Berkshire Hathaway's Stock Premium Widens

Berkshire Hathaway's Class A stock is currently trading at a larger-than-usual 2.5% premium compared to the company's Class B stock. This development comes after the stock experienced a significant increase on Monday.

Consider Class B Shares

Given the favorable conditions for Berkshire Hathaway investors, it might be worthwhile to consider investing in the Class B shares.

On Monday, Berkshire's Class A stock saw a 1.7% increase, reaching $549,000, while the Class B stock recorded a smaller gain of 1.1%, reaching $357.12.

Widest Spread Since April

The premium between the two classes of stock now stands at 2.5%, equivalent to over $9 per share. This is considerably higher than the 1% premium observed in late November and marks the widest spread since April, when it briefly reached 3.4%.

It is currently unclear what factors are contributing to this increased spread. However, it is worth noting that the spread has fluctuated throughout the year.

Berkshire CEO's Recommendation

CEO Warren Buffett has previously suggested that investors should prioritize purchasing Class B shares when the premium for Class A shares exceeds 1%. Conversely, if both classes of stock are at parity, Buffett advises opting for the Class A stock. This was the case at the beginning of 2023.

The Two Classes of Stock

Berkshire Hathaway, like many other companies, offers two classes of stock. The original stock is the Class A shares, through which Buffett holds approximately 15% of his economic stake in Berkshire. On the other hand, the Class B stock was introduced in 1996 and has since become more widely owned and liquid, primarily due to its lower share price and inclusion in the S&P 500 index.

Understanding the Spread

To calculate the spread between the two classes, one must divide the price of a Class A share by 1,500, as each Class B share is economically equivalent to 1/1,500 of a Class A share. As a result, each Class A share is currently valued at approximately $366.

It will be interesting to see how this situation develops and if the premium between the two classes of stock continues to widen.

The Unique Features of Berkshire Hathaway Stocks

The stocks of Berkshire Hathaway, known as Class A and Class B shares, possess distinct characteristics that set them apart. The first notable difference is the conversion ratio, where each Class A share can be converted into 1,500 shares of Class B stock, but not vice versa. This convertible aspect often leads to a trading premium for the Class A shares.

Throughout this year, the premium has consistently averaged close to 1%. However, due to arbitrage opportunities, the Class B shares cannot trade at a premium to the Class A shares. If this were to happen, arbitragers would seize the chance to purchase the Class A shares and convert them to Class B shares. It's important to note that there is no limit to the premium that can be placed on the Class A shares.

Another distinguishing feature is the voting power associated with each share. While the economic stake of a Class B share is 1/1,500th of a Class A share, its voting rights are only equivalent to 1/10,000th of a vote. This disparity allows Warren Buffett to maintain a significant 31% voting stake in the company while possessing just a 15% economic interest.

In a 2010 letter posted on Berkshire's official website, Buffett shared his perspective on the trade dynamics between the two classes of shares:

"In my opinion, most of the time, the demand for the Class B shares will lead to them being valued at approximately 1/1,500th of the price of the Class A shares. However, there may be occasions where a different supply-demand situation arises and the Class B shares are sold at a discount. From my perspective, when the discount exceeds 1%, it presents a better buying opportunity than the Class A shares. Nevertheless, when both classes are at equal value, individuals interested in purchasing 1,500 or more Class B shares should consider acquiring Class A instead."

These unique characteristics make Berkshire Hathaway's Class A and Class B shares an intriguing investment option for discerning investors.