8 Comments
Apr 28, 2023Liked by The Rational Walk

I used to take advantage of the spreads in a similar fashion also using an IRA account. Several years ago my broker (Fidelity) stopped allowing the A shares to be bought/sold via computer. That is, a phone call was required. This slowed the process, so I opted to not participate due to the possibility that the price could move faster than I could respond. That is, it increased the odds that the spread could move against the trade.

What brokerage service do you use?

By the way, Mr. Buffett was the one who put the idea in my head. At some point after the creation of the A's and B's he made the comment that this could allow for an arbitrage opportunity.

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I used my Vanguard account. No problem doing this online. Good to know that fidelity restricts this. Not sure why they do so.

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Apr 28, 2023Liked by The Rational Walk

I was told by Fidelity that the A's were infrequently traded and therefore not eligible for computer trading. I never pushed back. As I recall, I used a broker for two different opportunities and then threw in the towel.

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Would you have to sell to covert from A to B? Could your broker handle since it’s allowed under the prospectus?

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Apr 28, 2023·edited Apr 28, 2023Author

A is convertible to 1500 Bs at any time. This is done by notifying your broker. The A ceases to exist and you get 1,500 B in exchange. There is no sale or any tax consequences.

But there are times when the Bs trade at a discount. Currently, the market price of one A is equivalent to 1,531.7 Bs.

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In your post you said “I sold the Class A share that I purchased in May 2022 for $468,114. Seconds after the sale of the Class A share, I purchased 1,500 Class B shares for $307.95 for a total of $461,925.”

Why did you sell and not just convert?

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That makes perfect sense. I couldn’t see the forest for the trees

Thanks!

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Apr 28, 2023·edited Apr 28, 2023Author

Because if I had converted the A, I would have received 1500 B shares. By selling the A and buying 1500 B, I had 1500 Bs plus $6,189 of cash.

When the B shares sell at a significant discount, as they do today, someone who has an A share has the option of selling it and purchasing 1,500 Bs and having cash left over. Or the A shareholder can sell the A and purchase more than 1,500 Bs.

For example, the A closed at $499,700 and the B closed at $326.23 yesterday.

Assuming transactions at the closing price, the A shareholder could convert to 1,500 Bs, but that would result in owning shares worth 1500 * 326.23 = 489,345.

Alternatively, the A shareholder could sell the A for $499,700 and buy 1,500 Bs for $489,345 and have $10,355 in cash left over.

Or the A shareholder could sell the A for $499,700 and buy 1,531 B shares for $499,458 and have $242 in cash left over.

In either case, from an economic standpoint (excluding tax consequences) the A shareholder is better off selling the A than converting to 1,500 B.

What the A shareholder loses is full voting power. Rather than having a full vote for the A share, he now has 1,500 Bs, each of which has only 1/10,000th of a vote. So the shareholder now has just 15% of the voting power that he had previously.

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