Warren Buffett's Berkshire Hathaway (BRK) is a big, well-run, well-diversified company. Its stock price is up 90% since early 2000. Its shareholders love it. But for all Berkshire's merits, the company almost certainly will never rub shoulders with General Electric (GE) and Exxon Mobil (XOM) in the exclusive club known as the Dow Jones industrial average. Why not? Take a look at the chart below and you'll see.
The problem is that the Dow Jones industrial average is price-weighted, which means that its daily movements are influenced more by high-priced stocks, like IBM (IBM), than by low-priced stocks, like Intel (INTC). And Berkshire Hathaway is the undisputed world champion of high-priced stocks. While IBM looks pricey at around $84 a share, Berkshire goes for $99,310 a share—and recently hit an intraday high of over $100,000.
THE "BERKSHIRE DOW."
The chart shows what would have happened to the Dow industrials if Berkshire had been added as the 31st member back on Jan. 14, 2000, when the Dow hit its previous peak of 11,722.98. (We changed the index's divisor so the "Berkshire Dow" started from the same point as the real Dow.) The addition of Berkshire, because of its heavy weighting in the Dow and its strong performance since then, would have lifted the Dow industrials to 21,919 through Oct. 11—more than 10,000 points higher than its actual level today.
This, of course, is strictly fiction. John A. Prestbo, executive director of Dow Jones & Co.'s Dow Jones Indexes (DJ), says that if Berkshire Hathaway were to replace some other company in the Dow industrials, "That one stock would dominate the entire index. It would be a one-stock index. That would get us a lot of criticism."
Prestbo acknowledges that the Dow's higher-priced stocks carry more weight than lower-priced ones, but he says that since Dow members tend to be priced between $20 and $100, a relatively narrow range, price-weighting doesn't seriously distort the Index's performance.
Next question: Why are Berkshire shares so expensive? It's not because the company is highly valuable. After all, plenty of companies are even more valuable but have lower-priced shares. The reason is that Buffett refuses to split Berkshire shares—that is, to issue shareholders, say, 1,000 shares worth $100 apiece in place of one worth $100,000.
Buffett says he likes the stock price to be high because it makes trading difficult and encourages long-term holdings. Here's what he wrote in a 1983 letter to shareholders:
"We want [shareholders] who think of themselves as business owners and invest in companies with the intention of staying a long time…. Were we to split the stock or take other actions focusing on stock price rather than business value, we would attract an entering class of buyers inferior to the exiting class of sellers."
When Buffett wrote that, Berkshire was around $10,000 a share. And he's sticking to his message now, with the stock nearly 10 times as high—telling Charlie Rose of PBS earlier this year that "we don't want to encourage the kind of buyer who is excited by stock splits."
Buffett has certainly achieved that goal. Berkshire's shareholders, far from demanding more trading liquidity, are happy to worship uncomplainingly at the feet of the Oracle of Omaha. Which is fine. Just don't expect to see Berkshire in the Dow industrials.