It has to do with the incredibly high price of a single share of Buffett's company. I'm writing this on a Friday evening, for example, just after Berkshire Class A closed for the first time at $400,000 a share, making it by far the highest-priced publicly traded stock.
Can you even compare that to other stocks? Heck, it's considerably more than the median price of a single family home in the United States, which was $315,900 at the end of 2020.
Now, the easy explanation for why Berkshire's Class A stock is so expensive is twofold:
- It's a legitimately valuable company (although nowhere near the most valuable company), and
- Buffett is adamant about never splitting the stock.
The real question of course is why he's so adamant on that latter point.
So, let's go back to something Buffett wrote 37 years ago that includes an interesting explanation -- along with a key business lesson for today.
If you're running a business -- even one that isn't publicly traded with shares valued at a multiple of the average American income (roughly $66,000) -- I think it's worth the few minutes it takes to reflect on it.
Here's what Buffett had to say about never splitting Berkshire stock, back in the shareholder letter he released in 1984:
The key to a rational stock price is rational shareholders, both current and prospective. ... We want those who think of themselves as business owners and invest in companies with the intention of staying a long time.
Were we to split the stock or take other actions focusing on stock price rather than business value, we would attract an entering class of buyers inferior to the exiting class of sellers.
Interesting, right? It's about the intrinsic value of the stock, but it's also how people might react based on its perceived value.
To throw another factor into the mix, Berkshire was trading at around $1,300 per share when Buffett wrote that, so while it was expensive, he could truthfully say that very few people who were inclined to buy stocks in 1984 would be unable to afford a single share.
That's no longer accurate regarding Berkshire Class A stock, but in 1996, Buffett created a second class of stock, Berkshire Class B, partly to address this issue. That stock trades at a much more down-to-earth level: roughly $266 as of this writing.
I think to understand this now, you have to factor in the degree to which Buffett and Berkshire are entwined. With more than 50 years at the helm, he's the longest-tenured CEO in the S&P 500. And he's said quite directly that his sense of self-worth is partially tied to the share price of Berkshire.
"My ego is wrapped up with Berkshire. No question about that," he told a reporter years ago, when Berkshire was trading at around $3,900 a share. And he later told biographer Alice Schroeder: "I can gear my whole life by the price of Berkshire."
So, here's the takeaway and the lesson. It's clear that Buffett looks at the high share price as a marketing asset to be leveraged, not a challenge to overcome.
And, while almost no one else faces the exact issue he does on share price, I'll bet that you spend a lot of time in your business thinking about the prices to charge for various products and services.
Price can reflect value, but it can also -- probably more often, if we're being honest -- reinforce the perception of value. That's a brutal truth that many people never quite grasp.
- So, whatever you're selling, when you think about price, imagine what goes through a new potential customer's mind when they realize that you're half as expensive -- or twice as costly -- as a competitor.
- Consider a freelancer who offers his services at $35 an hour. Without knowing anything more about him, he's sending a very different signal from a competitor who sells her services at $100 or $250 an hour.
- Or else, a manufacturer who sells products at $200 per item, in a market with competitors selling at $150 and $250. Customers assume, at least at the outset, that there's a corresponding difference in value. But it's just as likely that the perception of value is derived from the price as that the price is derived from actual value.
Bringing this back to Buffett, imagine how casual investors might view him differently if it weren't for the fact that his company now trades at roughly 35,000 times what it did when he first bought it out in the 1960s.
Rationally, we know that a Berkshire with a stock split -- say, one that had 1,000 times as many shares, each of which sold for one one-thousandth of its current share price -- would be worth the exact same amount.
But people aren't always rational. Heck, many of them aren't really all that good at simple math.
That's something consider when you're thinking about price and value. Rational stakeholders of the kind Buffett wanted in 1984 might be wonderful, but emotional connections can be worth a lot more than numbers might otherwise suggest.
Don't forget the free e-book: Warren Buffett Predicts the Future.