Berkshire Hathaway is amongst the largest publicly traded companies by market capitalization and operates as a holding company within multiple different industries. It is primarily known 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 with his partner Charlie Munger as the vice-chairman.
The company fully owns 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.
That’s an enormous price difference so a valid question that one might ask is why exactly Berkshire’s class A stock is trading at such a tremendous price point.
Why Is Berkshire's Stock So Expensive?
The primary reason besides the long history of enormous growth for Berkshire Hathaway is the fact that the company’s Class A shares didn’t go through 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 because of 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.
So it’s clear 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 at that 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.
In the following chart, you can see the number of outstanding shares of Class B Shares increasing over time and the amount of Class A Shares decreasing as a result of share buybacks:
Additionally, the exceptionally high price of Class A shares encourages potential investors to really think about their investment in the long run and not what might happen to the price of the stock in the short term. The fact that the class A shares have never been split by the company can also be viewed as a sign of acknowledgment for investors that have invested in the business a long time ago when the company wasn’t this big.
While stock splits wouldn’t change the value of the underlying business but only the price of each share, they would eventually create more opportunities for short time traders to get in and out of the business and thus create more price fluctuations and increased demand.
Berkshire Hathaway Class B Shares
Retail investors who aren’t able to buy class A shares but still want to take part-ownership of Berkshire Hathaway can buy class B shares directly at a much less expensive price entry.
Class B shares already went through a stock split back in 2010 and stock splits in the future are likely to come. Of course, both class A and B shares have performed similarly as they represent the same company.
Therefore, there isn’t a crucial difference between class A and B shares besides some benefits such as more voting rights or the choice for class A shareholders to convert their holdings into an equal amount of class B shares at any time.
Investing in class B shares may offer more flexibility due to its ‘low price’ to investors that might consider selling the stock at certain times, while class A shares might be taken into consideration by bigger investors who are likely to stay with the business for the long term.
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 like investors that can constantly switch within hours or days.
As a compromise to also offer ownership to regular investors who weren’t able to invest in class A shares, Buffett decided to issue class B shares for a more reasonable price. Class B shares have already gone through a stock split some years ago by 50-1 back in 2010 and are now trading at a more ‘normal’ price range.
- Please note 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 highly prestige but the market capitalization 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.
Most of the biggest publicly traded companies have executed stock splits throughout their growth to expand their shareholder base. Warren Buffett’s Berkshire Hathaway is a great example of why this may not always be necessary in order to become a great business.