WHY IS BERKSHIRE HATHAWAY STOCK SO EXPENSIVE?

0
WHY IS BERKSHIRE HATHAWAY STOCK SO EXPENSIVE?

WHY IS BERKSHIRE HATHAWAY STOCK SO EXPENSIVE?

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

berkshire hathaway stock certificate WHY IS BERKSHIRE HATHAWAY STOCK SO EXPENSIVE
WHY IS BERKSHIRE HATHAWAY STOCK SO EXPENSIVE

$211,660.00.

That’s the price for one share of Berkshire Hathaway Class A stock.

Leon Cooperman Likes These Real Estate, Credit And Private Equity Funds

InvestMany famous hedge fund managers engage in philanthropy, often through their own foundations. Leon Cooperman of Omega Advisors founded his foundation with his wife Toby, and he invested the foundation's funds into many hedge funds and other assets. Q3 2021 hedge fund letters, conferences and more Here are Leon Cooperman's favorite hedge funds based on Read More

It’s also a lot of money.

For $211,660.00, you could pay for 4 years of a college education, make a down payment on a $1 million house, or buy yourself a Lambo.

You could also buy almost 300 shares of Google stock (currently trading for ~$730) and almost 2,000 shares of Apple stock (currently trading ~$110).

So what gives?

Why is Berkshire Hathaway stock so damn expensive?

WHY IS BERKSHIRE HATHAWAY STOCK SO EXPENSIVE - “EXPENSIVE” IS RELATIVE

First, I have to admit that the title of this article is a little misleading.

The term “expensive” is relative when it comes to stocks (that is, relative to some fundamental metric like book value or cash flow). Expensive should really be a synonym for overvalued, whilecheap should be a synonym for undervalued.

Just because stock A trades for $80 and stock B trades for $40, it doesn’t mean that stock A is more expensive than stock B – it just means that it costs more. Stock B might indeed be more expensive than stock A if, say, its P/E ratio was 50 while stock A’s P/E ratio was 5.

So, the correct question to ask is: Why does one share of Berkshire Hathaway cost so much?

BUFFETT HAS NEVER SPLIT BERKSHIRE’S STOCK

In 1980, one share of Berkshire Hathaway stock cost less than $300. In 1990, it cost about $7,000. In 2000, it cost about $50,000. And today, as you know, it costs over $200,000.

Now, Berkshire Hathaway isn’t the only company whose total equity value has risen over the years. In fact, Berkshire’s total equity value (more commonly called market capitalization or just market cap) isn’t even the highest – it’s the 4th highest, behind Apple (#1), Google (#2), and Microsoft (#3).

The thing is, each of these other companies have split their stock.

In a stock split, a company increases the number of shares outstanding while lowering the price accordingly. For example, say a stock was trading for $1,000 a share. Everyone who owned oneshare previously worth $1,000 for a total value of $1,000 would now get two shares worth $500 for a total value of $1,000.

Splits don’t change anything fundamentally about a company or its valuation, but they tend to make a company’s stock more attractive to retail investors (e.g. you, me, or your mother-in-law), which could increase liquidity and might eventually cause the share price to increase slightly.

In 2014, Apple’s stock was trading for $650 until the company implemented a 7-for-1 stock split. I owned a couple shares, and the next day I magically owned 7x more – but they were each worth 7x less ($90 instead of $650). The value of my total Apple holdings hadn’t changed and the value of Apple as a company hadn’t changed. It was just arithmetic.

Again, many companies will do this to make their stock’s appear more attractive to smaller investors and there’s nothing intrinsically wrong with doing so.

But Buffett has never split Berkshire’s stock. Why not?

WHY IS BERKSHIRE HATHAWAY STOCK SO EXPENSIVE - BERKSHIRE’S SHAREHOLDERS ARE BUFFETT’S PARTNERS

In The Snowball: Warren Buffett and the Business of Life, Buffett explains his reasoning for not splitting Berkshire’s stock:

“I don’t want anybody buying Berkshire thinking that they can make a lot of money fast. They’re not going to do it, in the first place. And some of them will blame themselves, and some of them will blame me. They’ll all be disappointed. I don’t want disappointed people.

The idea of giving people crazy expectations has terrified me from the moment I first started selling stocks.”

Buffett hasn’t split Berkshire’s stock because he’s afraid it will encourage people to try to day trade the stock and try to make a quick buck.

Buffett has always viewed Berkshire’s shareholders as partners in the business, rather than just investors in a large public company. He wants them to stick around and to stay invested.

Because Berkshire stock is so expensive, buying and selling a share are big decisions to make (like buying a house or choosing a college to attend) and you’ll likely be thinking about the long-term when you decide to buy or sell, rather than what the share price might do tomorrow or even in the next hour. And that is Buffett’s intention.

WHY IS BERKSHIRE HATHAWAY STOCK SO EXPENSIVE - THERE ARE ALWAYS CLASS B SHARES

If you don’t have $211,000 sitting around, there’s no need to be sad – you can still be a Berkshire Hathaway shareholder.

In 1996, Berkshire issued much cheaper Class B shares. Nicknamed “Baby Bs,” the shares were issued to prevent fund managers who wanted to set up a mutual-fund like structure that would sell slices of the Class A shares in smaller pieces. The Class B shares have 1/10,000th of the voting rights of a Class A share and currently trade for about $140.

Updated on

Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…
Previous article Why Henry Paulson Says The U.S. Should Engage More Deeply With China
Next article Least Financially Savvy States: Washington DC Among Worst

No posts to display