2008-03-14 17:18:49
Why Doesn't Berkshire Hathaway Split Its Stock?
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This is quite a common question. With Berkshire Hathaway's "A" stock currently trading at $129,360 (that's right - one hundred and twenty-nine thousand, three hundred and sixty dollars), why don't they split their stock?
You have probably read online that when companies split their stock, they do so for a number of reasons. One of the biggest reason is to make it appear as though the stock is "cheap" again, so that average investors and traders pile back into the stock. If a stock is trading at $200, most people will automatically assume that it is "expensive". However, if the company institutes a 20:1 stock split and is trading at $10 per share, people will automatically think that the stock is "cheap" and will want in, even though the overall value of the company is exactly the same.
Companies that institute stock splits are typically doing very well and want to encourage more investors and traders to buy their stock.
So if this is the case, then why doesn't Berkshire Hathaway do the same thing?
Warren Buffett has publicly addressed this question. He has said that he doesn't have any plans to ever split the stock. He said that he wants long-term holders of the stock, and that this high share price discourages traders and speculators.
It makes sense. If you were an active trader, what is the last company that you are likely to daytrade? Berkshire Hathaway, due to the fact that it costs over $100k to buy just one share.
To Buffett, a stock split would just be an artificial way of encouraging more small-time traders and speculators which would in turn increase the volatility of the stock. If you know Buffett, then you know that this is the antithesis of his investing philosophy. He is all about building value over the long-term, and he doesn't want people investing in his company that don't share the share philosophy.
By not instituting stock splits, Buffett is in a way doing his own method of "screening". People who invest in his company are likely sophisticated investors or else they wouldn't have almost $130k to invest in one share.
You may say, "Well why did Berkshire Hathaway institute their B shares then?" If it were up to Buffett, the company never would have done this, but their hand was forced. Buffett did this move "reluctantly" and only to thwart the creation of unit trusts that would have marketed themselves as Berkshire Hathaway look-alikes.
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