Professional investors, the talking heads on television and the Internet, often deride stock splits. Paraphrasing their reviews of splits, I seem to hear something like, “Much Ado About Nothing.” It’s just a paperwork shuffle for the folks who manage billions of dollars for other people.
Reverse splits increase the price of a share while forward splits reduce the price of individual shares. Neither of the splits changes the total value of the investment you have at the time of the split. Companies decide to split their shares for a variety of reasons.
A forward split may come as the result of their share price getting so expensive, they decide that the smaller investors can’t afford to buy it. A 2 for 1 split cuts the share price in half. If you’re an owner you now have more pieces of the pie that you can either sell or, perhaps, buy more of.
A reverse split could be made for a variety of reasons. Only a few of them good. A reverse split should motivate the investor to look more closely at the company’s balance sheet.
Let’s look at stock splits from the viewpoint of a small, private, long-term investor. Hey! That’s my people! I have a friend who has been a small time, private investor for decades. I enjoy our discussions on a variety of topics including investing. He manages his investments with the long-term goal of enabling a reasonable lifestyle in retirement.
He says that he loves stock splits, especially back in the early years when he couldn’t afford to buy a large block of shares. Of course, that was before the revolutionary change brought to the stock market by Robinhood. Now you can buy fractions of shares, put them in dividend reinvestment and add to them as you can afford it. If you’re young and don’t think you have enough money to start investing hold off on the Starbucks for a month and invest that. Put it back in Starbucks shares if you’ve suffered withdrawal symptoms.
Back in my friend’s day, he had to buy a minimum of 100 shares of a stock before a broker would make the purchase for him. And that was after he came up with enough money to open an account to even get in the game. My pal tightened his lifestyle and saved his money until he had the funds to open a small investment account. Nowadays you can jump into Robinhood much, much easier.
My friend watched his first 100 shares of a company increase in value. However, his concern was that to get any money out of that investment, he had to sell the entire 100 share block. He was thrilled with his first, two for one, stock split. Now he had 200 shares of a company he’d spent a lot of time researching and was very happy to own. Even though the total value of the investment remained the same, he could now watch his 200 shares hopefully increase in value. Instantly he had choices: he could sell a portion of his investment and still be in a company that he liked, or at the new low price of the stock, he could afford to buy more. With dividend reinvestment and patience, over the years, he managed to build up a substantial number of shares in that company. Substantial by our standards. Not substantial by the standards of big-time money managers. We’re not trying to be masters of the universe here; we just want to make the retirement years comfortable for those we care about.
He likes stocks because of the liquidity. If he needed ten thousand dollars and was only invested in real estate, “I’d have to take the time and sell the whole damned house. In stocks I sell the amount I need to, immediately. That’s called liquidity and I like that a lot.”
He trusts stocks more than he trusts bonds and he trusts companies more than he trusts the government. “Companies are in business to make money. Governments are in business to spend money. Governments go through small changes every two years and major changes can happen every four years. That’s instability.”
According to the Harvard Review the best performing CEOs have a tenure of 15 years which is about double the tenure of the average CEO. My friend obviously sees a higher degree of stability and trust in companies than he does in governments.
Investing in anything carries a degree of risk. Investing ignorantly can destroy you financially. Options should be only for experienced traders who have the time to monitor their project on an almost nonstop basis. Stocks, even if invested in wisely, can also go down in value. So, don’t invest more than you can afford to lose and be patient. Ignore the daily ups and downs that bombard you through TV and social media. My friend says he takes a lot of time to decide on a company. He only invests in companies that make or do something that he is familiar with. Peter Lynch, the oracle prior to Warren Buffet, wrote on investing and his advice was to invest in things you know about.
And finally, READ. Read a lot and learn about the stock market. A wealth of it, no pun intended, is available for free on the Internet. Of course, the stock market is going to go down, but no one knows when, or by how much, or for how long. Over the long term it’s also going to go up. Don’t be panicked into selling on the dips. You’ll soon be like the car dealer who bought high and sold low but made up for it in volume. (Think about it.)
Personally, I’m convinced. I think careful, thoughtful, and intelligent investment in the stock market is one of the few ways we middle class, working folks can achieve the financial security required for our retirement years. Start early, as early as possible, and stay the course.