If you're thinking about jumping into Berkshire Hathaway Inc.'s B-shares as they wait to join the S&P 500 after the market close on Friday, you're probably not alone. Since the 50-to-1 share split was announced in January, which made the Warren Buffett investment vehicle a lot easier for small investors to jump on, the shares have risen some 18 per cent on expectations that demand is about to spike.
However, Jon Ogg at 24/7 Wall Street highlights some of the potential pitfalls here, suggesting that waiting for an expected pullback might be the better strategy. He writes:
"Traders definitely trade ahead of and into huge index events. Some were saying that $14-billion(U.S.) of Berkshire Hathaway needed to be bought. It just needs to be remembered that an S&P analyst told me that he now sees more than one-third of the required buying happens ahead of the index change event, then there is buying the day of the event, and then a long tail of gradual buying by the funds for a week or two after the event. It is no longer that funds just wait and buy all at the close or the day of the index change.
"Berkshire Hathaway may continue to move on other news, but the big event has been telegraphed for over two weeks now and a 13 per cent run-up just for an index addition is considerable. That is during a bad stock market to boot. Profit taking may be seen today or it may come early next week. Either way, chances are that it will come."