Why won’t Berkshire Hathaway split its $200,000 Stock?
“Things attained with hardship are valued and those attained as a free-bee are easy to let go”
At US$2,13,330, Berkshire Hathaway is the costliest stock in the world. The next costliest stock in the world is of Seaboard Corporation. It closed at US$2,850 on 19th March.
Why is the stock so high? At this price, it exceeds the annual income of many and hence out of reach. To participate in the future gains of Berkshire, should one take an EMI?
What if there was a stock split of 1000:1? It would bring down the stock price to $213. That’s affordable. But there haven’t been any splits in the past and I don’t think that Buffett and Munger will do it in future. Why have they chosen to keep the stock price high and thereby out of reach from most people?
To start with, this is not a new question. It has lingered around for more than 2 decades. The common assumption behind splits (resulting in low stock price) is that it benefits the shareholders. Low stock prices increase liquidity. It facilitates buying and selling of shares. This way, an individual can participate in the capital markets even with a modest capital base. It’s far easier to buy a stock that is trading in 10s, 20s and 100s. This becomes difficult when a stock trades in 1000s and almost impossible when it trades at 213k. Is Berkshire being unjust by not splitting the stocks? Let’s see.
Often, stocks are not looked as an opportunity to get an ownership in a wonderful business. Instead they are viewed as pieces of paper that are to be bought low and sold high. Efforts are not made to understand the company or the managers. The investment horizon is short and stocks are dumped if the profit in any quarter is less than that of the comparable quarter the previous year. If this continues for a few more quarters, then there is mayhem in the stock prices. The emphasis on short term results eventually affects managers. They are under immense pressure to produce profits quarter after quarter. To satisfy the gratification received by ever rising stock prices, they take actions that produce profits in short-term but are disastrous in the long run. Worse is when they start indulging in financial tricks to boost co.s performance.
Low stock price results in high shareholder turnover. In other words, shareholder base, instead of being constant, keeps on changing. In his 1980 letter to shareholders, Buffett says:
“Phil Fisher, a respected investor and author, once likened the policies of the corporation in attracting shareholders to those of a restaurant attracting potential customers. A restaurant could seek a given clientele — patrons of fast foods, elegant dining, Oriental food, etc. — and eventually obtain an appropriate group of devotees. If the job were expertly done, that clientele, pleased with the service, menu, and price level offered, would return consistently. But the restaurant could not change its character constantly and end up with a happy and stable clientele. If the business vacillated between French cuisine and take-out chicken, the result would be a revolving door of confused and dissatisfied customers.
….The reasoning of managements that seek large trading activity in their shares puzzles us. In effect, such managements are saying that they want a good many of the existing clientele continually to desert them in favor of new ones — because you can’t add lots of new owners (with new expectations) without losing lots of former owners. We much prefer owners who like our service and menu and who return year after year. It would be hard to find a better group to sit in the Berkshire Hathaway shareholder “seats” than those already occupying them. So we hope to continue to have a very low turnover among our owners, reflecting a constituency that understands our operation, approves of our policies, and shares our expectations. And we hope to deliver on those expectations.”
Buffett viewed shareholders as partners. He expressed this beautifully in his 1984 letters to shareholders. He says:
“Although our form is corporate, our attitude is partnership. Charlie Munger and I think of our shareholders as owner-partners, and of ourselves as managing partners…We do not view the company itself as the ultimate owner of our business assets but, instead, view the company as a conduit through which our shareholders own the assets.”
Buffett has a sticky nature. He has stuck with Omaha, his stocks, business partners and he has stuck with his shareholders. These are some areas where he loathes change. I believe that to make his shareholders stick to him, he decided against splitting of Berkshire stocks. This kept the stock price high and with time it’s affordability just decreased. A high stock price attracted a select class of shareholder who would behave as owner and not view Berkshire’s stock a mere piece of paper. By keeping stock prices high, Buffett saw to it that exit in Berkshire is as difficult as entry. In 1984 letter to shareholders, he explains why he was against the idea of a stock split.
1) 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.
2) 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.
3) To obtain only high quality shareholders is no cinch…Entering members of a shareholder “club” cannot be screened for intellectual capacity, emotional stability, moral sensitivity or acceptable dress…
In large part, however, we feel that high quality ownership can be attracted and maintained if we consistently communicate our business and ownership philosophy — along with no other conflicting messages — and then let self selection follow its course. For example, self selection will draw a far different crowd to a musical event advertised as an opera than one advertised as a rock concert even though anyone can buy a ticket to either.
4) 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 want those 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.
5) 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… 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.
6) We will try to avoid policies that attract buyers with a short-term focus on our stock price and try to follow policies that attract informed long-term investors focusing on business values. Just as you purchased your Berkshire shares in a market populated by rational informed investors, you deserve a chance to sell — should you ever want to — in the same kind of market. We will work to keep it in existence.
I am not aware of any co. whose shareholder turnover even comes close to match Berkshire’s. It is the only co. that has managed this feat. Ever! Would Berkshire’s market cap be different if it had allowed for stock splits? I don’t know. But what I know is that he fostered an environment that incentivized ordinary people to stick with him for years after years when they could have sold the stock anytime and left to ride another ferry.