Berkshire Hathaway Class A Shares Have Become More Actively Traded. Why That’s Important.

In recent weeks, however, trading in the class A shares has been elevated at an average of more than 2,000 shares a day—and 2,500 a day in past five sessions—against an average of fewer than 500 shares daily in 2020. The difference translates into about $800 million of additional daily trades in the class A stock. Trading activity in the class B shares, meanwhile, has not been elevated—an average of about five million shares a day in the past month, against six million in the last 12 months.

Berkshire shares have bested the S&P 500 this year with the class A stock up 9.7% through Friday, against a 2.5% rise in the index after trailing the index by a total of over 40 percentage points in 2019 and 2020. Wall Street has warmed to Berkshire thanks to its relatively low valuation versus book value and as a reopening play given its many economically sensitive businesses.

The shares continued their recent rally on Monday, with the class A shares up 1.6%, to a near record of $387,840, and the class B stock 1.4% higher, at $256.65.

Investors will probably have to wait until mid-May, when institutional holders file their March 31 equity investments, for the identity of the possible buyer of the class A stock to be known, unless the purchaser gets to a 5% stake, which would trigger a quicker regulatory filing.

Berkshire’s class B stock is equal to 1/1500 of a share of the class A shares, but it carries just 1/10,000 of the vote.

This has helped Buffett maintain control of the company as his economic interest declines because of his large annual gifts of Berkshire stock to the Bill & Melinda Gates Foundation and other charitable organizations over the past 15 years. Buffett gave way $2.9 billion to the various foundations last year. The class A is the original Berkshire stock, while the class B was created in 1996.

Buffett holds 248,734 class A shares, a 16% economic interest in the company, but roughly 30% of the vote. Buffett owns 39% of the class A stock. Around 40% of Berkshire’s stock is held in the class A shares, with the rest in the class B. Berkshire’s market value is around $580 million.

It is notable that when Buffett gives away stock annually, he converts his class A stock to class B stock. The class B stock is more liquid than the A, simplifying subsequent sales by the Gates foundation and others. But in converting the A shares, Buffett ensures that other investors won’t get their hands on the supervoting shares.

That could be important in the post-Buffett era, because it means whoever is overseeing his estate should have a sizable voting interest in Berkshire. Buffett has said that his Berkshire stake would be given away in the 12 years after his death.

Berkshire could face pressure from activists after Buffett’s death to break up the company, something that the CEO opposes. Buffett has said that he doubts any breakup will occur because sufficient stock is likely to be in friendly hands after his death.

The class A stock can be converted into 1,500 shares of the class B stock, but not the other way around. As a result, the class A stock can trade at a premium to the class B. With the recent buying activity in the A stock, it ended Friday at a roughly 0.5% premium to the B shares, against virtual parity at year-end 2020.

There are few sizable holders of the class A stock besides Buffett. Fidelity parent FMR is the only other owner of more than 5%. Much of the Fidelity stake is held by Fidelity Contrafund (FCNTX), whose manager, Will Danoff, is a longtime Berkshire fan and holder.

Buffett discussed the class A and class B stock in a 1999 memo to Berkshire holders that was last updated in 2010.

Here’s what Buffett wrote:

“When there is more demand for the B (relative to supply) than for the A, the B will sell at roughly 1/1,500th 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 1/1,500th of the price of the A,” Buffett wrote.

“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, 1%, it offers a better buy than the A. When the two are at parity, however, anyone wishing to buy 1,500 or more B should consider buying A instead.”

Write to Andrew Bary at [email protected]