The Berkshire Hathaway Arbitrage

How much did Berkshire Hathaway stock fall last week? Well, the A shares opened Tuesday (Monday was a holiday) at $86,900, and closed at $77,000 -- a fall of $9,900, or 11.4%. The more liquid B shares, by contrast, opened at $2,802 and closed at $2,387 -- a fall of $415, or 14.8%. That's a big difference.

Now the B shares have 1/30th of the economic value of the A shares, but only 1/200th of the voting rights. They began the week worth about 1/31 of an A share, and ended it worth less than 1/32 of an A share. Given that the seeming arbitrage persisted all week, the market might well be starting to value those A-share voting rights.

"In my opinion," says Warren Buffett, "when the B is at a discount of more than say, 2%, it offers a better buy than the A." Right now the discount is a whopping 7%. So if you want to take Buffett's advice, start buying up B shares. If, that is, you want to buy his stock in the first place. Which is a different matter entirely.

Disclosure: No positions

Comments

[Vox Rationalis:]

Agree with the premise, but follow through with it - the play is not just buying the B shares, but selling the A shares as well. Right now, the A share trades at about 7.5% higher than 30 B shares, which is unsustainable. I think what happened is that the B shareholders are as a group more skittish than the A shareholders and were selling as all the big banks sold off. Fear creates the arbitrage opportunity.

The duration is the key - how long will it take for the prices to converge? I have not done the research to see what sorts of gaps and durations have occurred previously. But in the noon hour, when the gap reached more than 10%, the play was clear as day.

Feb 23 07:52 AM

[BAWE:]

As a practical matter -- Are the shares shortable???

Feb 23 08:05 AM

[long_on_oil:]

I cut and pasted this from the Berkshire web site so watch what you do.

The Relative Prices of Berkshire Class A and Class B Stock

The Class B can never sell for anything more than a tiny fraction above 1/30th of the price of A. When it rises above 1/30th, arbitrage takes place in which someone ¾ perhaps the NYSE specialist ¾ buys the A and converts it into B. This pushes the prices back into a 1:30 ratio.

On the other hand, the B can sell for less than 1/30th the price of the A since conversion doesn’t go in the reverse direction. All of this was spelled out in the prospectus that accompanied the issuance of the Class B.

When there is more demand for the B (relative to supply) than for the A, the B will sell at roughly 1/30th of the price of A. When there’s a lesser demand, it will fall to a discount.

In my opinion, most of the time, the demand for the B will be such that it will trade at about 1/30th of the price of the A. However, from time to time, a different supply-demand situation will prevail and the B will sell at some discount. In my opinion, again, when the B is at a discount of more than say, 2%, it offers a better buy than the A. When the two are at parity, however, anyone wishing to buy 30 or more B should consider buying A instead.

Feb 23 08:36 AM

[Vox Rationalis:]

Sure. Ask Doug Kass.


On Feb 23 08:05 AM BAWE wrote:

> As a practical matter -- Are the shares shortable???

Feb 23 10:27 AM

[snake driver:]

I have B shares, are they convertible to A? How does one go about doing this??

Just picked up another one this morning for $2375. I call it a deal, but we'll see, won't we...

Does anyone have any new information on the big bets Mr. Buffett made regarding the stock market indices?

Feb 23 11:28 AM

[Vox Rationalis:]

On Feb 23 11:28 AM snake driver wrote:
> I have B shares, are they convertible to A?

Per the above post, no.

> Does anyone have any new information on the big bets Mr. Buffett
> made regarding the stock market indices?

No. Look for an update in the quarterly SEC filing. Expect the total non-cash loss to be scary big.

Feb 23 12:39 PM

[Ricard:]

Well said. I detect no BS here. :)


On Feb 23 07:52 AM BS Detector wrote:

> Agree with the premise, but follow through with it - the play is
> not just buying the B shares, but selling the A shares as well.
> Right now, the A share trades at about 7.5% higher than 30 B shares,
> which is unsustainable. I think what happened is that the B shareholders
> are as a group more skittish than the A shareholders and were selling
> as all the big banks sold off. Fear creates the arbitrage opportunity.
>
>
> The duration is the key - how long will it take for the prices to
> converge? I have not done the research to see what sorts of gaps
> and durations have occurred previously. But in the noon hour, when
> the gap reached more than 10%, the play was clear as day.

Feb 23 10:13 PM