What would happen if one day Warren Buffett decides he is done with the stock market and would much rather spend his days watching reruns of Friends.
If his entire stock market fortune is liquidated what would happen? $70 billion or so coming out of the market. Where would the money come from?
$70B is a drop in the bucket in the world of economics but its still a very large number, would it cause any sort of fallout?
The trick is that $70 billion wouldn’t be coming out of the market. For every seller of a stock, there has to be a buyer, too. You can’t just cash in your stock like poker chips. So the money comes from the people who buy some of Buffet’s stock.
It would prompt a sell-off, though, because brokers are like a herd of gazelle; when they see someone else running, they run first and ask questions later.
It wouldn’t come from anywhere, because if anyone tried to liquidate $70 billion in Berkshire shares, the price would crash. You don’t sell shares to an invisible bucket of infinite money, although it may seem like that. The purpose of a stock exchange is to match buyers to sellers. Nobody wants to buy $70 billion in Berkshire. (At least, not without some time to prepare for it.) If Warren tried to sell it, he’d sell a few shares at the current price, then once those buyers are satisfied, the only way to sell more shares would be to lower the price, at which point a few more people will buy some, and so on, until the price is very low.
Other Berkshire shareholders would not be amused by this maneuver.
It would depend on how skillfully his traders were able to manage the massive amounts of stock they would need to sell. There is an entire industry based around how to move large amounts of money into and out of the stock market while minimizing price impact. If they blindly sold into the market with no sensitivity to price or liquidity available, BRK-A would tank. However, they wouldn’t do that. They would contact institutional trading desks and “shop” blocks of stock with the hope that they could find large counter-parties willing to transact in the $10 million+ range. Though that information would inevitably leak and the stock would also trade down in the secondary market. Eventually demand and supply would agree on a price and the stock would stabilize. Though, there would undoubtedly be concerns about the health of Berkshire and about why exactly Mr. Buffett wanted to get out. That would also weigh on the price.
As far as where the money would come from - other people, just like any other stock sale. Though, a $70 billion portfolio on paper is very different from actually realizing sale proceeds of $70 billion.
Most traders would look at the average daily volume for any given security for the last 30-60 days and then only trade about 10-15% of that daily volume in any given day. This would normally not have an impact upon the market price of the security. It will also tell you how long it will take you to exit your position.
This, Bill Gates for example is worth over $60bn, at one point he was just over $100bn and for much of his time as a billionaire the majority of his assets were tied up in MSFT stock. But when he retired in 2008 (or was it 2007?), he started a process whereby he was selling off large blocks of MSFT stock at pre-set, regular intervals. Right now he has $12-13bn in MSFT shares, and I believe his automatic sell off continues until it is even substantially smaller.
The reason it was done this way was to both avoid tanking the stock price, and also by announcing it so far in advance investors aren’t going to react with panic every time they see Gates sell a new block of shares. They’ll know it isn’t based on some knowledge or opinion he has about the future of MSFT, but is instead just part of his pre-planned sell-off after his retirement.
Given Buffett’s age I doubt he ever plans to exit Berkshire in this way. Doesn’t the lion’s share of his Berkshire holdings go to a foundation when he dies?
Yes, Warren Buffett pledged the majority of his fortune to the Bill and Melinda Gates Foundation.
Just a quibble, which doesn’t refute your point:
BRK-A would always be valued at (roughly) at least the value of its holdings. It’s currently valued at considerably more than its holdings, because investors would rather let Warren do the stock picking, and are paying a hefty premium for that. (You could do nearly as well as BRK by simply keeping your portfolio to match BRK’s top 10 or 20 stocks, although you’d suffer a bit from not making the adjustment trades at the ideal times.)
For BRK to tank, the companies it holds would also have to tank, or else the management of BRK would need to be seen to be buying junk.
Buffett wouldn’t do it, but if he did put all his shares up for sale with no limit, for a while there’d be a lot more supply than demand for shares of companies held by BRK. That might incite some scare-selling. But as soon as people figured out what’s going on, I bet we’d see people start snapping up undervalued shares, which would establish a bottom.
The total US trading dollar volume is about $100B/day. Nearly doubling that in one day would have an enormous impact, but my guess is that it wouldn’t topple the market, unless the reason for selling all his shares was the scary part.
(Of course, the trading volume wouldn’t go up by $70B, since shares would be selling at a dramatically lower price, and it’d take more than a day.)
I don’t think it is possible to come even close to what BRK owns - Buffett tends to take companies and turn them into private subsidiaries and keep existing management and culture in place - so there are no public shares for you to buy.
IE, see all the 100%'s here: