OMAHA, Neb. (
) -- The arbitrage opportunity between the
A shares and B shares just got revised by 1%, by
On Thursday, Berkshire Hathaway B shares began trading post a 50-to-1 stock split, a watershed day for investor access to the Oracle of Omaha.
The new, more liquid B share presented a host of issues related to trading, including whether an
arbitrage opportunity could exist between the Berkshire Hathaway A and B shares .
Investors accessed the new, more liquid B shares -- trading at the $70 mark, as opposed to $3,400 -- in droves on Thursday.
Berkshire Hathaway stock had its biggest volume day ever, not surprisingly, with close to 14.5 million shares traded, versus an average volume of 41,000 shares previous to the stock split. Warren Buffett said yesterday that he thought the trading level was higher than he would have hoped.
Buffett himself set the course for more retail investor trading when he first created the class-B Shares, and compounded that trading trend with the 50-to-1 stock split.
And it's not a bad thing: Why shouldn't more Americans be invited to the party celebrating Buffett's "all-in wager on the U.S. economy?" It's as close as we will ever likely come to a Warren Buffett/Berkshire Hathaway version of America's beloved Dollar Store.
The arbitrage opportunity between the two Berkshire Hathaway share classes is a niche trading issue, of little interest to most retail investors who might be attracted to the opportunity to buy a bit of Buffett at $70.
Still, Buffett was not only talking this week about the trading spike, as well as maybe trying to push attention away from the new and more liquid B share, by publicly chastising
and President Obama on
Buffett also revised an existing letter on the Berkshire Hathaway Web site regarding the arbitrage opportunity between the famed Berkshire Hathaway A shares and the newer and more liquid B shares.
In the previous July 3, 2003 letter from Buffett to Berkshire Hathaway shareholders, Buffett had written:
"In my opinion, most of the time, the demand for the B will be such that it will trade at about 1/30th of the price of the A. However, from time to time, a different supply-demand situation will prevail and the B will sell at some discount. In my opinion, again,
when the B is at a discount of more than say, 2%
, it offers a better buy than the A. When the two are at parity, however, anyone wishing to buy 30 or more B should consider buying A instead."
On Wednesday, Buffett posted a revised version of the same letter on the
Berkshire Hathaway Web site.
The most notable revision is that Buffett now says that it will only take a 1% discount -- as opposed to 2% -- to trigger an arbitrage buying opportunity between the A shares and B shares.
Whether the reverse arbitrage opportunity could open up in the B shares post-stock split, with investors viewing the B's as more attractive versus the As with their added liquidity, was a question posed yesterday by Keefe, Bruyette & Woods analyst Cliff Gallant.
It didn't happen on Thursday, and Ravi Nagarajan, a private investor who has written on Berkshire Hathaway arbitrage opportunities in the past at
his Web site, explained that the factor that would keep the B's from trading at a higher than 1500:1 ratio to the A's is that A's have conversion rights into B.
Nagarajan explained that if the B's are consistently trading at a premium, that would motivate traders to buy A's, then immediately convert their A shares into B's and sell at the higher price. In other words, the presence of a premium on the B's will cause the supply of B shares to increase as more get manufactured through A to B conversions. Ultimately it's a supply/demand dynamic at work with an incentive for the supply of B's to increase if they trade at a consistent premium to A.
Nagarajan, who has witnessed opportunities in the past to arbitrage the Berkshire Hathaway share classes with the B shares discounted, believes the more liquid B shares should make trading more efficient, and ultimately, decrease the opportunity for arbitrage.
Nagarajan is in agreement with Buffett, who wrote in his letter that the B shares "can never sell for anything more than a tiny fraction above 1/1,500th of the price of A. When it rises above 1/1,500th, arbitrage takes place in which someone -- perhaps the NYSE specialist -- buys the A and converts it into B."
Is Buffett's "tiny fraction" big enough to present arbitrage opportunities in an age of market trades being executed in milliseconds?
Nagarajan said, at least theoretically, the question really is whether there is enough liquidity in both the Berkshire Hathaway A shares and B shares to execute the arbitrage strategy of simultaneously buying the A, converting it into 1500 B shares, and then selling the B's.
"In practice, I assume that one would have to buy the A, short 1500 B, and then convert the A into B to cover the short," Nagarajan wrote in an email, however, he questioned whether the trade could ever be executed in a timely fashion.
Nagarajan said it doesn't seem like an opportunity that could exist for more than a very small amount of time either.
On Thursday, the B shares did end the day at a slight premium to the A shares.
On Friday afternoon at 11:45 a.m. ET, the Berkshire A shares were down 2.81%; the B shares were down 2.97%.
The oracle has spoken, or we should say, has written: for investors wanting to make an "all-in wager" on when to arbitrage the discount between the B share and the A Share, the trigger is now 1%.
-- Reported by Eric Rosenbaum in New York.
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