The Gift

This week Warren Buffett released a letter on his philanthropic efforts.

Warren gave away Berkshire Hathaway shares worth over $1 billion ($1,158,464,000 to be exact). He did it by converting 1600 class A shares into class B shares and donating them to four family foundations.

Warren now holds 206,363 class A shares (worth $149 billion). This is a 56.6% decrease in his share ownership since he pledged to give his wealth away in 2006.

In 2004, Buffett and his late wife Susie owned 508,998 shares. If those shares were still held, they would be worth $368 billion. That would have made Buffett the wealthiest person in the world by far.

Multiple share classes

Allow me to explain the multiple share classes by departing from the letter for a moment.

Berkshire Hathaway has two classes of shares, class A shares and class B shares. The class A shares trade at $724,040 per share. The class B shares trade at a much more reasonable $483 per share.

The class B share is worth 1/1500 of a class A share. So, if Berkshire ever pays a dividend of $1500 per class A share, the class B shareholders will get $1 per share. That’s how the economic benefit works.

However, the voting benefit is different. The class A share has much more voting power than the class B share. Thereanent, the class B share has 1/10,000 of the voting rights of a class A share.

Finally, class A shares can be converted to class B shares, but not the other way around. Converting from class A to class B is a one-way street.

Why multiple share classes?

When shares become too highly priced, it can reduce the liquidity in the share (i.e. the number of shares traded in the market) and it can become unaffordable to smaller investors.

Thereanent 😀 company’s usually do a stock split. For example a 10-for-1 stock split would give you 10 times more shares, but each would be worth 10 times less.

Buffett did not want to make the class A shares cheap through a stock split because he believes that the high price attracts long-term shareholders. However, people were considering starting unit trusts and mutual funds which would purchase class A shares and then sell lower priced “units” to their clients who wanted to own Berkshire but could not afford to do so.

Buffett knew they would charge clients a fee to own these small portions of Berkshire. To sidestep them, he created the class B share.

In 1996 the board introduced the class B share. At that time, it was worth 1/30 of a class A share. However, in 2010 the class B share underwent a 50-for-1 stock split, making it worth 1/1500 of the class A share.

Buffett’s philosophy on Inheritance

Back to the letter.

Buffett believes in leaving children "enough so they can do anything but not enough that they can do nothing." He emphasizes the importance of preparing children for managing wealth responsibly.

Quote: "These bequests reflected our belief that hugely wealthy parents should leave their children enough so they can do anything but not enough that they can do nothing."

Trust in his children and succession planning

Buffett expresses complete trust in his children (Susie Jr., Howie, and Peter) to manage his wealth and philanthropic endeavours.

He has designated three successor trustees, slightly younger than his children, to ensure continuity.

He hopes his children will distribute all his assets before the need for successor trustees arises.

Quote: "I know the three well and trust them completely."

Open communication and family involvement

Buffett encourages open communication about inheritance and philanthropic plans within families. He advises parents to discuss their wills with their children and be receptive to their input.

Quote: "When your children are mature, have them read your will before you sign it."

Reflections on wealth and opportunity

Buffett acknowledges the advantages he has enjoyed as a white male born in the United States. He mentions this not to bring a sexist or racial element to the discussion, but rather to point out that it gave him a favoured status. A status that would not be available to his sisters until many decades later. He expresses gratitude for his good fortune and the opportunity to distribute his wealth to those less fortunate.

Quote: “Things didn’t look great when I arrived at the beginning of The Great Depression. But the real action from compounding takes place in the final twenty years of a lifetime. By not stepping on any banana peels, I now remain in circulation at 94 with huge sums in savings – call these units of deferred consumption – that can be passed along to others who were given a very short straw at birth.”

Emphasis on values and humility

Buffett and his family believe in equal opportunity and reject ostentatious displays of wealth.

Quote: "Instead, we shared a view that equal opportunity should begin at birth and extreme “look-at-me” styles of living should be legal but not admirable."

Shared philosophy with Berkshire shareholders

Buffett notes that many early Berkshire shareholders share his philanthropic philosophy. These shareholders have also accumulated wealth through long-term compounding and are committed to giving back to society.

Quote: "It also has been a particular pleasure to me that so many early Berkshire shareholders have independently arrived at a similar view."

Conclusion

In Buffett’s letter, he talks about his philosophy on inheritance as well as the practical challenges of extreme wealth, along with a few solutions.

The letter is four pages long and well worth reading.

I commend it to you.

You can find it here.

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