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Do Stock Splits Matter?
A quick post on the age-old investing question
Stock splits happen when a company issues every shareholder a second share of stock. Every investor has double the shares, but each share is worth half the price. Stock splits are so unnecessary that they belong on a CVS receipt. Still, when they do occur the 24-hour financial news cycle reacts as if Mount Vesuvius has just re-erupted in Taylor Swift’s bathroom. Which is why people are constantly asking me: do stock splits matter? Here is my response.
Read my lips: stock splits don’t matter. They are not news. They are meaningless. They are the financial equivalent of the TSA. When a pea-brained pundit makes the argument that the stock price should increase because it will be “perceived as cheaper,” they should be vigorously spanked by the acting chair of the Federal Reserve. Stock splits are as useful to investors as a stork is to family planning. If you cut a dead cat in half, you still have one dead cat. Stock splits do not matter.
Having said that, stock splits totally matter. People, who tend to be generous in assessing their own intelligence and too stupid to appreciate other’s, assume no one else realizes the obvious fact that stock splits don’t matter. Therefore, investors buy a stock on the news of its split, hoping to capitalize on the reliable ignorance of their peers. The stock then rises. It’s a self-fulfilling prophecy, a moronic placebo effect. Everyone thinks everyone else has no sense and therefore the market, a reflection of everyone, becomes senseless.
The Alice in Wonderland logic at play here is maddening, but it reveals a key insight into the business world. Theory and reality are separate, occasionally overlapping systems. In a vacuum, everything is perfectly predictable. Stock splits don’t matter. In the theater of the real world, rational actors can unwittingly and unpredictably become monkeys slinging their crap across the room. Chaos ensues. Stock splits matter.