Is Berkshire Hathaway Welcoming Day Traders?

Next Wednesday, Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) is holding a special shareholders meeting to approve the planned 50:1 split of its B shares. The B share split was announced in November, on the same day that the Burlington Northern Santa Fe (NYSE: BNI  ) acquisition was announced. The key rationale given for the split was to enable small Burlington Northern shareholders to select the tax-free share exchange rather than cash, though interestingly, the proxy statement announcing the special shareholders meeting indicates that the split will move forward independent of the railroad deal's closure.

The rationale for the 50:1 split sounds shareholder-friendly -- that is, for small Burlington Northern shareholders. But what about current Berkshire Hathaway shareholders? Over the years, Berkshire Hathaway CEO Warren Buffett has written about share splits, and not in a favorable way. In his 1983 letter to shareholders, Buffett wrote, "Were we to split the stock or take other actions focusing on stock price rather than business value, we would attract an entering class of buyers inferior to the exiting class of sellers." Nearly a decade later in his 1992 letter, Buffett's view on share splits remained consistent, "... there is no way that our shareholder group would be upgraded by the new shareholders enticed by a split. Instead we believe that modest degradation would occur."

While stock splits are not uncommon -- S&P 500 components AmerisourceBergen (NYSE: ABC  ) , Brown-Forman (NYSE: BF-B  ) , Fluor (NYSE: FLR  ) , and Union Pacific (NYSE: UNP  ) have all done splits in the last two years -- it is difficult not to pay special attention to the Berkshire split. First, the split will dramatically change the share price; this is no garden variety 2:1 split. At 50:1, the split will drop Berkshire B share prices from $3,300 per share to roughly $66 per share, making the stock accessible to small investors and traders alike, and making its addition to the S&P 500 index conceivable. Second, it is hard to ignore the past views that Buffett has expressed on stock splits.

Call me old-school, but I like the four-figure share price. What do other Fools think? Will the 50:1 Berkshire Hathaway split morph the shareholder base into a fast-trigger trading crowd that will result in higher turnover of Berkshire B shares? Or will Berkshire see little change in its B share owners? Stay tuned for more Foolish analysis following the split.

More on Berkshire's recent acquisition and Warren Buffett:

Fool contributor April Taylor owns Berkshire B shares. Berkshire Hathaway is a Motley Fool Inside Value and a Motley Fool Stock Advisor selection. The Fool owns shares of Berkshire Hathaway. The Fool has a disclosure policy.


Read/Post Comments (23) | Recommend This Article (29)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 14, 2010, at 11:49 AM, sas912 wrote:

    I bought the BRK.b for 2 reasons: 1) long-term growth using Buffett's investing philosophy and 2) to avoid the volatility of individual stocks. I treat it like a mutual fund. Now my reasons for buying it will be undermined. If I want volatility, I can buy more GMCR and get far greater returns than with the BRK.b. I think its a bad idea, but respect the reasons that Buffett has offered. Long term it may be a good move, but it sets a bad precedent in my eyes.

  • Report this Comment On January 14, 2010, at 1:57 PM, Yiddishbdg wrote:

    In the most anti-berkshire type investing move ever, it could be worthwile to speculatively add a position in brk/b prior to the split anticipating the potential inclusion into the S&P 500. If included, index funds are going to need to add brk/b to their existing positions to fall in line with the actual make up of the index they track. Day trading brk/b is now a possiblity with a share price increase due not to underlying business valuation, but a necessary addition of shares by index funds.

  • Report this Comment On January 14, 2010, at 5:23 PM, Fool wrote:

    Either I am completely disoreinted in the market place but I can recall some old ecomic rules from my college classes that stated the following.; with everyting being equal the market is predicated largely on the supply & demand theory. Not let me try to understand what the "Mighty fools" are saying ;"that this is a bad idea? I totally disagree.! You have one of the greatest investors of all times giving the opportunity of a vast population to invest with the great Buffet because the stock price is within their budgets now. Let me assure you that they will buy in droves & when it is placed on the S&P index means automaticaaly that many more mutual funds will buy it automaticaly & send the demand through the roof. I'll bet the "Mighty Fools" a luncheon that before the end of the year 2010 that this split will result in 20%+ increase for-BRK-b!! Quality of the stock is not even an issue--he has proven it beyond any question (Lunch at your choice--any takers?).

