The Evolution of BRK-B: From 'Baby Berkshire' to S&P 500 Inclusion

Embark on a captivating journey through the evolution of BRK-B, affectionately known as 'Baby Berkshire,' from its inception to its prestigious inclusion in the S&P 500 index. Discover the strategic foresight of Warren Buffett and Charlie Munger, the game-changing stock split, and the profound impact on shareholder rights and market presence. Join us in exploring the legacy of BRK-B and the promise of continued excellence in the world of investing.

Introduction

In the grand tapestry of financial markets, few narratives are as captivating as the evolution of Berkshire Hathaway Inc., a conglomerate that has grown from a struggling textile manufacturer to a towering colossus under the stewardship of Warren Buffett ↗. Central to this tale is the story of Berkshire's Class B shares, affectionately dubbed 'Baby Berkshire,' a financial instrument that has democratized access to the investment acumen of one of history's greatest investors. This article will trace the journey of BRK-B from its inception to its prestigious inclusion in the S&P 500 index, an ascent that mirrors the very ethos of Berkshire Hathaway: steadfast growth, unwavering principles, and a long-term outlook.

The genesis of 'Baby Berkshire' was not merely a financial maneuver but a strategic response to protect individual investors and uphold the integrity of Berkshire Hathaway's investment philosophy. With the current price of BRK-B shares soaring beyond $350 as of December 2023 ⁵, the foresight of Buffett's actions is undeniable. As we delve into the motivations behind the creation of Class B shares, we invite shareholders and enthusiasts alike to explore the profound impact of this pivotal moment in Berkshire's history.

The Genesis of Class B Shares

In 1995, Berkshire Hathaway unveiled a bold recapitalization plan to create two classes of stock, Class A and Class B ¹. The introduction of Class B shares was a strategic move to safeguard the company's shareholder culture against the proliferation of unit trusts that were not only expensive but also a poor imitation of Berkshire's investment model. With each Class B share embodying 1/30th the rights of a Class A share, except in voting rights and eligibility for charitable contributions, the company set forth a clear path for investors: a way to partake in Berkshire's success without the hefty price tag of a Class A share.

The non-convertibility feature, ensuring Class B shares could not be converted into Class A shares, was a deliberate design to maintain the balance of voting power. Berkshire's intention to raise at least $100 million through a public offering of the new B shares was ambitious, yet the company was confident that it would not erode the per-share intrinsic value of the existing stock ¹. This move was not just about raising capital; it was about inclusion and convenience, allowing Class A shareholders to convert their stock into Class B shares for gifting, thereby extending the reach of Berkshire's ownership.

The additional costs incurred by handling a larger number of shareholders were deemed a necessary investment in the company's future ¹. Warren Buffett's vision, as he articulated, was to double Berkshire's per-share intrinsic value every five years, a goal that underscores the company's commitment to long-term value creation ¹.

The Launch and Immediate Impact of Class B Shares

The launch of Class B shares in May 1996 was a resounding success, with 517,500 shares generating net proceeds of $565 million ². This financial coup was not just about the numbers; it was a strategic blockade against the unit trusts that threatened to exploit Berkshire's storied past for their gain. By offering B shares with a mere 1.5% commission, the lowest in common stock underwriting, Berkshire Hathaway made a clear statement: this was a company for serious, long-term investors ².

The sale was structured to deter short-term speculators, with an open-ended amount offering that curbed any immediate price surge ². This approach paid off, as approximately 40,000 shareholders were added, most of whom were aligned with Berkshire's investment horizon and philosophy ². The immediate impact of the Class B shares was not just financial; it was a reinforcement of the company's values and a testament to the trust placed in Buffett's vision.

The issuance of Class B shares has been deliberately explained by Warren Buffett not only in the referenced letters to shareholders, but also in the annual meeting 1996:

Now, let's move 14 years into the future.

The 50-for-1 Stock Split and S&P 500 Inclusion

The year 2010 marked a significant milestone for Berkshire Hathaway with the 50-for-1 split of its Class B shares ³ ↗. This strategic move was not merely a stock manipulation but a calculated effort to increase liquidity and facilitate the acquisition of Burlington Northern Santa Fe Corporation ↗. The split turned the Class B shares into a more accessible investment, and the immediate aftermath saw a 7.9 percent rise in their price, a testament to the market's positive reception ³.

The inclusion of Berkshire Hathaway in the S&P 500 was a byproduct of the increased liquidity and trading volume brought about by the stock split ⁴. This event was not something Warren Buffett actively sought, but it was undoubtedly a milestone he appreciated, as it reflected the company's growing influence and the recognition of its stability and performance ³. The S&P 500 inclusion was a nod to Berkshire's steadfast presence in the market, a seal of approval from one of the most followed indices in the world.

