The Risk of Undoing Three Decades of Effort

Warren Buffett has long argued against stock splits, as he believes they increase trading churn, invite short-term speculators, and detach the share price from underlying business value. 

Splits were one step Berkshire Hathaway would never take in Buffett’s view, as these were shown to degrade the existing shareholder constituency and risk reversing “three decades of hard work” building Berkshire’s base of rational, owner-minded shareholders.

Why Buffett Opposes Stock Splits 

Buffett has focused on investor behavior and frictional costs in his case against splits. They:

1. increase share turnover, and therefore the so-called “pickpocket” of transaction costs;
2. attract speculative buyers who focus on the price quote, not value; and therefore,
3. lead to prices that deviate from intrinsic value.

He thus concluded there were “no offsetting advantages” to splitting Berkshire’s traditional, Class A shares.

Buffet’s broader goal is a market price that is rationally related to intrinsic value. That requires self-selecting, long-term owners who think like business partners rather than traders. A lower share count to make the sticker price lower, he argues, entices the wrong crowd: “People who buy for non-value reasons are likely to sell for non-value reasons.”

Two Exceptions: Class B Shares and a 50-for-1 Split

Buffett did, however, make two exceptions in Berkshire’s history that may muddy the waters when it comes to splits. The first was Berkshire’s creation of Class B shares (BRK.B) in 1996 to combat the proliferation of high-fee Berkshire “clone” trusts and to offer a lower-denomination vehicle for real long-term investors to invest in Berkshire.

He emphasized this was to preserve the shareholder culture that helped his investment decisions. B-class were set at roughly 1/30th of an A share (with a reduction in voting rights) to be useful, but still have a big enough entry ticket to keep out the purely speculatively minded. Today, the B shares trade for 1/1,500 the market price of A shares.

Second, in 2010 Berkshire executed a 50-for-1 split of Class B shares to consummate the Burlington Northern Santa Fe (BNSF) acquisition. Berkshire’s regulatory filings explicitly framed the split as a way to facilitate the deal, rather than as a new stance on stock splits.

What It Means for Investors 

For investors, there are two takeaways.

1. Don’t mistake a lower sticker price for value. A split doesn’t change the fundamentals of the business, but it can change behavior around the stock. Buffett wants that behavior aligned with long-term fundamentals, not short-term trading impulses.
2. Permit entry without watering down philosophy. The dual-class structure permitted smaller investors to purchase B shares without diluting A shares. This has enabled Berkshire to make strategic investments while maintaining the culture of its base of core investors.

The Bottom Line

Buffett was blunt about this issue. A split, he wrote, would raise trading costs, downgrade the shareholder population, and encourage prices less consistently-related to intrinsic business value. His approach over the years has not changed, even as Berkshire added B shares and split those for specific acquisition purposes, all the while maintaining that A shares would never be split.