While creating websites for a specific market, it’s always helpful to understand the current market’s design methodology. Being this particular website is for a Holdings company, I thought to visit the Berkshire Hathaway website – since it the King of Holding Companies (Owned and operated by Warren Buffet).
This isn’t what I expected from a Billion Dollar company, but it shows me their focus is where it should be.. Managing their businesses. I checked the NYSE and found the stock price for Berkshire is almost $250,000! Yes indeed the stock that costs more than a Lamborghini!
Of course, I had to dive deeper…
Warren Buffet wanted his investors to be business partners versus investing for a quick win. Although Berkshire Hathaway issued Class B shares ‘NYSE:brk.b‘ which cost about $170. Owners of these shares have 1/10,000th voting rights. Basically, you can buy these – but you won’t have much say. Note taken.
What is a ‘Holding Company’
A holding company is a parent corporation, limited liability company or limited partnership that owns enough voting stock in another company to control its policies and management. A holding company exists for the sole purpose of controlling another company, which might also be a corporation, limited partnership or limited liability company, rather than for the purpose of producing its own goods or services. Holding companies also exist for the purpose of owning property such as real estate, patents, trademarks, stocks and other assets. If a business is 100% owned by a holding company, it is called a wholly owned subsidiary.
BREAKING DOWN ‘Holding Company’
One benefit of forming a holding company is that the holding company itself is protected from the losses. If one of their companies goes bankrupt, the holding company experiences a capital loss and a decline in net worth, but the bankrupt company’s debtors and creditors can’t pursue the holding company for remuneration. Thus, a major corporation might structure itself as a holding company with one subsidiary to own its brand name and trademarks, another to own its real estate, another to own its equipment and others to operate each franchise. This way, each subsidiary as well as the holding company itself has limited financial and legal liability. Structuring a company this way can also limit tax liability by strategically basing certain parts of the business in jurisdictions with lower tax rates.
Holding companies also allow individuals to protect their personal assets. Rather than owning assets personally and therefore being liable for their debts, potential lawsuits and other risks, holding companies can own the assets so that only the holding company’s assets and not the individual’s assets are at risk.
A holding company’s operations consist of overseeing the companies it owns. It can hire and fire managers if necessary, but those companies’ managers are responsible for their own operations; the holding company is not. Although the holding company does not manage the day-to-day operations of the companies it controls, the owners should still understand how these their subsidiaries operate to evaluate the businesses’ performance and prospects on an ongoing basis.
Back to the stock itself..
It’s also a lot of money.
So what gives?
Why is Berkshire Hathaway stock so damn expensive?
“EXPENSIVE” IS RELATIVE
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, while cheap 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 stock 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 5th highest, behind Apple (#1), Google (#2), Microsoft (#3). Amazon (#4)
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 one share 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 stocks appear more attractive to smaller investors and there’s nothing intrinsically wrong with doing so.
But Buffett has never split Berkshire Hathaway’s stock. Why not?
BERKSHIRE’S SHAREHOLDERS ARE BUFFETT’S PARTNERS
In The Snowball: Warren Buffett and the Business of Life, (which made it to my favorite books list) 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 Hathaway’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 Hathaway 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.
THERE ARE ALWAYS CLASS B SHARES
If you don’t have $255,000 sitting around, there’s no need to be sad – you can still be a Berkshire Hathaway shareholder.
In 1996, Berkshire Hathaway 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 $170.