Citigroup & Berkshire Anomalies

Summary: Both Citigroup and Berkshire Hathaway continue to violate the law of one price.

Citigroup

In previous posts (this is the most recent), I’ve pointed out that there are three ways you can purchase common shares of Citigroup:

Simple: Buy shares of common stock.

Preferred: Buy shares of preferred stock that will convert into common.

Synthetic: Use call and put options to replicate the financial returns of owning common stock.

In a perfect world, these three approaches would give nearly identical prices. That’s the law of one price.

Over the past few months, however, Citi securities have been breaking that law. Investors who have been buying common shares have been significantly overpaying relative to the values implied by the prices of the preferred stock and options.

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The Berkshire Anomaly

Readers seemed to enjoy my post about anomalies in the pricing of Citigroup securities, so I thought it would be fun to look at another anomaly, this time in the shares of Berkshire Hathaway, Warren Buffett’s famous company.

This pricing anomaly is small compared to the Citigroup one.  But it does raises some interesting questions about how well the markets are functioning (and, who knows, maybe someone can profit from it).

The root of the anomaly is that Berkshire Hathaway has two classes of shares: A and B.

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