After the superlative performance of Warren Buffett’s Berkshire Hathaway investment fund the last few decades, it’s no surprise that so many investors want to share in the success of the company by buying shares in the world famous conglomerate.
But given that Berkshire offers two different kinds of stock – Class A and Class B – what exactly distinguishes between them both, and, more importantly, which makes for a better buy and why?
Berkshire Class A vs B Shares: What’s The Difference?
The first thing any investor notices between Berkshire’s two different stock options is the price.
While BRK.B shares trade in the hundreds of dollars, BRK.A stock, by comparison, is a few orders of magnitude more expensive, hovering somewhere north of $440,000 range at the time of writing.
This discrepancy between the share types is explained by a couple of reasons. The first is that Berkshire Hathaway Class A shares are the firm’s original stock issue, and, since Warren Buffett took control of the company, the securities have never been subject to a stock split.
In fact, the Oracle of Omaha stated on numerous occasions that these Class A shares will never be split, the intention being to attract long-term investors unconcerned with making a quick buck out of short-term price volatility.
Secondly, Class B shares, on the other hand, were first issued in 1996 as a way to offer regular investors with less capital the opportunity to benefit from Berkshire’s ongoing success. These shares were significantly cheaper than their earlier counterpart, and were initially set at 1/30th of the value and equity of the original Class A stock.
A later 50-to-1 stock split reduced their price further, meaning that any share Class A common stock is now equivalent to 1,500 shares of Class B common stock.
Which Berkshire Share Class Is The Best?
Once you’ve decided that you want to purchase shares in Berkshire Hathaway stock, you then have to settle on which selection is the best for you. For investors who can’t afford the price of a single BRK.A share, the choice is simple; but for those who can afford either type, which should you opt for, and why?
To begin with, despite having a 1-to-1,500 conversion ratio when it comes to their monetary value, this isn’t exactly the case when it comes to the shares’ respective voting rights, however.
Voting Rights
In fact, each share of Class B common stock only confers 1/10,000th of the voting power of a comparable Class A share.
This practice of giving some kinds of stock more voting rights than another is not unusual, and is a way to ensure that voting power is concentrated in the hands of a select few investors. So, if you’re buying Berkshire Hathaway stock as a way for you to have a greater say in how the business is run in the future, it might be better to choose Class A shares over Class B stock to maximize your influence in that regard.
Stock Market Performance & Beta
Another important distinction between Class A and Class B stock is the fact that both shares can behave differently to one another when it comes to market performance.
One reason for this is that, due to the stock’s high market price value, only a small number of Class A shares are traded each day, which reduces volatility and makes for a far more stable share price.
Conversely, BRK.B stock, being cheaper, is traded with greater liquidity, leading to larger price swings and a higher beta.
It’s also true that holders of Class A stock are less likely to sell as often as Class B owners, both because of the increased value of a single Class A share, but also because Class A shares tend to attract long-term investors who are more likely to stick with their investment for many years.
Liquidity
Following on from this point, it’s also the case that if an investor does want to cash out a fraction their investment, it’s far easier to do so with Class B stock than it is Class A.
The high price of Class A stock means that investors can only sell in multiples of whatever the stock currently trades for, making it impossible to liquidate a value less than this.
Alternatively, Class B shares are usually cheap enough to be able to sell for pretty much whatever value the investor is looking for.
Conversion Rights
The last major difference between Class A and Class B stock is the conversion privilege between the two i.e. that Class A shares can always be converted into the equivalent number of Class B shares whenever the holder of Class A stock decides, whereas the reverse – Class B shares into Class A shares – does not pertain.
This means that the owner of Class B stock would first have to sell their shares for cash before buying Class A shares again. This arrangement, while inconvenient, can also have deleterious tax consequences for holders of Class B stock.
How To Buy Berkshire Class A Stock?
One of the primary reasons why Buffett chose to issue Class B shares in the first place was to avoid investors having to go through an exchange traded fund (ETF) or unit trust to get exposure to his company.
For Berkshire, this was a reputation saving maneuver, ensuring that investors weren’t burdened with excessive commission fees, and keeping its stakeholder base happy and content.
Ironically, Berkshire Hathaway is, in some ways, very much like an ETF, with its highly diversified portfolio of businesses providing shareholders the opportunity to profit from investments in a number of different sectors. And whether you decide to buy its Class A or Class B shares, you’ll always get the benefit of Buffett’s tried-and-true stock market wisdom.
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