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One of Buffett's goal is to sell Berkshire Hathaway (BRK.A)(BRK.B) stock at price related to its intrinsic value. The key to a rational stock price is rational shareholders, both current and prospective. Manic-depressive personalities produce manic-depressive valuations.
It is not easy to obtain high-quality shareholders. They selection cannot be screened for intellectual capacity, emotional stability, moral sensitivity or acceptable dress.
Buffett's team considers that the one way to attract high quality shareholders is to communicate a business and ownership philosophy without conflict. Through this, the team tries to attract investors who will understand their operations, attitudes and expectations. It is widely known that Buffett likes shareholders who think themselves as business owners and invest in companies with the intention of staying a long time. He also wants those who keep their eyes focused on business results, not market prices.
Upgrading a shareholder group that possesses these characteristics is not easy. Should the stock be split or other actions be taken focused on stock price rather than business value, then a class of buyers inferior to the exiting class of sellers would be attracted.
People who buy for non-value reasons are likely to sell for non-value reasons. Their presence in the picture will accentuate erratic price swings unrelated to underlying business developments. At Berkshire, the idea is to attract long-term investors rather than short-term players.
One of the ironies of the stock market is the emphasis on activity. Brokers, using terms such as "marketability" and "liquidity," sing the praises of companies with high share turnover. But investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pickpocket of enterprise.
For instance, there is a company earning 12% on equity. It has a high turnover rate in its shares; 100% per year. If a purchase and sale of the stock trades at book value, the owners of the company will pay, in aggregate, 2% of the company's net worth annually for the privilege of transferring ownership.
This activity does nothing for the business earnings.
Owners think that the market trading 100 million shares is nothing but a curse. They have to pay more. Hyperactive equity markets subvert rational capital allocation and act as pie shrinkers.
In Berkshire the situation is different. Depending on the size of the transaction, the difference between proceeds received by the seller of Berkshire and cost to the buyer may range downward from 4% to perhaps 1½%. Because most Berkshire shares are traded in fairly large transactions, the spread on all trading probably does not average more than 2%.
At Berkshire, it is considered that splitting the stock would increase the cost, downgrade the quality of shareholder population, and encourage a market price less consistently related to intrinsic business value.
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