One Reason for the Berkshire Arbitrage

Why are Berkshire Hathaway's B shares still selling at a substantial discount? The answer might have something to do with the Gates Foundation, which is in the middle of a three-year plan to liquidate most of the shares it owned last year.

When Warren Buffett decided to donate most of his shareholding in Berkshire Hathaway to the Gates Foundation, he didn't want to give the foundation control of his company. So before giving away his voting stock, he first splits it into B shares, which carry many fewer voting rights. He has also told the Gates Foundation that he wants his entire annual donation of stock spent every year, rather than just getting added to the Foundation's endowment.

As a result, the number of B shares in circulation is constantly rising, as Buffett converts his A shares, and the Gates Foundation is a more-or-less permanent seller of the B shares. It's easy to see how the price of the B shares will be depressed as a result, especially when the holders of A shares are generally extremely long-term investors with no desire to sell at all. As a result, it could be a very long time indeed before this arbitrage is closed.

(Thanks to John Hempton for pointing this out to me.)