Wednesday, January 27, 2010

Berkshire Hathaway: "Warren Buffett and the S&P: What it Means" (BRK.A: BRK.B) Arbitrage Anyone?

UPDATE: A reader pointed out that I failed to mention dividing by the recent 50:1 split to get to Warren's original arbitrage rule of thumb.
Original post:
In early pre-market trade the B shares were trading up $5.46 (8%). It means more business for the specialist in the stock, Jim Maguire. I looked to see if anyone had talked to him, nada. I looked to see if anyone had commented on arbitraging the A and B shares and a Climateer Investing post pops up, see below.
From MarketBeat:

Baby Berkshires are getting bid up in premarket trading, after Tuesday’s announcement that the class B shares in Warren Buffett’s iconic company will replace shares of Burlington Northern Santa Fe in the S&P 500 stock index. The Journal’s Scott Patterson reports:

Berkshire’s addition to the index means fund managers who track it will need to rush to buy shares. Many index funds controlled by money managers, such as Vanguard Group, are benchmarked to holdings in the S&P 500, a broad gauge of corporate America. S&P estimates that more than $3.5 trillion in assets are held in investment funds, including index funds, tied to components of the S&P 500.

Previously, Berkshire Hathaway shares had been excluded from the S&P 500 because their high prices cut down on how often they were traded....MORE

November 3, 2009
Baby Berkshire split may put shares in S&P 500 Index (BRK.B)

The Berkshire Hathaway Arbitrage (BRK.A: BRK.B; LAB)
The quick and dirty:
This is a repost from February, with a couple additions at the end.

As a followup to yesterday's "Buffet Urges Investors to Read Graham’s Chapters 8 and 20 in Times of Financial Crisis (but wait, there's more!)", Market Movers brings a pair trade to our attention (it's not a classic arbitrage as the "B" shares are not good delivery for the "A"):

...Now the B shares have 1/30th of the economic value of the A shares, but only 1/200th of the voting rights. They began the week worth about 1/31 of an A share, and ended it worth less than 1/32 of an A share. Given that the seeming arbitrage persisted all week, the market might well be starting to value those A-share voting rights.

"In my opinion," says Warren Buffett, "when the B is at a discount of more than say, 2%, it offers a better buy than the A." Right now the discount is a whopping 7%. So if you want to take Buffett's advice, start buying up B shares. If, that is, you want to buy his stock in the first place. Which is a different matter entirely....SOURCE

We are conversant with the issue. From Berkshire Hathaway (oops, just noticed that Mr. Salmon has the link to the memo, here it is anyway:...Memo

Whose the happiest guy on the floor today? From Barron's, April 25, 2005....