Almost everyone knows the name Warren Buffett, regardless of whether they invest in the stock market or not. In case you don’t, Warren Buffett is the CEO of Berkshire Hathaway, a multinational conglomerate of companies based in Omaha, Nebraska. Berkshire Hathaway also happens to be the eighth-largest company in the world by revenue.
Almost $300,000 for ONE SHARE? Welcome to Berkshire Hathaway.
With assets over $700 billion and a proven record of success for investors, purchasing Berkshire Hathaway stock would seem to be a winning play for any investor. But would-be investors are often confused by the two different classes of capital offered by Berkshire Hathaway, labeled Class A (BRK-A) and Class B (BRK-B). What’s the difference between the two, and what do you need to know as an investor before leaping?
The primary difference between Berkshire Hathaway’s Class A and Class B stock is the share price. As of June 2018, Berkshire Hathaway Class A is trading at about $294,055 per share- and no, that’s not a typo. During the same period, Class B shares were worth $196 per share. But aside from the massive price differential, there are other distinctions between the Class A and Class B shares.
Buffett’s Bold (and Brilliant) Move
At the close of the twentieth century, Berkshire Hathaway was satisfied in offering its highly valued stock solely to those who could afford it. But soon, ordinary investors began to demand a taste of Berkshire’s success, prompting CEO Warren Buffett’s 1996 move to issue 517,500 shares of Class B shares. Essentially, Buffett was offering a chance to invest in Berkshire Hathaway for one-30th the price of a share of its Class A stock. In 2010, the stock split 50-1, lowering the A/B ratio to one-1,500th.
The primary motivation for the introduction of Class B shares was to enable investors to purchase Class B stock directly instead of forcing them to buy stock in funds that tracked Berkshire Hathaway’s moves, known as unit trusts. In a 1996 annual letter to shareholders, Buffett explained the unorthodox move:
“As I have told you before, we made this sale in response to the threatened creation of unit trusts that would have marketed themselves as Berkshire look-alikes. In the process, they would have used our past, and non-repeatable, record to entice naive small investors and would have charged these innocents high fees and commissions.” If left in the hands of unit trusts, “Berkshire would have been burdened with both hundreds of thousands of unhappy, indirect owners (trust holders, that is) and a stained reputation.”
To further satisfy existing shareholders, Buffett has also repeatedly stated that Class A shares will never be subject to a stock split. His rationale is because of the incredibly high share price limits Class A shares to like-minded investors who choose to focus on long-term profits, not short-term price fluctuations or market corrections.
“B” Stands for Benefits
Class B shares offer the benefit of flexibility in addition to the easy accessibility to investors. The only way to liquidate any value from a share of Class A stock is to sell the entire share, which may represent far more liquidity than required for the situation. By comparison, the much more affordable Class B shares are traded to meet cash flow needs in much more manageable numbers. Remember, Class A stock sells for about $293,859 more per share than Class B stock; we’re talking about real money here.
There is also a potential tax benefit that Class B shareholders can utilize. Because Class B stock is priced so much lower than its Class A counterpart, it is passed down to heirs without triggering the gift tax. When compared to the tax liability of passing Class A shares down, it is easy to see this is no small tax benefit.
One final difference between the two classes of stock is that Class A shares can convert into an equal amount of Class B shares at any time. However, the conversion privilege is a one-way street, as Class B shareholders can only turn their Class B shares to Class A by selling them outright and then buying the same amount in Class A.
Warren Buffet saw the potential in allowing investors who couldn’t afford massively expensive shares in Berkshire Hathaway to share in the company’s success. Now innovative companies like Stockpile are taking that concept one step further by giving you the freedom to purchase fractional shares of Berkshire Hathaway Class B stock. Just log in to Stockpile and search for BRK-B, and just like that, you’ll be swimming with the biggest fish. Good luck!