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What Is a Baby Berkshire?

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  • Written By: Mary McMahon
  • Edited By: Shereen Skola
  • Last Modified Date: 22 September 2016
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A Baby Berkshire is a unit of class B stock in Berkshire Hathaway, a holding company famous for its ability to beat the market. Founded in Omaha, Nebraska, the company prospered under the guidance of strategist Warren Buffett, who generated returns for investors well above those of comparable products on the market. Investment in the company was historically only accessible to people with high net worth, as the coveted, and limited, class A shares sold for tens of thousands of United States Dollars (USD); sometimes they traded for over $100,000 USD. The introduction of the Baby Berkshire made investment in this firm more widely available.

Berkshire Hathaway’s approach to the management of shares is somewhat unique, and has attracted considerable attention. The company’s class A shares sell at a price so high that they offer limited liquidity, as they are difficult to sell or trade. Buffett also resisted stock splits, which would have lowered prices and increased the number of shares. Investment in the firm was functionally limited to institutional and high net worth investors.

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The company was initially reluctant to offer class B stock, but felt it was necessary to extend investment opportunities. Investors unable to afford the high sticker price on the class A stock might have been drawn to other options with a lower price easier to convert into cash. Consequently, the decision to offer class B shares was made, creating the Baby Berkshire. The initial price was still very high, until a stock split in 2010, which increased the number of Baby Berkshires and brought their price within the reach of ordinary investors.

Splitting the stock also allowed for listing on conventional stock indexes, which historically didn’t include Berkshire Hathaway. The unusually high trading price and low liquidity of the stock made it an unconventional investment less suitable for indexing than that of its competitors. Introducing the Baby Berkshire and bringing share prices for class B shares within the realm of affordability for more investors expanded the company’s reach by promoting direct investment. Firms copying the company’s investment strategy also faced competition, as they could no longer claim to offer a similar mixture of investments at a better price for investors.

It is possible to purchase Baby Berkshire shares on the secondary market. Class A stockholders can also choose to convert their shares, although holders of class B shares cannot convert them to class A. Investors may use such stocks to increase the mix of their investments, as they can access a broad mixture of companies and other investments held by Berkshire Hathaway by owning shares in the company.

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