Unraveling Stock Splits: Myths vs Value

Hello investors!

Today, let’s delve into the fascinating world of stock splits. A stock split is a corporate action in which a company divides its existing shares into multiple shares. Although the number of shares increases, the total value of the shares remains the same.

In todays letter

• Learning: Unraveling Stock Splits: Myths vs Value

• News insights

  • Unprecedented Hurricane: A Record-Breaker

  • UAE Oil Leader Backs 2050 Net-Zero Aim

  • Google's Indian Laptop Venture: A Boost for Modi's Tech Vision

• Key takeaways from video w/ Carl Icahn

Unraveling Stock Splits: Myths vs Value

Warren Buffett, a name synonymous with value investing, has shared his insights on stock splits. He emphasizes that while the number of shares owned may increase due to a split, the intrinsic value of the ownership remains unchanged. Let’s explore this concept through a real case study involving Apple Inc.

In this scenario, as of March 31, Buffett, via Berkshire Hathaway, owned approximately 245,155,566 shares of Apple. This represented about 5.73% of the total number of Apple shares outstanding at the time. Post the stock split, while the number of shares owned by Buffett quadrupled to 980,622,264 shares, his overall ownership percentage in Apple remained constant at 5.73%. This is because the total number of Apple shares outstanding also quadrupled, maintaining the proportionate ownership for all shareholders.

Here are five key points to analyze in a stock split:

1. Ownership Percentage: It remains constant as both the owned shares and the total outstanding shares increase proportionally.

2. Market Value: The total market value of the shares owned remains the same, as the increase in share count is offset by a corresponding decrease in the share price.

3. Psychological Impact: Stock splits can make shares seem more accessible to small investors, potentially broadening the investor base.

4. Liquidity: Stock splits can increase liquidity by creating more shares available for trading.

5. Market Perception: The perceived affordability of split shares can lead to increased demand, impacting the stock price in the short term.

In conclusion, a stock split does not alter the fundamental value of your investment. It’s akin to slicing a pie into smaller pieces; the size of the pie doesn’t change, just the size of the slices. The key lesson here is to focus on the intrinsic value and the fundamentals of the company rather than the nominal share price.

Now, why do companies like Apple opt for stock splits? It primarily revolves around human psychology. Rationally, stock splits shouldn’t create any value, but humans are not always rational. We are influenced by psychological biases, and one such bias is "sticker shock". A lower share price post-split may seem more attractive and affordable to retail investors, potentially driving demand.

To further illustrate, let’s consider the thoughts of Charlie Munger, Buffett’s long-time business partner, who often stresses the importance of rationality and understanding human biases in investing. He believes that recognizing and overcoming these biases can lead to better investment decisions, aligning with the idea that the perceived value from stock splits is largely psychological.

To make informed and rational investment decisions, it’s crucial to look beyond the surface and understand the underlying fundamentals and the psychological factors at play. As value investors like Buffett and Munger advocate, focusing on the intrinsic value and the long-term prospects of a company is paramount in navigating the complex world of stock investing.

Thank you for joining me in this exploration of stock splits. Let’s continue to learn and grow together, delving deeper into the intricacies of the financial world and unraveling the mysteries of value investing.

News insights

Unprecedented Hurricane: A Record-Breaker

Hurricane Lee rapidly intensified from a category one to a category five storm within 24 hours, bringing large swells and ferocious winds to the Caribbean islands. Experts attribute such rapid intensifications to the warming oceans and predict that major hurricanes are likely to become more frequent and more damaging due to climate change.

[📝Full article]

Key takeaway

For investors, this news underscores the increasing importance of considering climate risk in investment decisions, particularly in sectors like real estate and insurance. They should closely monitor developments in climate science and policy to assess the long-term viability and risk exposure of their investments, avoiding financial advice and focusing on sustainable and resilient investment strategies.

UAE Oil Leader Backs 2050 Net-Zero Aim

COP28 President Sultan Al Jaber announced that over 20 oil and gas companies are supporting initiatives to curb carbon emissions, aligning with the 2050 net-zero goal, and are committed to eliminating methane emissions and routine flaring by 2030. This announcement comes as the UAE pledges $4.5 billion to develop 15 GW of clean power in Africa by 2030.

[📝Full article]

Key takeaway

For investors, this signifies a pivotal shift in the energy sector's approach to climate change, reflecting a growing consensus around the importance of sustainable practices. Investors should consider the evolving landscape and potential opportunities in renewable energy and sustainability-focused innovations, while being mindful of the long-term risks associated with companies not adapting to the changing environmental expectations.

Google's Indian Laptop Venture: A Boost for Modi's Tech Vision

Google, in partnership with HP Inc., will start manufacturing Chromebook laptops in India, marking another significant tech company expanding assembly in the country. This move aligns with Prime Minister Narendra Modi’s incentive plan to make India a production base for tech giants and is aimed at boosting supply in India to compete more effectively with other computer brands.

[📝Full article]

Key takeaway

This development indicates a strategic shift in global manufacturing dynamics, with India emerging as a viable alternative to China for tech production. Investors should monitor companies adapting to geopolitical shifts and diversifying production, as these moves can impact supply chains, market competition, and potentially offer new investment opportunities in emerging tech hubs.

Key takeaways from video w/ Carl Icahn

Here are five key takeaways from the video:

1. Importance of Due Diligence:

   • Carl Icahn emphasizes the importance of thorough research and due diligence before investing in a company. He shared his experience with ACF, where he invested after analyzing the company's assets and potential.

2. Value of Understanding Business Operations:

   • Icahn stresses the need to understand the actual operations of a business. He had to visit different floors and meet various employees to grasp what they actually do, illustrating the importance of having a deep understanding of the businesses one invests in.

3. Efficiency and Streamlining Operations:

   • The story highlighted the significance of operational efficiency. Icahn discovered that many employees and operations were redundant and unnecessary, leading to the streamlining of operations, which is crucial for improving profitability.

4. The Role of Management:

   • Icahn points out that the management, especially the CEO, plays a pivotal role in a company's success. He implies that a CEO who is indifferent and is just in it for the money can be detrimental to the company's growth and success.

5. Risks of Borrowing Money:

   • Icahn warns about the dangers companies face when they borrow money, especially when it’s done to artificially inflate earnings. He suggests that this is a risky strategy, particularly for mediocre companies, and it raises questions about the sustainability of such earnings.

[🎥Full video]

This is all for today, thank you for reading. See you next time!