Tread carefully with baby Berkshires

Do your homework before investing in the highly popular Berkshire Hathaway B shares.

By TheStreet Staff Feb 5, 2010 4:45PM

TheStreetWarren Buffett. Credit: (© Paul White/AP)By Don Dion, TheStreet


Warren Buffett broke his own rules when he split Berkshire Hathaway (BRK.A) shares to pay for the acquisition of Burlington Northern Santa Fe (BNI), but the move appears to have paid off.


Since the 50-for-1 split on Jan. 20, Berkshire Hathaway’s B Shares (BRK.B) has been on an upward trajectory as investors pile into the firm in hopes of gaining access to the mind of the savviest investor around.


From the day of the split to Feb. 3, the company’s B shares have jumped more than 6%, while the S&P has dipped more than 3%. Class A Berkshire shares have gained throughout the period, jumping 7%.


Aside from the strong returns, the reduced price of the baby Berkshires has led to a staggering increase in volume. Prior to the division, high prices have kept B-share volume light.


Bing: More on Warren Buffett


However, on Jan. 20, the day of the split, the B shares’ volume jumped to over 1.2 million shares, more than double of the previous day. At one point since the split, the single-day volume nearly reached 2 million shares. This popularity is expected to continue after the S&P 500 adds the stock to the index.


With prices still within the reach of the average investor, it may be time to consider adding Berkshire B Shares as a small position in a well diversified portfolio. Time is of the essence, however, because of the popularity of the stock and the fact that Buffett has said that no additional B share would be issued in the future.


Before jumping in, investors need to do their homework.


Though it will soon find its place in the S&P 500, Berkshire Hathaway is considerably different from the many of its peers. When buying the B shares, you are not buying a single entity. Rather, holding Berkshire is akin to holding a basket of companies Buffett has taken bets on during his impressive investing tenure. Therefore, as in the case with ETFs and mutual funds, investors need to be aware of the companies they are getting into.


Looking at Buffett's most recent holdings report, it quickly becomes apparent that the company has a huge percentage of its portfolio dedicated to its top two holdings: Coca-Cola (KO) and Wells Fargo (WFC). More than a third of Berkshire Hathaway's portfolio is dedicated solely to these two companies.


As with other financial instruments with top-heavy weighting, investors are particularly vulnerable to any violent market swings. If either of these top companies takes a considerable hit, there could be a gut-wrenching drop.


This risk is further multiplied if, on top of owning Berkshire Hathaway, investors already hold large positions in these heavily weighted firms via their common stocks.


Additionally, investors need to be aware that Berkshire Hathaway is not a static company. On the contrary, over the course of holding shares of Buffett's firm, there is a good chance that underlying positions will shift, holdings will be dropped and new positions will be added. As a result, investors need to be prepared for any impact these changes may have on the company's stock value.


Though Buffett has proven his investing excellence time and again, playing Berkshire Hathaway should not be a passive process. Rather, to avoid the risks that can come with holding a dynamic play like B shares, investors need to keep a watchful eye on not just their BRK.B positions, but their entire portfolios.


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