  • Report this Comment On January 14, 2010, at 5:51 PM, docksiderudder wrote:

    I thought the Bs traded in a ratio to the As. If so then it was the price of the A's X the ratio that determined the price of the Bs.

    By splitting the Bs all BKH did was change the ratio. Orders to buy Bs (the demand) would only be executed at the ratio-fixed price regardless of how high someone wanted to bid up the price of the Bs. Such orders would just remain unfilled ... though I confess I don't know how this would be done.

    Any input on this?

  • Report this Comment On January 14, 2010, at 5:56 PM, Technodweeb wrote:

    It makes NO DIFFERENCE whether they split 25:1, 50:1, or 100:1. The business remains the same, and the value per share remains the same. Buffett would find this argument silly.

  • Report this Comment On January 14, 2010, at 6:08 PM, docksiderudder wrote:

    Stocks don't trade on value - they trade on perceived value in the future

  • Report this Comment On January 14, 2010, at 6:10 PM, TMFHousel wrote:

    Technodweeb,

    "Buffett would find this argument silly."

    On business value, yes, but he's been on record arguing against stock splits:

    "Were we to split the stock or take other actions focusing on stock price rather than business value, we would attract an entering class of buyers inferior to the exiting class of sellers."

  • Report this Comment On January 14, 2010, at 7:31 PM, FutureMonkey wrote:

    Meh...the trading volume and price movement isn't all that different or in anyway predictable before and after splits for any other stock. Not sure why Brk-B would be any different.

    Individual small or personal investors may have some behavior changes, but the large institutional investors don't really much care if their $60M buy/sell order is divided by $3300 or $65. Brk-B's average volume is 32,000 shares per day ($1B) Now it will be $1B traded in 1.6M shares. Incidently Brk-A trades about 1000 shares a day, or about $1B.

  • Report this Comment On January 15, 2010, at 10:17 AM, DKRUGER wrote:

    Why wouldn't Mr. Buffett suggest a reverse-split after a reasonable period of time? That seems logical

  • Report this Comment On January 15, 2010, at 10:24 AM, RobertC314 wrote:

    The more interesting concern is, obviously, does Buffett think his shares are overvalued (and thus would rather use them instead of cash to make his purchase), or was his purchase price just that much better because of the tax benefits to BNI shareholders?

    As for welcoming day traders, $3300 is still well within the range of the institutional day traders who comprise most day trading volume. I don't think anyone really cares about Jim-Bob who sits at his computer and tries (generally unsuccessfully) to beat the market.

  • Report this Comment On January 15, 2010, at 12:51 PM, edyboom223 wrote:

    I'm Jim-Bob, only successful. For me personally, I would love the stock split!

  • Report this Comment On January 15, 2010, at 1:11 PM, LAWoodward wrote:

    TMFJoker-

    How will the split increase volatility when class B shares "can never sell for anything more than a tiny fraction above 1/30th of the price of A?"

    I had the same question, and actually I am wondering about the arbitrage language in that statement. It seems if demand drives the price of the B stock up, then if A price doesn't increase proportionately, then a Berkshire agent will be forced to convert A stock into B, creating a greater supply, and thus bringing the price back down...

    Even though that seems like a statement, it is just my observation and in fact is my question. Is that interpretation correct?

  • Report this Comment On January 15, 2010, at 2:06 PM, WGDIII wrote:

    Class A shareholders have the ability to convert their shares to Class B, but not vice-versa. That feature prevents Class B from every materially outperforming Class A. Conversely, people won't buy Class B if those shares are materially underperforming Class A. The mechanisms will keep both classes trading evenly.

  • Report this Comment On January 15, 2010, at 5:09 PM, yousuck01 wrote:

    I think the split is a terrible idea!!! I waited for years to purchase this prestigious stock to keep in my IRA.If I wanted a railroad company I would have purchased one!Shame on you Mr.Buffet for splitting the stock. No Splits,HAHA the stock will go nowhere

  • Report this Comment On January 15, 2010, at 5:14 PM, yousuck01 wrote:

    I think the split is stupid!!! If I had wanted a railroad company I would have bought one. Shame on you Mr. Buffet

  • Report this Comment On January 19, 2010, at 11:47 AM, topsecret09 wrote:

    I think FOOL (above) has the scenario figured out pretty well. Once the stock Is added to the S&P 500,ALL of the mutual funds that are Indexed to this fund will HAVE to buy the stock. I am a buyer before the split.. TS

  • Report this Comment On January 19, 2010, at 3:01 PM, Royzo wrote:

    When Warren (after decades of marketplace demands) first proposed B shares, they were to be 1/30 0f an A share, with A shares convertible into B shares (but not convertible back to A's) and with B shares losing voting power with only 1/200 of a vote per share. He suggested that the 30:1 ratio would stay pretty close, or arbitrage would even it up, and it has.

