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Feb 10


In 2004, when I was writing about Google’s then-upcoming IPO, I made the point that the absolute price of a stock has an effect on the liquidity of a stock – mainly due to psychological factors. I brought up the example of Berkshire Hathaway, which at that time was trading at almost $90,000 for its A shares and about $3,000 for its B shares. At those prices, I noted that Berkshire was less liquid than some of its comparably sized peers (ie, Berkshire shares were changing hands relatively infrequently). A reader disputed this proposition, so it’s interesting to now revisit it, given what has happened at Berkshire over the last couple of weeks.

Aside from the fact that it’s Warren Buffett’s company, Berkshire is an interesting company. Berkshire itself is a holding company, with many, many wholly- or majority-owned subsidiaries (a large insurance and reinsurance arm, utilities, apparel, retail, etc). It also holds significant stakes in numerous major corporations (Moody’s, Washington Post, Wells Fargo, Gillette, Coke, Goldman Sachs, GE, etc). Consequently, investing in Berkshire is akin to investing in a diversified mutual/managed fund – Buffett himself has 99% of his personal wealth in the form of Berkshire stock. Berkshire’s business lines produce a lot of cash (somewhere in the region of $8-10bn), and it’s Buffett’s job to figure out how to invest that money.

Berkshire’s common stock (“BRK”) is split up into two classes. Its Class A shares have been the highest priced shares on the NYSE for some time now, so Buffett decided to create Class B shares, to allow “the masses” to be able to invest in BRK. A B share has 1/30th the rights of an A share, with two other differences: B shares have proportionately less voting rights, and cannot be converted into A shares (whereas conversion in the opposite direction is true). Consequently, a B share is theoretically worth slightly less than 1/30th the price of an A share.

B shares, however, are now priced at about $75. The reason for the repricing is that they underwent a 50-for-1 stock split a couple weeks ago. Berkshire is notable for having never distributed a dividend, nor splitting its stock (both of which are factors which helped to drive those stocks’ prices to lofty heights). The reason for the recent split was only to support the mechanics of a proposed acquisition deal.

The immediate consequence of the split was to drive up the liquidity of the stock. Small-time investors could suddenly afford to buy a handful of BRK shares, and the trading volume of BRK.B spiked that week. The other consequence was that BRK could now be added to the S&P 500 index. Despite its market cap of about $200b, BRK was absent from the index due to its low liquidity. Because there are many funds out there which attempt to track the S&P, any change to the stocks comprising that index would necessitate at least some of those funds needing to add BRK to their portfolio. This in turn would drive up liquidity (and price) of the stock.

Granted, five days of trading history with the new Berkshire B shares doesn’t provide much of a window onto long-term return potential. Average daily trading volume in the Berkshire Hathaway B shares has soared though, from 41,000 shares traded to as high as 6.6 million shares traded — and that was just on Monday. In the past five days, approximately 50 million Berkshire Hathaway shares have been traded.

Consider this: the 50 million Berkshire Hathaway shares traded over the past five days represent what would have previously amounted to almost three-and-a-half years’ worth of trading volume for the Berkshire Hathaway B shares. (src)

Interestingly, many still regard that BRK is still undervalued post-split (Buffett thought they were undervalued pre-split).

Finally, another side effect of the split is that the Bill & Melinda Gates Foundation will probably benefit nicely. Several years ago, Buffett pledged to donate about $30b to the Gates Foundation in the form of BRK stock, delivered over time. The Foundation currently holds about 78 million BRK.B shares, and because it is obligated to spend a certain amount of money by Buffett, the Foundation regularly sells its BRK shares on the market. The increased demand for BRK.B shares in the short-term should held the Foundation to unload stock at better prices. In the long-term, the increased liquidity of the stock should also enable the Foundation to more smoothly unload shares without jarring the market price as much.

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