What it is:
A Baby Berkshire is a Class B share of Berkshire Hathaway (NYSE: BRK-B). The term also refers to the act of creating a portfolio of the same companies that Berkshire Hathaway invests in and then buying and selling proportionately when Berkshire Hathaway buys and sells.
How it works (Example):
Berkshire Hathaway is a publicly traded investment company headed by the world famous investor, Warren Buffett. The company has two classes of shares: the A class, which has never split and thus typically costs well over $100,000 per share, and the B class, which are each equal to a small fraction (about 1/30) of one Class A share.
The Class B shares are much less expensive because after Berkshire Hathaway acquired Burlington Northern Santa Fe, it split its Class B shares 50:1.
Why it Matters:
Investing in Baby Berkshires is a way to obtain shares of a legendary company without having to come up with hundreds of thousands of dollars of capital. It is also a way to indirectly purchase a basket of shares of ownership in other companies. The accessibility also lends a liquidity advantage to Baby Berkshires, as more people are able to buy and sell the shares (which is precisely why the Class B shares became part of the S&P 500 index in early 2010).