Splitting the Difference: Demystifying Stock Splits

Hello investors!

In the ever-evolving world of finance, understanding the intricacies of the stock market can set you apart. Today, we're diving into one such intriguing facet: stock splits. Let's unravel the mystique behind them.

In todays letter

• Learning: Splitting the Difference: Demystifying Stock Splits

• News insights

  • Q2: German Economy Plateaus After Winter Dip

  • Moody’s Unveils Wildlife Trafficking's Economic Peril

  • Beijing Backs Its Real Estate Titans

• Key takeaways from interview w/ Li Lu and Charlie Munger

Splitting the Difference: Demystifying Stock Splits

A stock split occurs when a company decides to issue additional shares to current shareholders in proportion to their current holdings. It's a way for companies to make shares seem more affordable to smaller investors, even though the underlying value of the company remains unchanged.

Case Study

Let's consider the example of Company A. Suppose it has 100,000 shares trading at $100 each, which gives it a market capitalization of $10 million (100,000 x $100). Now, if Company A decides to do a 2-for-1 stock split, shareholders will receive two shares for every one they own. Post-split, the company will have 200,000 shares trading at $50 each but will still have the same market capitalization of $10 million (200,000 x $50).

Five Key Pieces of Advice on Navigating Stock Splits:

1. Don’t Misinterpret Affordability: Post-split stocks may seem more affordable, but remember, the intrinsic value of the company hasn’t changed. Warren Buffett once said, "Price is what you pay, value is what you get."

2. Volume Increase is Common: After splits, trading volumes often increase as more investors can now trade these 'affordable' shares. This can lead to short-term volatility.

3. Dividends Can Adjust: If a company pays dividends, the amount may adjust post-split to reflect the new share price. As an investor, your overall dividend value remains consistent.

4. Look for Reasons Behind the Split: Companies usually have strategic reasons for splits – to attract retail investors, boost liquidity, or psychological advantages. It’s important to understand these reasons.

5. Monitor Long-Term Performance: Charlie Munger, Buffett's right-hand man, often emphasizes the importance of patient, long-term investing. Splits are a single event in a company's journey; the long-term fundamentals matter more.

Another Example

Think of Company B with 50,000 shares trading at $200 each, totaling a market capitalization of $10 million. If they announce a 4-for-1 split, the number of shares will increase to 200,000 but will now be priced at $50 each. The overall market capitalization remains $10 million (200,000 x $50).

Stock splits can be intriguing events in the life of a company. While they change the number of shares and the price, they don't alter the company's intrinsic value. As astute investors, it's crucial to look beyond the immediate appeal of a reduced share price and focus on the company's long-term fundamentals. As many value investors would advise, invest in a company's value, not its stock price.

News insights

Q2: German Economy Plateaus After Winter Dip

Germany's economy demonstrated no growth in Q2, maintaining its position as one of the weakest major global economies. Adjusted GDP contracted by 0.2% year on year, marking a continuation of the economic downturn from the previous winter.

[📝Full article]

Key takeaway

The stagnation in the German economy, coupled with weak economic indicators, suggests potential challenges for investors with interests in the region. It may be prudent for investors to reassess their portfolios, considering factors like weakened purchasing power and declining industrial orders, while also keeping an eye on potential rebounds in Q4.

Moody’s Unveils Wildlife Trafficking's Economic Peril

Moody's Analytics has published a whitepaper detailing the financial risks associated with wildlife trafficking, which is the third-largest illicit activity globally. Their GRID data indicates that the US is a major hub for wildlife trafficking, with the country having the highest number of entities associated with this illicit trade.

[📝Full article]

Key takeaway

The financial implications of wildlife trafficking can pose significant threats to businesses, particularly with increasing global awareness and legislative action against the practice. Investors should prioritize understanding their associations, and those of their investments, with any entities linked to wildlife trafficking and consider employing risk monitoring and screening solutions like Moody's Analytics Know Your Customer service to mitigate potential reputational and financial damages.

Beijing Backs Its Real Estate Titans

The People’s Bank of China has issued support policies for the real estate sector, reflecting Beijing's commitment to ensure the industry's 'healthy development.' While the government continues to back the sector due to its significance in contributing to GDP, fiscal revenue, and employment, there's an inherent challenge in preventing speculative bubbles and maintaining economic stability.

[📝Full article]

Key takeaway

The Chinese government's backing of the real estate sector underscores its importance in stabilizing urban household wealth, sustaining economic growth, and maintaining employment, especially during economic challenges. Investors should understand the depth of China's reliance on real estate for economic and social stability; however, they should also recognize the potential risks of an over-reliance on this sector and consider diversifying their investments to mitigate any unforeseen challenges or policy shifts in the future.

Key takeaways from interview w/ Li Lu and Charlie Munger

Here are five key takeaways:

1. Value in Chinese Markets: Charlie Munger believes that there's more value for investors in China. He suggests that the best companies in China are currently selling at more reasonable prices than their counterparts in the United States. He emphasizes the importance of long-term investments and mentions that the best investments are those that are undervalued and have potential for growth over time.

2. Confucian Ethos: Munger draws a parallel between his and Warren Buffett's investment philosophies and Confucian principles. He believes that their popularity in China is partly because their approach to business and life resonates with the Confucian ethos of modesty, continuous learning, and dignified behavior.

3. Chinese Immigrants in the U.S.: Munger speaks highly of the Chinese immigrants in the U.S., particularly highlighting their contributions in building the Transcontinental Railroad and their successes in various professional fields. He also mentions the phenomenon of American families adopting Chinese girls and how these girls have excelled in various fields in the U.S.

4. Gambling vs. Investing: Munger differentiates between gambling and investing. He believes that the world is full of foolish gamblers who won't do as well as patient investors. He emphasizes the importance of having a long attention span, thinking deeply about investments, and avoiding the distractions of short-term market fluctuations.

5. Personal Growth and Investment: Towards the end of the video, Munger touches upon personal growth, suggesting that being a better person can lead to being a better investor. He mentions that professions that require continuous learning and growth, like professors, tend to live longer, drawing a parallel between personal growth and longevity.

[🎥Full video]

Remember, it's not always about the price on the tag, but the value within. Happy investing!