When I finished Warren Buffet’s authorized biography The Snowball: Warren Buffett and the Business of Life last month I knew I wasn’t done delving into all that is Buffett. I immediately downloaded all of his shareholder letters. If you are new to Buffett (beyond reading what other’s think he is thinking on investment sites) I would recommend reading the two books in this order as it gives you an idea as to what is going on in his life. For example, if you read his biography first there is an entire chapter dedicated to his relationship and eventual purchase of the Nebraska Furniture Mart, so when he mentions the purchase in his annual shareholder letter there is a deeper meaning to you.
In the first blog post on the subject I discussed a sliver of Warren Buffett’s 1979 letter in which he raised an interesting point regarding why insurance companies would purchase long term bonds when they are worried about long term inflation? If I were to force to apply the nugget of information to “personal finances” I think there could be application in retirement planning insofar as inflation is insidious to retirement planning and to take care of it with long term bonds alone may not be the answer.
Why Berkshire Hathaway Does Not Split?
In Buffett’s 1981 letter he describes why he won’t split his $1,300/share Berkshire Hathaway. If you could buy BRK.A for $1,300?! As of the date of this post it is trading over $185,000 per share.
We often are asked why Berkshire does not split its stock. The assumption behind this question usually appears to be that a split would be a pro-shareholder action. We disagree. Let me tell you why.
One of our goals is to have Berkshire Hathaway stock sell at a price rationally related to its intrinsic business value. (But note “rationally related”, not “identical”: if well-regarded companies are generally selling in the market at large discounts from value, Berkshire might well be priced similarly.) The key to a rational stock price is rational shareholders, both current and prospective.
If the holders of a company’s stock and/or the prospective buyers attracted to it are prone to make irrational or emotion-based decisions, some pretty silly stock prices are going to appear periodically. Manic-depressive personalities produce manic-depressive valuations. Such aberrations may help us in buying and selling the stocks of other companies. But we think it is in both your interest and ours to minimize their occurrence in the market for Berkshire.
Very interesting point of view. He continues to describe who he wants as fellow owners:
Through our policies and communications – our “advertisements” – we try to attract investors who will understand our operations, attitudes and expectations. (And, fully as important, we try to dissuade those who won’t.) We wantthose who think of themselves as business owners and invest in companies with the intention of staying a long time. And, we want those who keep their eyes focused on business results, not market prices.
This next part is really made me bookmark the page; apparently, Mr. Buffett has the same confusion about stock splits as I do, and chooses not to engage with his own company,
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. At $1300, there are very few investors who can’t afford a Berkshire share. Would a potential one-share purchaser be better off if we split 100 for 1 so he could buy 100 shares? Those who think so and who would buy the stock because of the split or in anticipation of one would definitely downgrade the quality of our present shareholder group. (Could we really improve our shareholder group by trading some of our present clear-thinking members for impressionable new ones who, preferring paper to value, feel wealthier with nine $10 bills than with one $100 bill?) People who buy for non-value reasons are likely to sell for non-value reasons. Their presence in the picture will accentuate erratic price swings unrelated to underlying business developments.
I think there is a deep, lesson about value and the market. Mr. Buffett is comfortable allowing other companies to be valued irrationally so there is a possibility he can acquire part or all of a business pursuant to the voting machine that is the market. Buffett’s mentor Benjamin Graham is often credited with the quote,
In the short run the market is a voting machine. In the long run it’s a weighing machine.
The short term vote shouldn’t matter so Buffett seems to take it out of the equation for both himself and his fellow owners.
Buffet’s advice is always sound and he obviously has a great track record showing what he knows. I don’t own any Berkshire but I probably should just to get a piece of WB. The way he can explain some complex ideas in such simple terms always amazes me.
JC,
You don’t need to buy BRK.A or BRK.B if you just want a piece of WB’s knowledge. Check out the letters – on Amazon it is literally 3 or 4 bucks. You can even go to the BRK website and dl them all for free and print them out.
I would counter that you want to make your product available to the largest addressable market as possible. I don’t see what’s wrong by doing that with stock. You make it difficult to buy, but it is simple to sell.
I don’t buy the excuse of focusing on business value vs. stock price. They aren’t mutually exclusive. I presume it is trivially easy to get your financial people to do a stock split while the core business is focusing on business value.
BRK does have a market maker though