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Tread Carefully With Baby Berkshires

Do your homework before investing in the highly popular Berkshire Hathaway B shares.
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) -- Although Professor Buffett broke his own rules on splitting shares to pay for the acquisition of

Burlington Northern Santa Fe


, the move appears to have paid off handsomely.

Since the 50-for-1 split on Jan. 20, Warren Buffett's

Berkshire Hathaway B Shares

(BRK.B) - Get Free Report

has been on an upward trajectory as investors pile into the firm in hopes of gaining access to the mind of the savviest investor around.

From the day of the split to Feb. 3, BRK.B has jumped over 6%, while the rest of the S&P has dipped over 3%.

Class A Berkshire

(BRK.A) - Get Free Report

shares have gained throughout the period as well, jumping 7%.

Aside from the strong returns, the reduced price of the Baby Berkshires has led to a staggering increase in volume. Prior to the division, high prices kept BRK.B volume light. However, on Jan. 20, the day of the split, BRK.B's volume jumped to over 1.2 million shares, more than double of the previous day. At one point since the split, the single-day volume nearly reached 2 million shares.

This popularity is expected to continue after the

S&P 500

recently announced that Berkshire Hathaway officially met its requirements for inclusion to the index and will be added to it in the near future.

With prices still within the reach of the average investor, it may be time to consider adding Berkshire B Shares as a small position in a well diversified portfolio. Time is of the essence, however, because of the popularity of the stock and the fact that Buffett has said that no additional shares of BRK.B would be issued in the future.

However, before jumping in, investors need to do their homework before playing with Professor Buffett.

Though it will soon find its place in the S&P 500, Berkshire Hathaway is considerably different from the many of its peers. When buying BRK.B, you are not buying a single entity. Rather, holding Berkshire is akin to holding a basket of companies Buffett has taken bets on during his impressive investing tenure. Therefore, as in the case with ETFs and mutual funds, investors need to be aware of what companies they are getting into before getting their feet wet.

Looking at Buffett's most recent holdings report, it quickly becomes apparent that the company has a huge percentage of its portfolio dedicated to its top two holdings:


(KO) - Get Free Report


Wells Fargo

(WFC) - Get Free Report

. Currently, over a third of Berkshire Hathaway's portfolio is dedicated solely to these two companies.

As with other financial instruments with top-heavy weighting, investors are particularly vulnerable to any violent market swings. If either of these top companies takes a considerable hit, there could be a gut-wrenching drop.

This risk is further multiplied if, on top of owning Berkshire Hathaway, investors already hold large positions in these heavily weighted firms via their common stocks.

Additionally, investors need to be aware that Berkshire Hathaway is not a static company. On the contrary, over the course of holding shares of Buffett's firm, there is a good chance that underlying positions will shift, holdings will be dropped and new positions will be added. As a result, investors need to be prepared for any impact these changes may have on the company's stock value.

Though Buffett has proven his investing excellence time and again, playing Berkshire Hathaway should not be a passive process. Rather, to avoid the risks that can come with holding a dynamic play like BRK.B, investors need to keep a watchful eye on not just their BRK.B positions, but their entire portfolios.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion did have any positions in the equities mentioned.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.