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Berkshire Hathaway
Liquidity/Marketability

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By tetmiller
September 28, 2005

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To those who believe there is not or will not be a liquidity/marketability issue that will eventually be brought on by a narrow shareholder base, and that it is just a roundabout poorly disguised argument for a stock buyback or split, consider the following:

Consider Buffett's "pizza" analogy:

Certainly most of us will agree that there is no greater value in having 2 slices of pizza 1/16 of an inch thick, versus one slice 1/8 of an inch thick.

But now the dough begins to rise. Pretty soon the pizza gets pretty darn big at $80,000 per slice and all those who don't like the "anchovy" pizza that WEB has cooked have opted to purchase elsewhere. A few loyal BRK owners have been watching their pizza grow rather than consuming for many years. Now these loyal owners need to sell a few shares for college educations, for retirement, etc. They would like to get top dollar. They find that the universe of potential buyers only includes those that want "anchovy", and those who want it in Berkshires extra thick huge slices. Furthermore, one potential market for their shares (existing owners) are already very full of BRK pizza, and they to are growing older and some will also need to sell . In fact, much to their dismay, they believe larger older owners of pizza have been selling regularly, keeping the price down.

Does this "marketability" or "liquidity" discount have any factual basis in the real world? (Read Shannon Pratt on valuing a business). The potential discount can be huge.

Does this apply to Berkshire currently and is it time to evolve and grow the policy with the size of the business so all shareholders are treated equally?

According to CBS Marketwatch, Susan Buffett's foundation has apparently completed proposed sales of 100, 130 and 200 sales of Berkshire A shares in February and March of this year for a total of about $34,400,000 so far. The foundation owns about 34,000 A shares.

Malcolm Chace, a longtime Berkshire director, has been a regular seller of A shares over the last year. I am estimating about 334 shares just since October of last year.

There are about 1,250,000 total A equivalent shares outstanding. Buffett owns about 476,000 of these shares and Susan Buffet Foundation about 34,000. Charlie Munger owns 16,411 shares and Sandy Gottesman about 21,635 A shares. If you add this up it amounts to almost 550,000 shares or about 44%. Is this just twaddle?

Berkshire A shares trade about 400 shares daily on average. If there are about 5 trading days a week and 52 weeks a year that means TOTAL volume or turnover would be about 104,000 shares annually. Do you think you will fare well if Warren Buffetts foundation chooses to eventually monetize 1/8 of the shares per annum, (as the Susan Buffett Foundation is doing)? That would be about 60% of an entire years volume. If this keeps a lid on the price for 8 years is that significant? How do other selling shareholders benefit when competing with these very large sellers? Will long term but slightly younger, holders possibly see their price depressed for many 8-15 or more years to come as present owners liquidate?. Some TMF contributors reason that they never want to see Berkshires price go up, as it is a perpetual buying opportunity. The reasoning escapes me. If they are a large holder and do not plan additional purchases, how do they eventually benefit?


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