What Is Baby Berkshire and How Does It Work?

Berkshire Hathaway is one of the most well-known companies in the stock market, but its high share price has made it inaccessible for many investors. To address this, Berkshire introduced a more affordable option known as “Baby Berkshire,” referring to its Class B shares.

This alternative allows a broader range of investors to gain exposure to Berkshire’s portfolio without needing significant capital. However, there are key differences between these shares and the company’s original Class A stock that investors should understand.

Class B Stock Classification

Berkshire Hathaway’s Class B shares were introduced in 1996 to provide a more accessible entry point for investors. Unlike Class A shares, which have never split and trade at a significantly higher price, Class B shares were designed to be more attainable while still offering exposure to the company’s performance. Initially, each Class B share represented 1/30th of a Class A share, but after a 50-for-1 stock split in 2010, this ratio changed to 1/1,500th. The split facilitated Berkshire’s acquisition of Burlington Northern Santa Fe, allowing shareholders of the railroad company to receive Berkshire stock in exchange for their shares.

Both classes are backed by the same underlying assets, benefiting from Berkshire’s diverse portfolio of businesses and investments. However, Class B shares have limitations, particularly in conversion rights. While Class A shares can be converted into Class B shares at a 1-to-1,500 ratio, the reverse is not possible, preventing arbitrage opportunities that could disrupt pricing.

Share Price and Liquidity

Berkshire Hathaway’s Class B shares trade at a significantly lower price than Class A shares, making them more accessible to a wider range of investors. This affordability has contributed to higher trading volumes, resulting in greater liquidity—the ease with which a stock can be bought or sold without significantly affecting its price. Stocks with higher liquidity tend to have narrower bid-ask spreads, allowing investors to enter and exit positions with minimal price slippage.

The trading volume of Class B shares is consistently higher than that of Class A shares, largely due to affordability and inclusion in major indices such as the S&P 500. Funds tracking the S&P 500 must hold Class B shares, further increasing demand and trading activity. This liquidity benefits investors by reducing the likelihood of price manipulation and ensuring large buy or sell orders do not drastically impact market value.

Voting Rights Considerations

Investors in Berkshire Hathaway’s Class B shares receive significantly fewer voting rights compared to Class A shareholders. Each Class A share carries one vote, while a Class B share holds only 1/10,000th of a vote. This structure keeps control concentrated among long-term stakeholders, particularly Warren Buffett and key executives, who primarily hold Class A shares.

This arrangement ensures strategic decision-making stability, preventing short-term investors from influencing corporate governance. Unlike companies where activist investors can acquire substantial voting stakes to push for changes, Berkshire’s system minimizes external pressure. As a result, management can focus on long-term value creation rather than reacting to market demands.

For retail investors, the limited voting power of Class B shares means little influence over board elections, executive compensation, and major acquisitions. While some companies offer dual-class structures with voting benefits for smaller shareholders, Berkshire prioritizes stability over broad shareholder influence. This model aligns with Buffett’s philosophy of minimizing speculation and maintaining consistent leadership.

Dividend Preferences

Berkshire Hathaway does not pay dividends on either its Class A or Class B shares. Instead, the company reinvests earnings into its operating businesses and equity investments, a strategy that has historically delivered substantial long-term returns. Warren Buffett argues that retained earnings generate higher shareholder value than cash distributions.

This philosophy is evident in Berkshire’s capital allocation, which prioritizes acquiring undervalued companies, expanding subsidiaries, and repurchasing shares when prices fall below intrinsic value. While some investors prefer dividend-paying stocks for passive income, Berkshire shareholders rely on capital appreciation.

The absence of dividends also has tax implications. Under the U.S. tax code, qualified dividends are taxed at a maximum rate of 20% for high-income individuals, while long-term capital gains are subject to a similar rate. However, shareholders who do not sell their Berkshire stock can defer capital gains taxes indefinitely, allowing wealth to compound without annual tax liabilities. This tax efficiency benefits long-term investors and institutional funds managing large portfolios.

Financial Statements and Filings

Berkshire Hathaway’s financial disclosures provide a comprehensive view of the company’s performance, but analyzing them requires an understanding of its reporting structure. Unlike many publicly traded firms that focus on quarterly earnings guidance, Berkshire emphasizes intrinsic value over short-term profitability.

The company’s financial statements, filed with the Securities and Exchange Commission (SEC), include its 10-K annual reports and 10-Q quarterly filings, detailing revenue, operating income, investment gains and losses, and changes in book value. Berkshire’s reports cover both its wholly owned subsidiaries and extensive stock portfolio. The company owns businesses across various industries, from insurance and energy to manufacturing and retail, generating significant cash flow. Additionally, its equity holdings in companies such as Apple, Coca-Cola, and American Express contribute to reported earnings through unrealized gains and losses.

Due to accounting rules under ASC 321, changes in the fair value of these investments are reflected in net income, leading to volatility in reported earnings. Investors often focus on operating earnings, which exclude market fluctuations in stock holdings, to assess Berkshire’s core business performance.