Before we proceed, disclosures. I have more than 20 percent of my 401(k) invested in Berkshire; Buffett is a director of NEWSWEEK’s parent, The Washington Post Company; and Berkshire and The Post Company own stakes in each other. Please note that I’m not recommending Berkshire. It fits nicely in my total portfolio but may not suit yours.
The fact that Berkshire is about to hit $100,000 is a classic example of how Buffett goes his own way–and how he makes Wall Street dance to his tune. A handful of fluke stocks have hit $100,000 a share, but never has a mainstream company like Berkshire approached that level. With rare exceptions–such as The Washington Post Company, whose stock is approaching $1,000–companies love to split their stock. That produces a two-digit stock and helps attract buyers, presumably producing a higher price. For example, Buffett’s buddy and bridge partner Bill Gates has repeatedly split Microsoft stock. Each share in Microsoft’s initial public offering in 1986 has become 288 shares. That’s why Microsoft is an accessible $25 rather than the forbidding $7,200 it would fetch had Gates never gone to splitsville.
Keeping Berkshire’s stock price at nosebleed levels is certainly part of Buffett’s shtik. But it also serves a useful purpose: keeping trading costs down. Buffett, who declined to speak to me for this column, would be the first to admit he’s a cheap guy. It costs less to buy or sell a single $92,000 share of Berkshire than it would to buy or sell 2,000 shares at $46. Berkshire has 1.3 million A shares outstanding, as well as 7.8 million B’s, each worth one thirtieth of an A. So there’s enough stock available for an investor to buy or sell a million bucks’ worth easily–but not $100 million worth. That keeps hot-money types away, making it easier to manage for the long term, which Buffett continues doing at 73.
Another reason Berkshire’s stock price is so high is that the company has paid only one cash dividend–10 cents a share in 1967–since Buffett took over. That lets Berkshire keep all its profits at work, compounding away at double-digit rates.
And now, for a surprise. Even though Berkshire stock has done great the past few years, the annual return that investors have earned during Buffett’s tenure there has been dropping–as Buffett has long said it would. Through last week, Berkshire stock had risen 24.5 percent a year, compounded, since Buffett took control on May 10, 1965, with the stock at $18. By contrast, the S&P 500 has risen only 10.4 percent a year (including reinvested dividends). These performance numbers are from Aronson+Johnson+Ortiz, a Philadelphia money-management firm. We’re using years that end April 30, which is as close as we could conveniently get to Buffett’s May 10 anniversary at Berkshire.
The high point: 1998, with 28.4 percent a year, compounded. (The low was 1975, at 8.3 percent. You can see the full list with this story at NEWSWEEK.com.) Berkshire is up $25,000 a share since 1998–but that’s only about 5 percent a year; therefore, long-term performance has fallen. Any year that Berkshire doesn’t rise at least 24.5 percent–likely to be most years for the immediate future–its long-term return will drop. This doesn’t mean you shouldn’t buy Berkshire, just that you should have realistic expectations. The same holds for stocks as a whole. I don’t think the market will match its historic 10 percent annual returns for a while, but I’ll still buy stocks.
OK. Even though you can’t expect to make 24.5 percent annually for the next 39 years–Buffett would have to be going full tilt at 112, and a Berkshire share would sell for $500 million–you can anticipate 100K Day. The NYSE has done so: it got an SEC ruling last month to let Berkshire trade in dimes rather than pennies when it hits $100,000, to avoid having to add a digit to its computers. Associated Press market-tables editor Marty Rosen says newspapers are preparing to squeeze six-digit Berkshire prices into the same space in which teensy-weensy five-digit quotes now appear. Magnifying glasses, anyone?
So lay in balloons and cake, Buffetteers; savor the moment. Just don’t bet the ranch on the party’s rocking on for 39 more years.