    I have no reason to doubt his explanation that this split enables an essentially tax free exchange of ownership with BNI shareholders, and also enables BRK to retain most of ot's billions in cash for other business. The proposal divides all privileges of B shares proportionally to their previous value: a B share will now have 1/10,000 of an A share vote and B's will still not be re-convertible to A's. But this is not a true "stock split", because A shares are not splitting at all!

    From my viewpoint, I will mainly mourn the now almost certainly ruined forever annual meetings. In the last 5 years, attendance has passed 20,000 and last May we had over 29,000. Now what? 100,000?

    It's been a great party, but will Borsheim's want to provide free food and drinks for $70shareholders? This year may be my last meeting. It's the only company meeting I have ever looked forward to, folks.

    I'm sure Warren studied this issue carefully, and considered many options. He does favor clarity and realizes that complexities create pitfalls [he said that investors IQs over 120 were wasted, because they'd just use complicated failing strategies, while the average ones find simple success] but I had hoped he would create a C class which could be convertible back to B and make conversion to C voluntary. Or some other strategy which would preserve the moderate size of our special club.

  • Report this Comment On January 19, 2010, at 3:05 PM, Pandorabelle wrote:

    I bought as much as I could afford when the split was announced in early November, which was 18 shares. Based on the value of the company and the respect for Buffett's experience and history, it seems likely to me that: a) there will be many more shares purchased - at least initially by a less prohibitive entry point - to be held LONG from a wide array of buyers who were unable to buy in the past...and the share price will head back up relatively soon, and b) it should easily be well over $200 a share in no time, which would force day traders to trade a high volume of a relatively pricey stock to make any gains.

    I say there will be an initial pop, so get in before the split...it's already happening. I'm sooo in!

  • Report this Comment On January 19, 2010, at 4:41 PM, FoolishErik wrote:

    If memory serves me, Buffet had two reasons for creating the class-B shares. Firstly, he wanted to provide his class-A shareholders a way to distribute their shares equitably to their heirs. It's tough to divy up 10 shares of $100,000 per share stock to 20 heirs. Creating a 30:1 voluntary, one-way split for distribution solved that problem. The heirs do lose substantial voting rights; but in my experience, that may not be a bad thing as I participated some years back in a small company that lasted long enough for heirs to get involved. It wasn't pretty. Secondly, Buffet wanted to keep single-stock "mutual funds" from joining the ranks of his class-A shareholders. These outfits buy whole shares, and sell partial shares to the "average Erik" (I'm cutting some slack to the average Joe since his Plumber aspect got beat up badly in the last presidential election :o). As the class-A stock grew out of reach of the average Erik, so grew the threatening drumbeats of the single-stock funds. The creation of the class-B shares cut them off at the knees. At $3300 per share, however, those drumbeats are no doubt returning. So a $66 class-B share quiets those drums and makes for happy Burlington Northern Santa Fe shareholders. I don't mind, my great grandfather was the foreman at the mainstay Santa Fe repair yard in Cleburne Texas back in the 1920s and 30s.

  • Report this Comment On January 20, 2010, at 12:05 AM, FoolishErik wrote:

    Go Santa Fe! All Aboard!!

    :o)

  • Report this Comment On January 20, 2010, at 5:55 AM, langco1 wrote:

    the split will amount to nothing as the glory days for berkshire are long over.buffett is hoping the lower shar price will increase to bring in cash to his ailing company ....

  • Report this Comment On January 20, 2010, at 8:31 PM, topsecret09 wrote:

    January 20, 2010, at 5:55 AM, langco1 wrote: the split will amount to nothing as the glory days for berkshire are long over.buffett is hoping the lower shar price will increase to bring in cash to his ailing company ....

    ??????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????? What ????????????????????????????????? LOL !!!!!!!!!!!!!!!!!

  • Report this Comment On January 22, 2010, at 11:26 AM, ronhartman wrote:

    You bet your swee-ee-t bippy it will usher in day traders and the momentum crowd - and next will come LEAP options - Buffett is about ready to turn over the reins to Munger or God knows who?

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