Question

Summarize two topics you found to be most noteworthy in this reading. Must be in own words.

Buffet Essays

A. The Bane of Trading: Transaction Costs28
It is likely that in a few months Berkshire shares will be traded on the New York Stock Exchange. Our move there would be made possible by a new listing rule that the Exchange's Board of Governors has passed and asked the SEC to approve. If that approval is forthcoming, we expect to apply for a listing, which we believe will be granted. Up to now, the Exchange has required newly-listed companies to have a minimum of 2,000 shareholders who each own 100 shares or more. The purpose of this rule is to insure that NYSE-listed companies enjoy the broad investor interest that facilitates an orderly market. The 100-share standard corresponds to the trading unit ("round lot") for all common stocks now listed on the Exchange. Because [in 1988] Berkshire ha[d] relatively few shares outstanding (1,146,642), it [did] not have the number of 100-shares-ormore holders that the Exchange has required. A ten-share holding of Berkshire, however, represents a significant investment commitment. In fact, ten Berkshire shares have a value greater than that of 100 shares of any NYSE-listed stock. The Exchange, therefore, is willing to have Berkshire shares trade in ten-share "round lots." The Exchange's proposed rule simply changes the 2,000 shareholder minimum from one measured by holders of 100 shares or more to one measured by holders of a round lot or more. Berkshire can easily meet this amended test. Charlie Munger, Berkshire's Vice Chairman, and I are delighted at the prospect of listing, since we believe this move will benefit our shareholders. We have two criteria by which we judge what marketplace would be best for Berkshire stock. First, we hope for the stock to consistently trade at a price rationally related to its intrinsic business value. If it does, the investment result achieved by each shareholder will approximate Berkshire's business result during his period of ownership. Such an outcome is far from automatic. Many stocks swing
between levels of severe undervaluation and overvaluation. When this happens, owners are rewarded or penalized in a manner wildly at variance with how the business has performed during their period of ownership. We want to avoid such capricious results. Our goal is to have our shareholder-partners profit from the achievements of the business rather than from the foolish behavior of their co-owners.
Consistently rational prices are produced by rational owners, both current and prospective. All of our policies and communications are designed to attract the business-oriented long-term owner and to filter out possible buyers whose focus is short-term and market-oriented. To date we have been successful in this attempt, and Berkshire shares have consistently sold in an unusually narrow range around intrinsic business value. We do not believe that a NYSE listing will improve or diminish Berkshire's prospects for consistently selling at an appropriate price; the quality of our shareholders will produce a good result whatever the marketplace. But we do believe that the listing will reduce transaction costs for Berkshire's shareholders-and that is important. Though we want to attract shareholders who will stay around for a long time, we also want to minimize the costs incurred by shareholders when they enter or exit. In the long run, the aggregate pre-tax rewards to our owners will equal the business gains achieved by the company less the transaction costs imposed by the marketplace-that is, commissions charged by brokers plus the net realized spreads of market-makers. Overall, we believe these transaction costs will be reduced materially by a NYSE listing.
[T]ransaction costs are very heavy for active stocks, often mounting to 10% or more of the earnings of a public company. In effect, these costs act as a hefty tax on owners, albeit one based on individual decisions to "change chairs" and one that is paid to the financial community rather than to Washington. Our policies and your investment attitude have reduced this "tax" on Berkshire owners to what we believe is the lowest level among large public companies. A NYSE listing should further reduce this cost for Berkshire's owners by narrowing the market-maker's spread. Under NYSE rules we must have at least two independent directors. Among the Board of Directors you elected in May, only Malcolm Chace, JI. meets their test of independence. But from this deficiency comes a good result. Charlie and I are pleased to inform you that Walter Scott, Jr., CEO of the Peter Kiewit Sons', Inc. has joined the Berkshire board. PKS is one of the remarkable business stories of our time. The company, which is employee-owned, has a long-term financial record so good that I'm not going to recite it for fear of stirring unrest among our shareholders. Throughout his lifetime, Pete Kiewit ran the company as a strict meritocracy and it was in this tradition that he picked Walter to succeed him upon his death. Walter instinctively thinks like an owner and he will feel at home on the Berkshire
board.
One final comment: You should clearly understand that we are not seeking a NYSE listing for the purpose of achieving a higher valuation on Berkshire shares. Berkshire should sell, and we hope will sell, on the NYSE at prices similar to those it would have commanded in the over-the-counter market, given similar economic circumstances. The NYSE listing should not induce you to buy or sell; it simply should cut your costs somewhat should you decide to do either.

Answer 1

Answer:

The essay is a commentary from legendary investor, Warren Buffet about listing the Berkshire stock on NYSE.

Among many, following are the two topics I found most noteworthy in this reading.

1] Stocks to trade at Intrinsic Value

Ideally, the stocks should trade at their intrinsic business value which is determined by how well the underlying businesses are performing. Stock value should be independent of the platform/markets it is trading on say NYSE or OTC market. The markets to facilitate trade and reduce transaction costs however, they do not influence the businesses operations and hence cannot influence the stock prices.

2] Stock markets have lower transaction cost as compared to OTC market

A part of the transaction cost is induced by the bid-ask spread for a share. It acts as a hefty tax on the investors who like to trade actively in the stocks. A listing on the stock market is expected to narrow the market makers spread as against the spread observed in the OTC market. Thus, it will help in reducing the transaction cost for investors. Also, I note that the essay discourages active trading in the stocks.

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