May 03, 2004


Warren Buffet is in the news again, over on the goldmember list, and no doubt countless thousands of lesser media [1]. At the annual shareholder meeting, the 10,000 or so shareholders turn up for what amounts to a great big party. As well as a meeting where the company actually talks to the shareholders.

"Vice Chairman Charles Munger and Buffett fielded questions from the crowd for about six hours about their investment philosophy, succession plans and reaction to criticism to Buffett's board seat on Coca-Cola Co. [2]"

What other company does that? Companies I know don't hold any shareholder meetings, let alone let them ask questions. Warren Buffet, is every investor's hero, and the founders of google recently wrote him up as their God, as well.

"Shares of Berkshire, which owns energy, aviation, paint and carpet companies, have increased 28 percent in the past year compared with a 19 percent gain for the Standard & Poor's 500 Index. The shares fell $110 to $93,390 in New York Stock Exchange composite trading on Friday. [3]"

Mr. Buffet never splits, and thus the price goes higher and higher and higher ... His motive here is quite simple. Buffet, the world's best investor, wants to exclude small shareholders from his register. This price is so high that not only can no ordinary investor afford even one of his shares, but most systems cannot quote a price in it. (Check the WSJ, it's not there, last I heard.)

He has basically excluded all of the hoi polloi. In marketing terms, this is called "price discrimination." He has chosen an educated base of shareholders, using the proxy of wealth, as the tool to select his shareholders. Quite valid stuff, albeit an unusual use of an old marketing tool.

Here's how we arbitrage it. To frustrate him, we (being Ivan, a potential issuer) would buy one Berkshire-Hathaway share. One will do for now, we can always pick up another later! This share we escrow in the normal fashion with a transfer agent.

Then, we designate our one share as reserves for an issue of Ricardian instruments. Instead of issuing one derivative share backed by the one real Berkshire-Hathaway share, we would issue 100,000 microshares. These instruments I call Bufflets, and their price would be more likely around ninety three cents.

Hey presto, we arbitrage the marketing. With our 100,000 Bufflets, even your 10 year old can afford to become an investor in Berkshire-Hathaway. Mind you, only one of us gets to go to the party every year, but that's maybe the subject of a shareholder's meeting yet to come.

[1] Warren Buffett joins Kerry campaign
[2] Buffett Says He Has Increased Bet Against U.S. Dollar (Update3)
[3] Ibid.

Posted by iang at May 3, 2004 02:57 PM | TrackBack

Warren Buffett has averaged over 20%/yr.

George Soros and Jim Rogers averaged over 30%/yr for the first 30/35 years of the life of the Quantum fund. I don't know how it has done since. A lot of his best traders/speculators that he employed gradually left him. Whether he found new talent to replace them, I don't know.


Posted by: Bob at May 3, 2004 06:09 PM

I recall reading a comparison of Soros and Buffett with respect to their annual returns and one issue was that Buffett has had worse tax exposure than Soros ever had, since Soros was operating out of a haven.

Posted by: David Crookes at May 4, 2004 02:44 PM

The other factor would be that Soros was more of a financial speculator, whereas Buffet is more of a corporate investor. The risks and returns are higher in speculation, so you would need to look at the volatility of the Quantum fund to see whether it indicates the higher returns.

Posted by: Iang at May 5, 2004 08:26 AM