Berkshire Hathaway 1999 Annual Meeting Audience Question # 53

Sometimes Berkshire class-B shares can sell at a discount to the class-A shares

Warren Buffett:

Zone 2.

Audience Member:

My name is Gaylord Hanson. I’m from Santa Barbara, California.

And I’m a rookie as an investor with Berkshire Hathaway, because I only started investing last November. And if this is a typical annual meeting, I will be here every first Monday of May the rest of my life.

Warren Buffett:

And we’ll be glad to have you. Thanks.

Audience Member:

Now I’m very proud to have finally uncovered Berkshire Hathaway and am an investor. But I may have made a slight error in which issue to buy, A or B.

I watch my investments rather closely, and I do believe in buying and holding. I don’t buy and trade at all. I buy… I’ve got things I bought 10, 15 years ago, and I still have them, and I’ve made a lot of money.

But I made an… I make an analysis, every December 31st, on my portfolio. And I looked at Hathaway A and I looked at Hathaway B on January 1st, and again on the 23rd of April. Hathaway A was up 10 percent since January 1st. Hathaway B was 5.3 percent.

Now I don’t like that.

Now, I must confess that I’m not inclined to buy a $77,000 stock and buy one of your 5 or 10 shares. But in this instance, because I bought a fair little bit of it, I bought the B and my increase in value, per share, is 4.7 percent less in B than in A. And I got to have that explained to me… by Mr. Buffett.

Warren Buffett:

OK.

Audience Member:

Have one other… one further comment.

You mentioned the 30 times the B being an A value. Well, if I multiply the value on the 23rd of May… of April… of $2,474 per share by 30, I come up with 74,220 but the price of A was 77,000.

Now I want to know whether I’m stupid or some good intelligent answer from Mr. Buffett.

Warren Buffett:

OK. The…

If you read what we’ve got, both in the original offering on the B, as well as on the website, explaining everything, the A can always be converted into 30 shares of B.

So, it can’t sell for anything other than a very tiny amount less than 30 shares of B. And if it went below that, arbitrage would occur. But it doesn’t convert the other way.

So there’s no question that, whereas a share of B can never be worth more than about 1/30th of A, it can be worth less, because the conversion doesn’t run the other way.

Now at year-end, I didn’t look at the prices, but obviously the A and B were at almost parity, or probably at parity from what you say.

And at that level we say that if you’re buying at least 30 shares of B, you’re better off buying the A because you can always go… you can always convert it into 30 shares of B. And without having paid any premium, you can’t lose money and you can gain money if the B goes to a discount.

The B will periodically go to a discount against the A. It depends on the supply and demand of the two securities. The B will not go to a premium above the A of any significant amount because then conversion occurs. And we’ve had a lot of conversion occur.
I have personally said on the website, for example, that I think when the B is at more than a two percent I would rather buy the B, if it was me.

But if it’s at less than a two percent discount, I’d probably buy the A, because I just think that you’ve always got the right to go one direction and you don’t have the right to go the other direction.

I would predict, as I think I did just a little earlier, that if you take the next 10 years, you’re going to find a significant number of months when the two stocks trade at parity, at 30-to-1 relationship, and you’re going to find a significant number of months when the B sells at a discount.

When people who are buying smaller amounts are the more aggressive buyers of the stock, they will push the B up to the point where A gets converted into B. And that means that the B is selling at a slight, very slight, premium over the A.

And when you find times when people are, on balance, preferring their larger buyers, maybe institutional buyers, then the A will tend to sell at some premium.

I think that… you may have picked on April 23rd. My guess is it’s narrowed a little bit, because I think it’s a 3-and-a-fraction percent discount at the moment.

But I would sort of use that guideline I stuck on the website, although there’s nothing magical about it. Those will be the prevailing facts.

I mean, if the B is selling at 2,500 and the A is selling at 75,000, a 30-to-1 relationship, and you were buying at least $75,000 worth of stock, I’d advise you to buy the A because you… the next day, if you wanted to you could convert it into 30 shares of B.

And…

But you can’t buy 30 shares of B and convert it into one share of A.

So, I’m not sure on the day you actually bought… if you bought B, it sounds as if you did… on the day that you actually bought B, I don’t whether you were buying it at a discount or not. Most of the time last year it did not sell at a discount.

Most of the time this year it has sold at a discount. There will be times when it will sell at parity and there will be times when it sells at a discount.

Charlie?

Charlie Munger:

Yeah. When you made your original decision to buy the lower priced of the two stocks, you made a mistake.

Warren Buffett:

Well, if he was buying at least 30 shares…

Charlie Munger:

Yeah. Yeah. If you were buying at least 30 shares.

And now that the stock, the B stock, is down to such a discount versus the A, Warren is saying he would hold the B. What could be simpler?

Warren Buffett:

We’ll try and make both the A and B work out fine.

But it… there… you should understand the relationship of the two. And we tried to be extremely clear about that when we brought up… we had a page that… which we devoted precisely to that point.

And we have put… I put this thing up on the website because I was getting some mail that was questioning this. People clearly didn’t understand it, so I put this up on the website.

And if you click on the… our homepage, you will see some reference to something else you can click that says the relative situation on the A and B. And I hope it’s clear.

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