The 50-for-1 stock split and subsequent S&P 500 inclusion were more than just financial maneuvers; they were emblematic of Berkshire Hathaway's evolution from 'Baby Berkshire' to a behemoth whose shares were coveted by investors worldwide. As the company's market presence solidified, so too did the wisdom of Buffett's long-term approach to investing and shareholder relations.

The Market's Reaction to the Split

When Berkshire Hathaway announced the 50-for-1 stock split of its Class B shares, the market responded with palpable enthusiasm. Trading volume and liquidity for Class B shares surged immediately, reflecting the market's approval of the move ⁶. The price of the so-called "Baby Bs" climbed 4.8% to $72.88 from the split-adjusted close of $69.50, showcasing the positive sentiment among traders and investors ⁶. Warren Buffett, Berkshire Hathaway's CEO, commented on the potential for increased liquidity to drive the company's market value higher, a statement that resonated with the market's bullish outlook ⁶.

Class A shares also experienced a notable uptick, rising nearly 5% as of 10 a.m. ET on the day trading began with the new split-adjusted price ⁶. This positive trend was not a flash in the pan; Berkshire's stock closed over 4% higher in the previous day's trading, and Class A shares picked up an additional 2.6% on Tuesday, culminating in a rise of over 10% for the week ⁶.

Buffett's perspective on Berkshire's valuation at the time was that it was at the "low end," suggesting that there was significant room for growth ⁶. This optimism was echoed by the overall market performance during that week, as investors and traders alike seemed to align with Buffett's long-term value-driven investment philosophy. Buffett's knack for understatement and his reputation for shrewd investment choices added a layer of credibility to the market's reaction.

The sentiment surrounding the stock split and its implications was overwhelmingly positive, with the understanding that the move would democratize ownership of Berkshire shares, making them accessible to a broader base of investors. Buffett himself added a personal touch to the discussion, stating, "The addition to the index is something I don't think Warren Buffett was lobbying for, but is certainly something he would have wanted" ³.

The Evolution of Voting Rights and Share Ratios

The original voting rights associated with Class B shares were significantly lower than those of Class A shares, with 200 Class B shares required to match the voting weight of a single Class A share ⁴. However, following the 50-for-1 stock split, the ratio of Class B shares to Class A shares changed dramatically, increasing from 1,500-to-1 to an astonishing 10,000-to-1 ⁴. This alteration in the share structure had profound implications for shareholder voting power, as it further diluted the influence of Class B shareholders in corporate governance matters.

The split affected the corporate governance structure of Berkshire Hathaway by reinforcing the control of Class A shareholders, a group that includes Buffett himself. While this change may have concerned some investors about their diminished voting influence, it also reflected Berkshire's commitment to maintaining a stable governance framework that supports long-term decision-making.

The historical context of shareholder rights reveals that Berkshire's model is somewhat unique. Warren Buffett and legendary Charlie Munger (January 1, 1924 – November 28, 2023 ↗) had long emphasized the importance of a knowledgeable shareholder base that is aligned with the company's long-term objectives, rather than focusing solely on voting power. This philosophy has been a cornerstone of Berkshire's success and has contributed to the company's ability to pursue its strategic goals without the pressures that often accompany a more dispersed shareholder base.

Year	Class B Share Event	Details
1996	Issuance	517,500 shares issued, allowing investment at 1/30th the price of Class A shares
	Voting rights	1/200th of Class A share
	Goal	Long-term investment and open-ended offering to prevent volatility
2010	50-to-1 stock split	Share ratio changed to 1/1,500th of Class A share
	Voting rights	1/10,000th of Class A share

Berkshire Hathaway's Performance and Market Presence

Since the split, Berkshire Hathaway's Class B shares (BRK-B) have shown remarkable growth, with the current price standing at 356.83 USD ⁵. This represents a significant increase from the post-split prices, underscoring the strong performance of Berkshire Hathaway's stock. The inclusion of BRK-B in the S&P 500 index in 2010 further cemented its status as a major player in the market and provided an additional boost to investor confidence ⁵.

Berkshire Hathaway's market capitalization has grown substantially since its inclusion in the index, reflecting the company's financial health and the robust performance of its diverse portfolio of investments. The firm has managed to remain relevant and competitive in a rapidly changing economic landscape, a testament to its strategic investment choices and the management prowess of Buffett and Munger.

