Friday, February 12, 2010 2 comments ++[ CLICK TO COMMENT ]++

Berkshire Hathaway enters the S&P 500

Throughout his life, Warren Buffett has tried to isolate Berkshire Hathaway's stock from the daily swings in the market place. Like an ideal marriage or job contract, he wanted his shareholders to have a long-term focus. Buffett is also one of the few individuals who would rather have smaller investors own his company than the large institutional funds.

One of the main ways he has attempted to shield Berkshire Hathaway shares is to purposely avoid satifsying the requirements for entry into major indexes. In contrast, most executives and shareholders attempt to get their companies into major indexes. Entering an index provides greater visibility, improves prestige, and likely lowers the cost of capital. Berkshire Hathaway has been one of the largest publicly-listed companies in America for decades but never made it to the S&P 500.

Well, all that came to an end after trading today.

Berkshire Hathaway underwent a split, as part of its acquisition of Burlington Northern Santa Fe, that, finally, allowed it to meet S&P requirements for entry into the S&P 500. The history books will record Berkshire Hathaway as having entered the S&P 500 after close of trading on Friday. Not that it matters in the long run but it appears the market has given a thumbs down, with a (minor) sell-off Berkshire Hathaway shares—down 0.3%—during heavy after-hours trading.

Some might argue that Buffett had no choice and the entry into the S&P 500 was needed to complete the BNSF acquistion on good terms (Buffett apparently wanted to let everyone, including small shareholders, complete a tax-free transaction.) I personally don't share that view and believe that Buffett threw in the towel. This isn't necessarily a bad thing. Berkshire Hathaway was essentially Mr. Warren Buffett. When Buffett is not available to run the company, it will simply be another giant corporation, albeit with pretty good management culture.

I get the feeling that Warren Buffett is converting his company into a more mainstream company. Although I have always been critical of Warren Buffett at times (something Buffett followers never do,) I do think he is very honest and acts in the interests of shareholders he will never know or has any incentive to care about. Therefore, on top of his amazing performance, it is easy to see why many shareholders would be willing to invest their life savings with his company and take a long-term view. In the future, without Buffett, I suspect the loyalty will be difficult to maintain.

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2 Response to Berkshire Hathaway enters the S&P 500

Phil
February 17, 2010 at 1:31 AM

"Not that it matters in the long run but it appears the market has given a thumbs down, with a (minor) sell-off Berkshire Hathaway shares—down 0.3%—during heavy after-hours trading."

Wrong...this is because index participants had to buy up to time of the move into the index, creating artificially high demand...price then drops in first few days after as demand drops to normal levels.  This is pretty basic stuff...you need to do more homework.   Hmmmm....I think I need to exit the audience here...

Sivaram
February 17, 2010 at 8:03 PM

I don't get it... I'll have to look into it I guess...

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