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Collection: Warren Buffett - #154 'Arbitrage Between Berkshire Class A & B Shares'



On the question of A versus B, I’ve written something — I wrote it some months ago and stuck it up on the website — regarding my own thoughts on that.

Obviously, the most the B can be worth is 1/30th of the A, because you can always convert an A into 30 shares of B.

The B may sell a slight bit above that 1/30th price before it gets to a level where it induces arbitrage between the two. So, it can theoretically sell, and it will sell, a fraction of a percent above 1/30th of the price of the A. But if it gets above that, you know, I’ll buy the A and sell you the B.

There’s an arbitrage profit to be made, and probably the way markets work, most of that profit will be captured by the specialist, because he’s in the best position to effectuate trades of that sort.

But the B can never be worth more than a thirtieth of the A, and it can never sell for more than slightly above 1/30th of the A.

On the other hand, B is not convertible into A stock, so it can sell at a discount.

I put on the web some months ago that I thought — just my opinion — but I thought that when the B is selling for less — selling for more — than a two percent discount, I personally would rather buy B than A under those circumstances.

If it’s selling for the same price as the A — 1/30th the price of the A, but it’s selling on a parity basis — and I were buying 30 shares or more of B, I would rather buy A, because you can always go one direction and you can’t go the other direction.

I think, if you take the next 10 years — I would think that a fair percentage of the time, it’s going to be selling right about 1/30th of the price of the A, and there will be periods of time when it sells it at a modest discount.

And I would say that when it gets in the 3 to 4 percent range, I regard that as quite a wide discount. If I didn’t have a tax to pay myself, I might sell A and buy B if I was getting four percent more in the — in economic equivalent on B. It’s not practical for me to do it.

Some — I know of some tax-exempt investors that have actually done that sort of thing, and —

Long range, we will always treat the B exactly as we laid it out in the prospectus. There are two differences between the A and B. One is in the voting power, relatively. And the other is in the shareholder-designated contributions program. And otherwise, in all respects, B will be treated on the same basis as the A.

We have no — even though Charlie and I own a lot of A and we don’t own any B to speak of, we regard the B shareholders as being 100 percent on a parity, except for those two differences we laid out at the time of issuance, with A shareholders.

We would never — there won’t be a deal ever made for Berkshire anyway — but if there would be we would always treat the A and B on a 1-for-30 basis.

We would not — we’ve been in situations where people haven’t done that and we’ve never been very happy with it. So we would always treat people proportionally.



Well, I certainly agree with all of that.


The question about shorting, it doesn’t make a difference whether anybody shorts any stock or not, really.

I mean, if you were arbitraging between A and B, and the B was selling a little higher than the A, you might be buying some A and shorting some B, and you might delay conversion because you might figure the B might go to a discount. And then you’d unwind the whole transaction rather than convert.

I mean, there’s a lot of techniques that Charlie and I have engaged in over the years, and other securities that apply to that sort of thing.

But shorting doesn’t hurt us in any way, shape or form. I mean, it doesn’t make any difference.

I don’t care whether the short interest in the A is a thousand shares or 100,000 shares. You know, somebody sells it at one point and somebody buys at another point, and whether you reverse the buying and selling doesn’t make any difference.

What counts is the intrinsic value of Berkshire. And if we increase the value of Berkshire at a reasonable rate, you know, the shorts will have to figure out how to eat three times a day. (Laughter)

OK. Zone 5, please.

~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.


[YAPSS Takeaway]

1. Never short Berkshire Hathaway.

2. Buy whichever is cheaper. If both is at the same price, buy Class A. If you can't afford just buy Class B then 😁

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