Berkshire Added to the S&P 500

No, you’re not reading a really old post, I know it’s been over a decade since Berkshire was added to the S&P 500. But I recently listened to the 1999 Berkshire Annual Meeting, and a question came up about Berkshire being added.

At the time, Berkshire was the largest listed company NOT to be listed in the S&P 500. Buffett mentioned that one could probably short companies that get added to the index and do well, because index funds temporarily raise demand for newly listed companies. He said they wouldn’t mind being included, but had worries that it would raise the stock price too high. He mentioned two ways of avoiding it:

  1. Have Berkshire issue like 100,000 more A shares when the stock gets added to the index. He said they wouldn’t want to issue 1 more share, much less 100,000 shares.

  2. The index could gradually add Berkshire in by gradually increasing its weighing instead of keeping the market cap weight for it.

  3. They could just not add it.

Since then the S&P 500 has added Berkshire, and I don’t remember it having a huge impact on the stock price. I think the effect was reduced somewhat because Berkshire bought an S&P 500 component at the same time, allowing the index fund companies to convert BNSF shares into BRK shares, but there should have still been a large demand for shares. So what happened? Did I just miss a large runup?

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I was working at a bank’s index trading desk when this happened.
Because Brk is being added, the demand from index tracker funds pushed the stock up by something like 10%.

Because Brk is issuing stocks to buy BNSF at the effective date of the inclusion, Brk effectively lowered its cost by 10%.

I remembered the trader was saying WEB is showing how smart he is. He is fully aware that Brk is going to be included to SPX because of the new Brkb shares