The chart below shows the current price for one share of Berkshire Hathaway.
That’s a lot of money!
For that much cash, you could easily pay for 4 years of college education, easily make a down payment on a $1 million house, or buy yourself a Lambo.
You could also buy way more individual of shares of wonderful companies like Google or Apple for the same price.
So what gives?
Why is Berkshire Hathaway stock so damn expensive?
“Expensive” is Relative
First, I have to admit that the title of this article is a little misleading.
The term “expensive” is relative when it comes to stocks (that is, relative to some fundamental metric like book value or cash flow). Expensive should really be a synonym for overvalued, while cheap should be a synonym for undervalued.
Just because stock A trades for $80 and stock B trades for $40, it doesn’t mean that stock A is more expensive than stock B – it just means that it costs more. Stock B might indeed be more expensive than stock A if, say, its P/E ratio was 50 while stock A’s P/E ratio was 5.
So, the correct question to ask is: Why does one share of Berkshire Hathaway stock cost so much?
Buffett Has Never Split Berkshire’s Stock
In 1980, one share of Berkshire Hathaway stock cost less than $300. Not too bad, right?
After a decade passed, Berkshire cost about $7,000. In 2000, it’s price climbed to $50,000. And today, as you know, it costs over four times that!
Now, Berkshire Hathaway isn’t the only company whose total equity value has risen over the years. In fact, Berkshire’s total equity value (more commonly called market capitalization or just market cap) isn’t even the highest. It still lags behind powerhouse companies like Microsoft, Apple, Amazon, and Google.
The thing is, each of these other companies have split their stock.
What’s a Stock Split?
In a stock split, a company increases the number of shares outstanding while lowering the price accordingly. For example, say a stock was trading for $1,000 a share. Everyone who owned one share previously worth $1,000 for a total value of $1,000 would now get two shares worth $500 for a total value of $1,000.
Splits don’t change anything fundamentally about a company or its valuation, but they tend to make a company’s stock more attractive to retail investors (e.g. you, me, or your mother-in-law), which could increase liquidity and might eventually cause the share price to increase slightly.
In 2014, Apple’s stock was trading for $650 until the company implemented a 7-for-1 stock split. If you owned a couple of shares around then, you would have awoken the next day and magically owned 7x more – but each worth 7x less ($90 instead of $650). The value of your total Apple holdings hadn’t changed and the value of Apple as a company hadn’t changed. It was just arithmetic.
Again, many companies will do this to make their stocks appear more attractive to smaller investors and there’s nothing intrinsically wrong with doing so.
But Buffett has never split Berkshire Hathaway’s stock. Why not?
Berkshire’s Shareholders are Buffett’s Partners
In The Snowball: Warren Buffett and the Business of Life, Buffett explains his reasoning for not splitting Berkshire’s stock:
“I don’t want anybody buying Berkshire thinking that they can make a lot of money fast. They’re not going to do it, in the first place. And some of them will blame themselves, and some of them will blame me. They’ll all be disappointed. I don’t want disappointed people.
The idea of giving people crazy expectations has terrified me from the moment I first started selling stocks.”
Buffett hasn’t split Berkshire Hathaway’s stock because he’s afraid it will encourage people to try to day trade the stock and try to make a quick buck.
Buffett has always viewed Berkshire’s shareholders as partners in the business, rather than just investors in a large public company. He wants them to stick around and to stay invested.
Because Berkshire Hathaway stock is so expensive, buying and selling a share are big decisions to make (like buying a house or choosing a college to attend) and you’ll likely be thinking about the long-term when you decide to buy or sell, rather than what the share price might do tomorrow or even in the next hour. And that is Buffett’s intention.
There Are Always Class B Shares
If you don’t have hundreds of thousands of dollars sitting around, never fear – you can still be a Berkshire Hathaway shareholder!
In 1996, Berkshire Hathaway issued much cheaper Class B shares. Nicknamed “Baby Bs,” the shares were issued to prevent fund managers who wanted to set up a mutual-fund-like structure that would sell slices of the Class A shares in smaller pieces. The Class B shares have 1/10,000th of the voting rights of a Class A share. Click here to find out the current price of the Class B shares. Hooray for the peasants!
Is Berkshire Hathaway (or even class B for that matter) too expensive? That’s up to you to decide. An intelligent investor knows how to calculate the intrinsic value of a stock. If you don’t know how to do that, you can learn right here.
Berkshire Hathaway Letters to Shareholders
BY WARREN BUFFETT
This book compiles the full, un-edited versions of 50 years of Warren Buffett’s letters to the shareholders of Berkshire Hathaway. In addition to providing an astounding case study on Berkshire’s success, Buffett shows an incredible willingness to share his methods and act as a teacher to his many students.
Berkshire Beyond Buffett: The Enduring Value of Values
BY LAWRENCE A. CUNNINGHAM
Berkshire Hathaway, the massive conglomerate that Warren Buffett built, is among the world’s largest and most famous corporations. Yet, for all its power and celebrity, few people understand Berkshire, and many assume it cannot survive without Buffett. This book challenges that assumption.
The Ultimate Guide to Value Investing
Do you want to know how to invest like the value investing legend Warren Buffett? All you need is money to invest, a little patience—and this book. Learn more