Warren Buffett’s Well Worked Will

Summary

  • A flood of BRK shares to the market would put downward pressure on price.
  • Buffett’s donation program is spread out over time ensuring liquidity to the market is smoothed over time.
  • Buffett has been donating shares since 2007, so there should be no abrupt change in shares entering the market over time due to donations.

As a Berkshire Hathaway shareholder, my top concern is for the future of the company after Warren Buffett’s time. While the greatest loss to Berkshire will undoubtedly be Mr. Buffett’s business acumen, there is also the question of how the distribution of Berkshire shares in his will would affect the supply and demand – and hence the price – of Berkshire shares in the market. Fortunately, Mr. Buffett has thought through this issue carefully and, I believe, largely mitigated associated risks by i) spreading out the donation of shares over time and ii) gradually reducing the amount of shares donated each year so that the dollar value of shares entering the market via share sales by foundations is somewhat stabilised.

Background on Mr. Buffett’s donation structure

In 2006, Mr. Buffett announced that the vast majority of his shares in Berkshire would be donated to five foundations. The announced donation amounts, expressed as BRK.A shares, were as follows:

Recipient | Announcement Date >20062012Total
Bill and Melinda Gates Foundation333,333333,333
Susan Thompson Buffett Foundation33,33333,333
Howard G. Buffett Foundation11,6668,14719,813
The Sherwood Foundation (formerly Susan A. Buffett Foundation)11,6668,14719,813
NoVo Foundation (Peter A. Buffett)11,6668,14719,813
Total BRK.A Shares401,66424,441426,105

As per the above table, Mr. Buffett committed to donating the equivalent of approximately 426,105 of his A shares to these charities. In total, Mr. Buffett originally owned 474,998 BRK.A shares, meaning that about 90% of his Berkshire shares will be donated to these organisations.

Warren Buffett’s donation strategy

US charities by their nature are required (subject to certain allowances) to spend funds they receive within a relatively short space of time after receiving donations. Had Mr. Buffett decided to make the above donations in one fell swoop, that would have resulted in a huge surge of shares becoming available on the market. As an illustrative example: Considering the July 31st 2020 closing BRK.A price of about $300k per share, there would be about $128B of liquidity entering the market at once.

To avoid this issue, Mr. Buffett has spread out the donation of shares as follows:

  1. For many decades, Mr. Buffett pledge not to make any donations until the settlement of his estate. In 2006, he announced a change of course and started donating shares in 2007. By steadily donating shares through the rest of his life and then beyond, the potential for a sudden inflection point upon his passing was removed.
  2. The shares listed in the above table have been donated at a rate of 5% per year since the year following each announcement. Importantly, donations are made at the rate of 5% of the remaining balance after the previous year’s donation – not 5% of the originally pledged amount. This ensures that – while the stock price grows on average – the number of stocks donated per year falls. The result is that the dollar value of donations per year is somewhat stabilised – smoothening liquidity  which means that liquidity to the market is tempered, and, donations received per year by the charities too.

As of July 2020, Mr. Buffett has already donated 248,734 BRK.A shares – constituting just over half of his original stake. The donation of the rest of his shares will occur smoothly over time as per the plan described above. For further context, the amounts of shares being donated per year (about $2B per year in market value as of July 2020) are reasonable relative to the overall market capitalisation of the business (~$475B as of July 31st 2020) and relative to the total amount of shares being bought back by Berkshire Hathaway itself (on the order of single billions of dollars per year in recent years), which serves as one source of demand to mop up the supply of foundations selling.

Rest assured, Mr. Buffett has well planned the distribution of his shares to charities before and after his time.

Notes & Materials:

Buffett originally made a pledge measured in 2006 B shares, when 30 B shares were equal to 1 A share. Subsequently, B shares were split 50:1, resulting in a B to A relationship of 1,500:1 .

Spreadsheet formulated using Berkshire Hathaway information: BRK_donation_schedule.xlsx

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Published by Ronan McGovern

CEO at Sandymount Technologies

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