Stock Market - Berkshire Hathaway?

Question

Why might it be a plus for a company to have such a high share price that trading in its stock is discouraged? What drabacks might there be for a company in this situation? This is in reference to Warren Buffet's investment company, Berkshire Hathaway.

Answer 1

Publicly traded companies often feel pressure to sacrifice long-term stability and profits to meet the short-term goals of short-term investors. (They also feel pressure to use short-cuts to accomplish those short-term goals.) High stock prices discourage short-term investors and short-term thinking. So a higher stock price tends to mean the people owning the stock are more in line with Buffet's long-term, no-short-cuts, kind of investing mentality.

Chuck P is incorrect, however, when he says that the stock owners are largely Buffet's personal friends and family -- they are not. A majority of them just appreciate Buffet's kind of investing mentality and his success.

Answer 2

The answer to this depends a lot on how much financial knowledge you have. The stock market can be very dangerous if you don't know what you're doing. However, it also offers the highest rewards if you understand the market. It is a good idea to see a good financial planner to help you to set up a plan. Simply saving money in a savings account, while better than not saving, will actually lose value over time, because the interest that most savings accounts pay do not keep pace with inflation. You will have more dollars, but each dollar is worth less every year, due to the effect of inflation. A well-managed portfolio of stocks or mutual funds can out-pace inflation and actually increase your wealth. Hope this helps!

Answer 3

In most cases it doesn't matter. But when you look at a company like Bershire Hathaway they are in the business of buying and owning other businesses over the long term. As such they do not want to be subject to the normal market trading fluctuations that would be result if their assets were more reasonably priced.

Economically the value of the company doesn't change with a split...but psychologically and realistically the split does open up the shares to more investors and the asset loses it's "hold" appeal. Thus, the fund would have to increase their cash on hand in order to prevent the forced liquidation of assets that might otherwise occur if a large number of individuals requested a liquidation of their shares. So instead of holding perhaps 1.5% in cash they would have to bump it up to 2.5 or 3%. Doesn't seem like much until you realize how much 3% of the assets are....

Answer 4

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Answer 5

Warren Buffet has kept the price that high to keep speculators out. This companies main investors are his personal friends and family, they aren't buying on highs and selling during the pullbacks like other stocks. That is the same philosophy Google is trying to do with their stock, until they reach the level of affordability they will still have to put up the the day traders and other market speculators.

Answer 6

"We often are asked why Berkshire does not split its stock. The assumption behind this question usually appears to be that a split would be a pro-shareholder action. We disagree. Let me tell you why.

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.

If the holders of a companies 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.

To obtain only high quality shareholders is no cinch. Mrs. Astor could select her 400, but anyone can buy any stock. Entering members of a shareholder “club” cannot be screened for intellectual capacity, emotional stability, moral sensitivity or acceptable dress. Shareholder eugenics, therefore, might appear to be a hopeless undertaking.

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.

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.

Were we to split the stock or take other actions focusing on stock price rather than business value, we would attract an entering class of buyers inferior to the exiting class of sellers. 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. (Could we really improve our shareholder group by trading some of our present clear-thinking members for impressionable new ones who, preferring paper to value, feel wealthier with nine $10 bills than with one $100 bill?) 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.

Splitting the stock would increase that cost (transfer costs), downgrade the quality of our shareholder population, and encourage a market price less consistently related to intrinsic business value. We see no offsetting advantages."

Answer 7

There is no advantage. Buffet has said in the past that a split is meaningless, so he is worried about looking like a hypocrite if his company has a stock split.