How rational is the market? Not very, based on the first day of trading for the so-called baby B shares of Warren Buffett’s Berkshire Hathaway Inc. The shares got off to a steaming start on Thursday, up nearly 4% in the early going.
This is not the way the market is supposed to work. Finance professors and finance textbooks have taught for years that the market is an efficient calculator of value. The market, according to every Finance 100 course, is far too smart to be swayed by a mere repackaging.
Yet that is what has happened here. All that Buffett has done is to split each of his company’s B shares into 50 smaller B shares. (The split was required as part of his deal to acquire Burlington Northern Santa Fe Corp.) The move makes the shares more affordable to small investors, because the B shares used to trade for more than US$3,000 each. But it doesn’t affect the fundamental value of what you get for each dollar you invest.
The surge in the baby B shares isn’t the only evidence that Mr. Market can get giddy for no good reason. Consider the shares of the old bankrupt General Motors, which now trade over the counter under the label of Motors Liquidation Co.
The restructured General Motors Co., which is now a private company largely owned by the U.S. and Canadian governments, has warned several times that the shares of Motors Liquidation are worthless. The shares continue to trade, though, and have actually had a nice run up in recent weeks.
The total amount invested in the worthless shell is staggering. Motors Liquidation, which holds properties abandoned by GM during the restructuring process, continues to have a market capitalization of more than US$300 million, despite the certainty that its liabilities far exceed its assets.
Maybe it’s time to rewrite the finance textbooks.
Freelance business journalist Ian McGugan blogs for the Financial Post