arithmetic, compounded over decades, is where most of the work gets done.

The 2020 letter was published February 27, 2021, covering a year in which Berkshire's per-share market value rose 2.4% against the S&P 500's 18.4% total return — a 16-point lag that Buffett reported without defense. 1 The 56-year compounded annual gain stood at 20.0% versus the S&P 500's 10.2%. Insurance float ended the year at $138 billion, up from $129.4 billion, and Berkshire held $281 billion in marketable equities at cost of $108.6 billion. The $24.7 billion buyback was the dominant capital allocation event of 2020, more than five times the prior year's $5 billion. The letter also includes Buffett's most direct single-acquisition mea culpa in years — an $11 billion write-down on Precision Castparts with the admission "I paid too much" and "No one misled me in any way — I was simply too optimistic" — but the dual-repurchase mechanism is the passage that will outlast the particular COVID-year numbers.