Over the past 27 years, Berkshire Hathaway's Class B shares (BRK-B) have demonstrated a commendable performance, increasing at an annual rate of approximately 11%. In the same period, the S&P 500 showed a notable but comparatively lower return of around 7.6%, emphasizing a significant performance difference. Gold, with a return of approximately 6.4%, lags slightly behind the S&P 500. This data highlights Berkshire Hathaway's robust and superior performance compared to both the S&P 500 and gold over the timeframe from June 1996 to December 2023 (rounded numbers):

Asset	June 1996 Price	Dec 2023 Price	Approximate Annual Return
Berkshire Hathaway's Class B shares (BRK-B)	$21	$350	11%
S&P 500	650	4780	7.6%
Gold Price per Ounce	$390	$2070	6.4%

Note: the S&P 500 does not include cash dividends paid out by the companies. The total return of the S&P 500 including dividends during the above timefrime is in the range of 9..10% because of a historic S&P 500 dividend yield around 2% ⁷. As you know, Berkshire Hathaway's historic dividend yield is exactly zero - except for 1967, when Buffett "might have been in the bathroom" during the decision ⁸.

Long-Term Perspective: The Buffett and Munger Philosophy

Buffett and Munger have consistently expressed indifference to the size of their shareholders' investments, instead emphasizing the importance of having a knowledgeable base of investors who share the company's long-term perspective ¹. The creation of Class B shares and the subsequent stock split were strategic moves that aligned with this philosophy, making Berkshire's stock more accessible to a wider audience of investors who understand and support the company's objectives and time horizons ².

The impact of having a shareholder base that is in sync with Berkshire's long-term goals cannot be overstated. It has allowed the company to pursue its value investing strategy without the distraction of short-term market fluctuations. Buffett and Munger's teachings on value investing have deeply influenced Berkshire's approach to business and investment, fostering a culture of patience and discipline that resonates with their investors.

The annual shareholder meetings, often referred to as the "Woodstock for Capitalists," have become a cultural phenomenon, drawing thousands of investors who are eager to hear Buffett and Munger's insights and to participate in the celebration of Berkshire's unique investment culture. These meetings, along with Buffett's annual letters to shareholders, serve as an educational platform, reinforcing the company's investment principles and long-term outlook. Their investment philosophy centers on intrinsic value, margin of safety, and a keen understanding of business fundamentals. This philosophy has not only shaped Berkshire Hathaway's strategy but has also influenced generations of investors and business leaders around the world.

Conclusion

The journey of Berkshire Hathaway's Class B shares, affectionately known as "Baby Berkshire," is a testament to the strategic foresight of Warren Buffett and Charlie Munger. From the initial proposal of a recapitalization plan to create a more accessible investment vehicle for smaller investors ¹, to the pivotal stock split that catapulted BRK-B into the S&P 500 ³, each step has been carefully orchestrated to uphold the company's values while expanding its investor base.

Reflecting on the strategic decisions that have shaped the course of BRK-B, it is clear that Buffett's motivation to introduce the B shares was rooted in a desire to protect investors from the high costs and aggressive marketing of unit trusts that were mimicking Berkshire's success ². The subsequent 50-for-1 stock split in 2010 not only increased liquidity but also democratized ownership, allowing more individual investors to participate in Berkshire's growth ³.

The significance of the stock split extended beyond mere accessibility; it was a game-changer that led to the inclusion of BRK-B in the S&P 500, a move that was not actively lobbied for by Buffett but was certainly in line with his vision of increasing Berkshire's market value through enhanced trading volume and liquidity ⁶. This strategic move was met with positive market reactions, as the Class B shares rose 7.9 percent following the announcement ³, signaling strong investor confidence.

The evolution of voting rights and share ratios over time has been another aspect of BRK-B's transformation. Originally, Class B shares came with disproportionately reduced voting rights, but the 2010 split adjusted these ratios, further aligning the interests of Class A and Class B shareholders ⁴. This alignment is crucial, as it ensures that all shareholders, regardless of the size of their holdings, are part of Berkshire's long-term vision.

Berkshire Hathaway's performance and market presence have remained robust, with the stock price of BRK-B exceeding $350 in December 2023 ⁵, realizing an 11% annual return since 1996. This strong performance underscores the appeal of BRK-B shares to long-term investors and reflects the company's consistent value creation ↗.

The Buffett and Munger philosophy of a long-term perspective has been the cornerstone of Berkshire Hathaway's success. They have cultivated a base of knowledgeable shareholders who share their objectives and long-term outlook ¹. This philosophy has not only guided the company's decisions but has also resonated with investors who understand and believe in Berkshire's approach to business and investing.

As we consider the historical context and future potential of BRK-B shares, it is clear that they offer more than just a slice of Berkshire Hathaway's impressive portfolio; they represent a piece of its legacy. The legacy of Warren Buffett and Charlie Munger, as it relates to BRK-B, is one of thoughtful stewardship, investor inclusivity, and unwavering commitment to long-term value.

In conclusion, the evolution of BRK-B from 'Baby Berkshire' to a staple in the S&P 500 is a narrative of strategic growth, market acumen, and principled leadership. For shareholders, both current and prospective, the story of BRK-B is not just about the past but also about the promise of continued excellence and integrity in the world of investing. It is an invitation to be part of a legacy that is built to last, guided by the timeless wisdom of two of the most renowned investors in history.

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