Why Berkshire Hathaway’s stock price is over $400,000

Hamzah Yacoobali, The London School of Economics and Political Science

OVERVIEW

Berkshire Hathaway is known to many for two reasons and those two reasons only, it’s stock price or as I perhaps should say it’s astronomical stock price and for its leadership by Warren Buffett who is arguably considered one of the most successful investors of all time. Buffett serves as the chairman and chief executive of the company. People know the latter of what it has become vis-a-vis financially but what about the former? What has made this possible? What do they do? Will the price run further to the unattainable for the many?

Berkshire is amongst the largest publicly traded companies by market capitalisation and operates as a holding company within multiple different industries, In conjunction, they fully own several firms such as GEICO, Duracell, Dairy Queen, and Long & Foster, while also holding a significant stake in known companies like American Express, The Coca-Cola Company, Wells Fargo, and Apple.

ANALYSIS

One thing one should note before continuing to read is that, Berkshire trades at the stock market as two share classes. There are the Class A shares (BRK-A) that are currently priced at around $416,000 USD per share and Class B shares (BRK-B) which, on the other hand, only trade at around $279 per share. 

Why Is Berkshire’s Stock So Expensive?

The primary reason besides the long history of exponential growth for Berkshire Hathaway is the fact that the company’s Class A shares have never undergone any stock splits. This is what differentiates the stock from other major companies such as Microsoft, Apple, or Amazon which all have shares trading at a much lower price level due to their higher share count.

A stock split essentially increases the number of shares outstanding while decreasing the price of each share. Berkshire’s Class A shares have never been split in the history of the company. The stock has risen along with the value of the business and thus is now the most expensive stock trading on the stock market.

Warren Buffett isn’t willing to have any stock splits for multiple reasons. He doesn’t like any short term traders to think that they can consistently make quick money out of the stock simply because they can’t. Any series of stock splits would have eventually brought down the share price to such a low price range where even day traders would be able to trade the stock.

And therefore it is clear as day that Warren Buffett and the board of Berkshire usually don’t prefer any stock splits.

However, in 1996, the company issued Class B shares as a reaction to mutual funds that tried to mirror the performance of the stock. Most retail investors simply didn’t have the ability to invest in the company due to the high price of the only existing Class A shares that were trading at around $30,000 USD at the time. The new Class B shares would prevent any small indirect owners from making naive investment decisions based on the unfair conditions of unit trusts, which were the only option back then that enabled investors to be part of Berkshire’s growth.

The future

With its stock price up by 54% over the past year, it’s only natural that some investors are concerned that Berkshire Hathaway, stock A & B might be getting a little too expensive. There are projections according to various analysts that have a somewhat strong probability of the price rising 30% by the end of the year.

Many think of Berkshire as an S&P index fund for people who want the ability to slightly beat the market. What I mean by that is if you buy an S&P index fund for the purpose of a 10% annualised return over time. You buy Berkshire with the goal of getting around 11% or 12% – marginally better. It may not be a home run but is like an index fund with Warren Buffett running the show.

CONCLUSION 

The main reason why Berkshire Hathaway Class A stock is priced so high is that the company didn’t decide to split its stock. As a result, the price of each share has risen along with the immense growth of the holding company over the past decades and is now the most ‘expensive’ publicly trading stock.

Warren Buffett and the board of directors don’t prefer to split up their shares, as it would essentially make it easier for more and more unserious investors to obtain ownership within the company. This would eventually let the stock become subject to more speculation and short term trading. Buffett prefers to treat the company’s shareholders as partners and not just as investors that can incessantly switch within hours or days.

Warren Buffet, easy to say, the most successful investor is the Chief Executive and Chairman who without a doubt oversees business acquisitions, this will make anyone comfortable as those businesses obtained will contribute to Berkshire’s continued success.

If there’s one thing to take from this article is that the price of a share doesn’t reflect anything about the qualities of a company nor how big it actually is. The stock price of Berkshire Hathaway might be considered by many investors as prestigious but the market capitalisation can be similar to companies that may have a much lower share price (in return for a higher amount of shares outstanding). One example is Alibaba Group (BABA) that has a similar market cap to Berkshire Hathaway but trades at a stock price of around $210 per share.

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