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Larry Bellehumeur
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Larry is a long-time do-it-yourself investor, who has been buying stock for about 20 years. The main focus of his investing is in value plays. He has been featured by the Associated Press and in Canadian Business as a small investor to watch. Visit Larry's blog on Covestor... More
  • Berkshire's split: Blessing or disaster? 0 comments
    Jan 30, 2010 12:25 PM | about stocks: BRK.B, AAPL

     Hello Everyone,

    Many thanks for the nice notes I received over the past little while, inquiring where I have been (one of them actually said "Are you freaking still alive?", very touching!).  I was just a little busy starting up a new business.

    The most talked about stock split of the past few years (at least until Apple does it down the road) was undoubtedly the split of Berkshire's Class B shares.  The justification to doing so is obvious, and has been well covered....But I was thinking more about how it would affect my favorite stock?

    1) Lower Price = More Activity
    Many investors like to buy shares in bundles of 50 or 100, which was virtually impossible for most investors to do before the stock split. So, this is definitely causing more trading activity in the shares.  This part comes courtesy of the Globe and Mail web page:

    Average daily trading volume in the Berkshire Hathaway B shares has soared though, from 41,000 shares traded to as high as 6.6 million shares traded -- and that was just on Monday. In the past five days, approximately 50 million Berkshire Hathaway shares have been traded.

    Effect: For the short term, the jury is still out in my opinion.  Yes, the share price did go up, but that was more to do with Point #3 (being added to the various Indexes) than the extra activity.  The extra activity will likely prove to be fun to watch when the first quarterly report comes out.  Since Berkshire has to declare the true value of all of its derivatives each quarter, this stock can have some wild swings in short-term profitability.  It will be interesting to see how many investors bail out of the stock if one quarter shows a Temporary loss of billions.....this may make for a great long-term entry point for long-time holders.

    2) Average Investors = Average holding period
    Similar to Point #1, more trading activity on a stock means that investors are holding the shares for shorter time periods.  I tried to find some great stats to show how long the average share was held by an investor in 2009, but couldn't find it (if anyone knows, please comment). Needless to say, it is likely just a few months.  Berkshire's holding period has always been one of the longest, even when you remove Buffett and Munger's shares from the equation. While this will still hold true for the A shares, I'm curious to see how the 2010 holding period ends up for the B shares.

    Effect:  See Point #1

    3) Analyst coverage = Double edged sword
    Berkshire always had a much lower amount of Analyst coverage than any other stock that was worth over $10B in Market cap.  This was likely since it was not heavily traded, and it was not part of any major stock index.  It is likely that the number of analyst covering this stock will jump considerably by the end of 2010.

    Effect:  This one could go either way.  A lot of analysts have trouble providing true evaluations for Conglomerates such as GE and United Technologies, as they often have different evaluation criteria for each business.  I can just imagine them trying to put a true evaluation on Berkshire, who might have the most wide varying holdings of any company being traded.  Pointing back to the first point, this may very well create some extra volatility, leading to some great buying opportunities.

    4) Change in Strategy for Berkshire?
    The theory here is that since the mindshare of the average Berkshire investor may change from being "Buy and Hold" to a more traditional shorter holding period, there may be extra pressure on the management team to change some of its ways to focus more on short term returns.  There may also be pressure for Berkshire to become more involved in "hotter trends" in the market, such as high flying stocks like Apple and others.  Pressure may also be placed to sell some businesses that are not performing well in the short-term, something that Buffett has always decided against.

    Effect:  If this were to happen, this would change Berkshire as we know it.  Good news for the long-term holders though, there is almost no chance of this happening.  Buffett's conservative and simple approach to investing is so embedded in this company, they will not be changing anytime soon, while he is able to maintain control of the decisions.   I'm a bit curious to see what happens after he and Munger step aside, as the shares may be sold onto the open market. Definitely something to watch for the long-term....

    Overall, as a 10+ year shareholder of Berkshire, I am actually disappointed with the split.  It was great to be part of an "exclusive" club, one that was able to fly under the radar from most investors.  This allowed for a lower amount of volatility, and for the shares to be owned (for the most part) by those who believed in a certain philosophy of investing.  As well, if you thought it was difficult to get a hotel in Omaha for "Woodstock for Capitalism", imagine how it will be now!

    Disclosure - Berkshire Hathaway is one of my largest (and longest) holdings.  No position in Apple.

    Disclosure: Long BRK.B, no position in Apple

    Stocks: BRK.B, AAPL
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