1996: Will class-B shares effectively discourage unit trusts?

AUDIENCE MEMBER: My name is David Hendel (PH). I’m from Boca Raton, Florida.

To your knowledge, will this program effectively discourage the unit trusts?

WARREN BUFFETT: Well, it’s certainly designed to. And I think the answer to that is yes, because I see no way that a unit trust — either in connection with the initial offering or with the subsequent trading — I see no way that the unit trust could offer people as an efficient and inexpensive way of participating in Berkshire as direct purchase of the B.

Bear in mind, if a unit trust were established, it would have to buy Berkshire shares in the market. So, it would have the costs that people have in buying shares. And, then, on top of it, it would superimpose these other costs. And in addition to the initial commission, they even had a valuation fee.

That was a job I wanted to have because every — (laughter) — three months or however often, maybe every day, somebody, their job was to evaluate this trust value which involved the great skill of being able to locate it alphabetically — (laughter) — in the newspaper.

The figure was left blank as to what the evaluator’s fee would be. But I had a feeling that it was one of the more cushy jobs available. (Laughter)

There was an added problem, too. I mean, if these unit trusts started and did not get off the ground very far, they could’ve become something in the way of orphans. And they certainly would’ve become expensive to operate.

And, then, with Berkshire paying nothing in the way of dividends, but with the trust incurring expenses, including this evaluator’s fee, among others — but with the trust incurring expenses, they would have to sell small amounts periodically to pay the expenses. And that would create tax consequences for every unit trust holder.

I mean, people would not know what — we felt they would not know what they were getting into.

The more serious problem is that somebody would flash our past record in front of them or show them some chart on Berkshire’s stock price and say, “You know, this is your chance to do the same thing.” And it, obviously, isn’t — wouldn’t have been.

And — but based on what we have seen, right now, we anticipate the offering being 350,000 shares. But the extent to which the number of tickets involved, that even seeking out informed purchasers only, there’s very substantial demand.

So I think if you widen that circle to include uninformed, it might have been quite an experience.

I think the answer is that we will not have a problem with the unit trusts in the future.