Buffett Breaks the Markets. Literally.
Berkshire Hathaway tests the highest possible price point, makes Nasdaq change its rules.
These days, everything is going to the moon. Cryptos, NFTs, commodities, share prices. Common people like you and I might have failed to predict the unpredictability of today’s scenes. But what’s more bewildering, even Nasdaq (US equivalent of Bombay or National Stock Exchange) failed to predict and was underprepared for what came next.
Umm... so what happened? Read on.
May 6 2021. A day as good as any other day. Stock prices of Berkshire Hathaway stop broadcasting on Nasdaq.
Why Berkshire Hathaway? Did the company announce something earth-shattering? Did Warren Buffett(Chairman and CEO) or Charlie Munger(Vice-Chairman) retire?
Nothing of that sort happened. Just that it's share price shot up to such an extent that Nasdaq’s algorithm couldn’t capture it.
How did it happen?
You see, Nasdaq quotes prices on 32-bit integers (binary digits to represent numbers) that can reflect a maximum numerical figure of 4,294,967,295, but since Nasdaq represents price in four decimal points, it can reflect a maximum figure of 429,496.7295.
Yes, Berkshire crossed this figure on May 6, after having closed at $424,840 on May 5. It is trading at $435,431 (as we write), roughly equal to INR 3.17 crore per share!
Looks unreal, right? But, how did they get this far? Before we get to that, let’s throw some light on Nasdaq’s blunder first.
Nasdaq was well informed about the approaching storm. They could have updated their software to 64-bit, which would have avoided such an instance in the first place, but no, they stuck with 32-bit as it uses less memory. They lived in denial, hence they were ‘the devil to pay’.
Clearly, Berkshire Hathaway is no ordinary company. It’s a conglomerate of numerous companies from various industries that deal in diversified products and services. It’s not the diversification that makes it so special, it is the company’s famous duo: Warren Buffett and Charlie Munger. They are the best known fundamental investors of our times, who laid out the company’s success mantra.
Long-term investing.
The duo believes that to make a large sum of money, one needs to stay invested in the same stock for a long horizon instead of trying to time the market. Simply put, a good stock will always outperform the market in the long run.
And they expect to attract shareholders who resonate with their ethos. Someone who truly believes in what the company is doing. Here’s what Warren Buffett had to say way back in 1995:
I know that if we had something that it was a lot easier for anybody with $500 to buy, that we would get an awful lot of people buying it who didn’t have the faintest idea what they were doing.
But, expecting is one thing. How do they make sure that only those who are serious get to become shareholders of Berkshire Hathaway? Afterall, the shares are listed on stock exchanges and are free to trade.
Well, by ensuring there isn’t a share split. In the entire tenure of Buffett in Berkshire, it has never split its share. Split what?
Share-split means reducing the share price and increasing the number of shares in the market in the same proportion. So, if there are 100 shares of Rs. 200 each, the company can simply make 10,000 shares of Rs. 2 each. The only rule of the game is that the total value will remain the same, before and after the split. In our example, Rs. 20,000.
This way, the company’s shares become affordable, while keeping the total market capitalization unchanged. And well, affordability also attracts speculation (short-term investing, with the motive to sell the shares soon with profit/loss).
Now you understand why Berkshire’s shares never split?
But, along came another problem. Not for Berkshire, but NASDAQ.
Since most of the shareholders of Berkshire are long term investors, with high buying demand and low selling, its share price soared to the sky.
Well, Berkshire has another strange policy.
Invest in dividends but avoid paying it.
Berkshire is a cash-rich company.
Now you must be wondering, if they invest for the long term how come they have liquid cash?
Simple. By buying “dividend growth companies”.
These are companies that have consistently increased their dividend payouts over several years eg: Coca-Cola. Berkshire holds 400 million shares of Coca-Cola that would fetch the company around USD 672 million (Wow!) in dividends this year.
But, Berkshire is against laying out dividends, especially not under Buffett’s watch. According to him, the company should reinvest their earnings into itself. It makes sense because this will induce the company’s efficiency and thereby performance, and the shareholders will ultimately benefit from the share price’s performance.
The only time Berkshire issued dividends was way back in 1967 to which Buffett jokes that he must have been in the bathroom when it was authorised.
Well, Berkshire has clearly showcased that a company’s success cannot be solely defined by its financials, as the management’s vision, perception, and morale is as important as any other factor.
Now that Nasdaq has upgraded its system to 64-bit, it can display a maximum figure of approximately 1844 trillion! By now, we know that there is no upper limit for a share price to climb, but expecting it to reach this high could be excessively optimistic as it’s 4.28 bn times the current price for Berkshire.
Just saying. Anyway, take care, stay safe and… read on.
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Amazing
Wow!