2004: Why doesn't Berkshire split it's stock?

AUDIENCE MEMBER: Good afternoon, Mr. Buffett and Mr. Munger. I would like to thank you for being here.

Well, my question pertains to price discovery and liquidity. It is a common perception that, unless there is adequate liquidity, price discovery is hurt.

Now if liquidity helps price discovery, then does it make sense to split the stock of a company which has a low liquidity problem? As a corollary, why do you consider stock splits and bonus issues to be bad for shareholders in the long run? Thank you.

WARREN BUFFETT: Stock splits, and what else Charlie?

CHARLIE MUNGER: Bonus issues.

WARREN BUFFETT: And what’s the relation, I don’t get it.

CHARLIE MUNGER: He didn’t indicate a relation —

WARREN BUFFETT: Oh.

CHARLIE MUNGER: He just asked you to describe —

WARREN BUFFETT: It’s just two —

CHARLIE MUNGER: — what’s wrong with both.

WARREN BUFFETT: It’s two questions, then. (Laughter)

Yeah, well, our — we have explained how we think about stock splits. There’s no religious view against them. We don’t think companies that do them are evil or anything of the sort.

We do think we’ve got the best group of shareholders in the world, and I think that a meeting like this, to some extent, is evidence of it.

We’ve got people that are more in sync, I think, with the policies of the company. We certainly have people who are more long-term in their view of Berkshire — or their intentions — regarding Berkshire.

I think we have people that understand their investment in Berkshire better than — well, really better than other large American corporation. We’ve got the lowest turnover of any large American corporation. Now, why is that?

Well, people can buy stock in any company they want to. I mean, you could have bought stock in Berkshire, or something else. But there’s this self-selection process of who comes in, and there’s a self-selection process of the people that just say, you know, that company doesn’t interest me.

And I would say that people who say they aren’t interested in a stock that sells in the thousands of dollars a share simply because it sells in the thousands of dollars a share, are not — would not as a group be as intelligent, and informed, and long-term in their outlook, and as in sync with the policies of management, as this group.

It’s not a killer of a thing, obviously. But it’s a sign — it’s a symptom — of people with a somewhat different attitude toward the stocks they own. Now, somebody is going to —

If we have a million and a half Class A equivalent shares — we have a little more than that — outstanding, somebody’s going to own them all. So it’s just a question of who is attracted and who is repelled to your — from your shares.

And I think not splitting, and some other things we do at Berkshire — a number of other things we do at Berkshire — has attracted a group of shareholders that really come the closest to an investment-oriented group, as is almost possible in a widely traded, widely available company.

And we like the group we’ve got. We’re not looking for the people who think it would be a more attractive stock if, instead of selling at 90,000 a share, it sold at $9 a share. Nothing wrong with those people, but they are —

If we were choosing partners, we would choose the group we have over the people who think a $9 stock is a wonderful thing.

Charlie?

CHARLIE MUNGER: Yeah, and on the second part of that question, I think the notion, which is taught in so much of modern academia, that liquidity is this — of tradable common stock — is a great contributor to capitalism — I think that is mostly twaddle.

The GNP of the United States grew at very good rates long before we had highly-liquid markets for common stock.

I don’t know where people got that silly notion. I think the liquidity gives us these crazy booms, which have many problems as well as virtues.

And in England, if you’ll remember, after the South Sea Bubble, England banned tradable common stocks for decades. It was absolutely illegal to have a company so widely held you got a liquid market in the shares, and England did fine during that period when you didn’t have a stock market.

So, if you think that liquidity is a great contributor to civilization, why then you probably believe that all the real estate in America, which is relatively illiquid, hasn’t been developed properly.

WARREN BUFFETT: The — [John Maynard] Keynes actually commented on the perversions brought about by liquidity. But of course, the truth is that Berkshire trades on average $50 million or so of stock a day. So there’s very few people that are going to have any problem with Berkshire, the liquidity in the stock.

CHARLIE MUNGER: But we’re trying to create more of them.

WARREN BUFFETT: Uh-huh.

CHARLIE MUNGER: More people who have this big liquidity problem, because they own so much stock.