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So there are BRK.A and BRK.B. The face value of BRK.A is 1,500 times of that of BRK.B, and BRK.A has 10,000 times the voting rights of BRK.B. BRK.A is normally traded at about 1,500 times the price of BRK.B. My question is: why is the price proportional to the face value, not the amount of voting rights?

When you buy shares you get dividend rights and voting rights. But Berkshire Hathaway is famous for never paying dividends. So to my understanding, this means you are practically buying the voting rights alone, so I wonder why anyone would pay 1/1500th of the price to buy 1/10000th of the voting rights. What am I missing?

My question isn't why people buy shares without dividend. It's why the price is proportional to the nominal face value. Since the IPO of BRK.B, it's always been traded at more or less 1/1500th of the price (adjusted, of course because share splits) of class A. I also know that they will maybe pay dividends in the future, but it's not 100% definite, and even if it was, to me it sounds like the price has to be somewhere between 1/1500 (dividend rights) and 1/10000 (voting rights).

So for all this to make sense, I think the amount of the shares Berkshire Hathaway buys back depends on the current market status so that they are exactly proportional to the face value, precisely. If they from now on chose to buy back BRK.B, for example, 5% more (relatively), BRK.B will be traded at a more expensive price. Is this correct?

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  • Do you plan on actually voting if you had voting rights? I wouldn't. I trust BRK's board knows what's best for them, better than I do. To me, voting rights make no difference. I also don't have the $460,000 laying around to buy a full share.
    – dberm22
    Feb 24 at 12:49

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The fact that Berkshire Hathaway doesn't pay dividends now doesn't mean that it never will. At some point the management might decide that returning money to shareholders that way is more efficient than the alternatives.

Opinions vary about how much of the current market price of a share is determined by pure speculative activity/hype and how much is based on the future expected returns from the share, but certainly at least some buyers and sellers will be thinking about those returns.

For the most part, voting rights are essentially worthless. Yes, maybe some people would care about having them, but they only really matter if you're amassing a substantial enough stake to have influence on company management or to take over the company. Neither is particularly realistic with Berkshire given its size.

There have been several previous questions about valuing stocks and why stocks with no dividends have value, for example:

Even now, Berkshire Hathaway does return money to shareholders, via share buybacks, when it judges that the current market price is less than the intrinsic value per share. See for example https://www.berkshirehathaway.com/2021ar/2021ar.pdf :

Our final path to value creation is to repurchase Berkshire shares. Through that simple act, we increase your share of the many controlled and non-controlled businesses Berkshire owns. When the price/value equation is right, this path is the easiest and most certain way for us to increase your wealth. (Alongside the accretion of value to continuing shareholders, a couple of other parties gain: Repurchases are modestly beneficial to the seller of the repurchased shares and to society as well.)

Whether to make those repurchases will be assessed on the value of the economic interest in the company that the share represents (i.e. in proportion to the face value), not the voting rights.

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So to my understanding, this means you are practically buying the voting rights alone

Dividends and voting rights are not the primary economic determinants of equity value. The basis of the value of a stock is the percentage ownership of the company's net assets (equity). Dividends are one way (and a crude way at that) to assign economic value, but since they are discretionary and do not add economic value (they just transfer it from the company to the shareholder), they are not the main economic factor. For a stock that does not pay dividends, you are really paying for the right to a percentage of the company's assets, which eventually will be realized in a buyout, liquidation, or merger, or given back partially in the form of dividends or repurchases.

In BRK's case, their B shares "own" 1/1,500 of the amount of assets per share that the A series owns, so they are priced accordingly. If the company were bought out, the A shares would receive 1,500 times per share the amount that B shares would.

Imaging if a company was "worth" $3,000,000 (however you measure a company's worth), issued one A share and 1,500 B shares. The A share would be worth $1,500,000 and the B shares would be worth $1,000 each. A single B share has virtually no impact on the direction of the company, since the owner of the A share can basically do whatever they want. It's even worse for BRK.B since the B shares are given diluted voting rights.

Voting rights do not have any real economic value. They are only valuable if you can acquire enough to make a significant difference in the direction of the company.

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  • Then why are Samsung Electronics preferred shares not traded at a similar value to that of their common shares? They both have the same amount of ownership. So far I thought it was because of the lack of voting rights.
    – Jaeseop Ahn
    Feb 22 at 15:10
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    @JaeseopAhn Preferred shares trade differently because their economic rights are different. They typically only receive the dividend the share promises, not any extra when the company is doing well.
    – GS - Apologise to Monica ♦
    Feb 22 at 15:17
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    Preferred shares are different- they pay a required fixed dividend and are valued more like a bond than stock. They also have higher seniority than common stock in a liquidation (meaning they get paid before common shareholders get anything)
    – D Stanley
    Feb 22 at 15:18
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    Maybe there's a difference in traditions or laws in Korea but their preferred shares do not pay fixed dividends. They typically pay 1/100th of the face value more dividends than the common shares, each time. And yes they get paid before common shareholders, so everything taken together, their preferred shares should be traded at premium, shouldn't they? But they are about 10% cheaper.
    – Jaeseop Ahn
    Feb 22 at 15:29
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    @JaeseopAhn: That sounds like a new question. You should probably ask it as such.
    – Ilmari Karonen
    Feb 23 at 18:59
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What am I missing?

Arbitrage, and buybacks.

Class A shares can be converted into class B, so class B wouldn't trade at prices higher than class A, otherwise a arbitragem exists.

Class B shares cannot be converted into class A, but Berkshire Hathaway engages in share buybacks from time to time. Stocks in treasury don't "vote" so any share buybacks will act on the share class that is relatively cheaper, if any, closing the gap.

The same applies to any investor that can buy either class, but rationally cannot expect to accumulate any amount of meaningful voting power. For this investor, voting rights values at zero, so there is only financial consideration.

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    Is your final paragraph arguing that Berkshire Hathaway themselves would execute the arbitrage if appropriate? Can they issue unlimited BRK.A?
    – GS - Apologise to Monica ♦
    Feb 23 at 15:35
  • If they sell one from the treasury to buy back 1,500 BRK.B, that sounds like transferring money from Class A to Class B. It isn't a profit for the company. @gs-apologise-to-monica What I know is the total face value of BRK.A has always been the same as that of BRK.B.
    – Jaeseop Ahn
    Feb 23 at 16:52
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A share of stock is partial ownership of the company. Yes, that carries voting rights, but it also means you share in the company's financial success.

There are two ways that the latter manifests. Traditionally, you would get a portion of the net profits as dividends. But if the company reinvests profit in growing, that theoretically increases the value of your share by the same percentage, and this tends to be reflected in increased share price when you choose to sell.

In recent years many stockholders have been demanding that companies optimize share price rather than dividends, for a variety of reasons ranging from a monomaniacal focus on trading to tax efficiency to pure emotion. But the balance between the two has always varied from company to company, and may change over time.

It's up to you to decide whether any given company is likely to return enough total value, when both aspects are considered, to be worth investing in. The number of shares outstanding may or may not influence your decision.

(Personally I ignore that unless a serious takeover/merger attempt is underway. Then again I rarely invest in individual companies anyway, so I don't say this is good advice, just context for my answer.)

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