Berkshire Hathaway
A Few More Thoughts

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By Tode
June 26, 2006

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Those who are willing to accept at face value WEB's assurance that his gifts won't in any way harm Berkshire's shareholders, can stop reading now.

This post is for those who prefer to ignore this statement as self-serving, and draw their own conclusions based on the facts.

First, get ready for the onslaught tomorrow. The pundits will be out in full force, pontificating on the negative impact of all of these foundations having to sell large amounts of a thinly traded stock. And if the stock downticks at the open, that will be taken as proof that this is bad news for BRK shareholders. Because as we all know, the Street is the ultimate arbiter of truth. If the stock is down in the first half hour of trading, you pretty much know all you need to know on how this will play out over the next ten years. And if you need help figuring it out, Maria and her guests on CNBC will be there for you.

WEB and the Gates will appear at a press conference tomorrow to explain the deal and take questions. I imagine WEB will get a few questions challenging his assertion that it is "ridiculous" to think that any resulting selling by the foundations could affect the price of the stock. I suspect that he will be able to field these questions without my assistance.

But for those who can't wait until the conference, here are a few thoughts.

1. The Gates Foundation is getting roughly 5/6 of the shares; the Buffett family foundations get the remaining 1/6.

2. The Gates Foundation has $30 billion of assets in a broadly diversified portfolio (which does not contain any MSFT by the way).

3. Not even counting the BRK shares, the Gates Foundation assets are likely to grow substantially. Bill Gates still owns over $20 billion of MSFT stock directly. He and Melinda are going to keep making additional gifts to the Gates Foundation for many years to come, and the existing portfolio is likely to continue to appreciate over time.

4. The Gates Foundation will get BRK shares in 2006 that are worth about $1.5 billion (at 3k/B share). After the two year transition allowed by WEB, they are expected to double their giving from $1.5B a year now (5% of $30B) to around $3B a year. So in effect, their rate of giving will be higher than the minimum of 5% per year required by law. But when deciding how to fund those grants, they could go for many years (if they so chose) without selling a single BRKB share. They have $30 billion of other assets, many of them income producing, to use.

5. If they sold every B share immediately, and the Buffett family foundations did likewise, according to WEB's math the annual turnover would go from 15% to under 17%. If the Gates Foundation sold no BRKB shares, and the family foundations sold all of theirs, the increase in turnover would be 1/6 of 2%. I could see Bill Gates concluding that BRK is a superior asset to most of the other assets in his foundation portfolio, and perhaps more undervalued today than the average other asset owned in the portfolio. So it would not surprise me to see the Gates Foundation deferring any significant selling of BRK shares for a while. Even if they sold half of their 5/6 allotment, we are talking an increase in turnover of about one percent, from 15% to 16%, which does not seem like that huge a deal to me.

6. Meanwhile, we have some things happening on the buy side of the equation that could partially offset any selling by foundations. WEB has already mentioned the possibility of BRK being added to the S&P 500. Apart from this (which I think is much more likely to happen after this announcement), remember there also are other index funds that own BRK shares, such as the Total Stock Market index funds and the newfangled "Powershare" type of index funds (which tweak the weightings by fundamental factors like sales, book value, earnings, etc.). Many of these funds construct their index weightings by ignoring the shares owned by insiders and counting only the public float. So regardless of what S&P decides to do, as the public float of BRKB increases, some funds (with lots of money) are going to be forced to increase their buying of BRKB shares. Some of you will remember a few years ago when the Vanguard Total Stock Market Index Fund dumped BRK shares every month for about six months when they implemented the new formula that excluded WEB's shares. Now they presumably will have to tweak the allocation up as WEB's shares are donated away. Not a huge deal--but it will offset some of the selling.

7. For years one of the raps on BRK has been that it is too thinly traded. It still is going to be thinly traded, but now the world can see that there is a plan in effect, starting in July, that will increase the liquidity over time. That, over time, may increase the demand for the stock from institutional owners. It won't just be index funds.

8. I also detect a change in WEB's attitude on this subject. His comments in the interview with Loomis suggest that he now welcomes the increased liquidity. For years we heard him boast about BRK's low turnover rate. I think now he realizes that while it is great to have loyal shareholders, sometimes they need to sell. And now "they" is him! He is not going to enjoy seeing the foundations selling "his" BRK shares at less than what he considers their true value. He obviously is not going to start pumping the stock. In fact I am certain he will feign indifference on the prices the foundations realize when they sell. But I think this new experience of "feeling what it is like" to be a seller, plus his desire that the foundations maximize the amounts they get in order to do their good works, may create some subtle changes in his thinking. Maybe he will be a bit more prone to say something when he thinks the stock is a little low. We'll see.

This got longer than I intended. Enough. Tomorrow will be interesting.

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