8. Stock Splits

in this episode, Josh explained stocksplits and why the greatest investor Warren buffet despises them. A stocksplit. It's not a natural phenomenon. It's manmade. The corporation looks atits stock price. The stock price is let's say $300 per share. And they say,let's do a split because blank. And there were a couple of reasons.

[00:00:31] Some I think are legitimate,some might think are illegitimate, but they'll say let's do a three for one,which would bring our stock price down to a hundred. And the shareholder wouldjust see a. Price. That's been cut by two thirds, but they'd see a tripling inthe amount of shares they own. It changes.

[00:00:49] Absolutely nothing about theirstake in the company, proportionally they own the same amount of the company.All that's happened is instead of cutting a pizza into eight slices, you've cutit into 16. Still the same size pizza does not grow the pizza. Well, I don'thave a problem with splits. The problem that I have is people coming up, peopleusing an impending stock split as a reason to buy a stock.

[00:01:15] It's one of the stupidest thingsI've ever heard in my life. And yet millions and millions of people boughtTesla because it was about the split and they got crushed immediately. Karma didnot wait around two months to 20 months. It went to work immediately and we sawthe stock fall from 500 something down to 300 something post split serves you,right?

[00:01:37] Not that I want anyone to losemoney. I've just don't want people to make stupid decisions about investing. Soif you're the kind of person that feels richer, With a hundred singles in yourpocket versus a $100 bill, then you are the type of person that would beenticed to buy into a stock. Simply for the reason that it's about to do astock split or just that a stock split Warren buffet, despises stock splits.

[00:02:01] This is the greatest investor ofall time. He's never split the Berkshire shares, which traded hundreds ofthousands of dollars per share. And his reasoning was very simple and he laidthis out back in the 1980s for any of us were worried about stock splits. Andhe basically said anyone who buys a stock for an uneconomic reason, which iswhat a stock split by would be, would also sell a stock for a non-economic reason.

[00:02:27] And I don't want those people asshareholders in my company. So I still believe that that is the best way tothink of that stock splits now. Are there reasons why you would do a stocksplit that are legitimate? Absolutely. If you don't have a lot of sharestrading to begin with, which was not Tesla's problem by the way, but if youhave a situation where there just aren't enough of shares that are trading,then you have what's called illiquidity, meaning one investor who wants tosell.

[00:02:56] Has trouble finding anotherinvestor to buy and vice versa because the marketplace doesn't have enoughtotal shares to facilitate ease of transaction. So that's not good. That's alegitimate reason to do a stock split. Another reason in, in 2014, Appleprobably got the heads up from Dow Jones from the index committee that theywere going to be admitted into the Dow Jones, industrial average.

[00:03:22] So they did a seven for onestock split. I think it was an $800 stock price. And the reason why you wouldwant to do or need to do a stock split in order to get into the Dow Jones. 30is because the Dow Jones is price weighted, meaning the higher the stock price,the more of an impact that has on what the Dow Jones industrial average doesevery day.

[00:03:45] It's a bigger factor in thecalculation. If Apple went into the Dow Jones as an $800 stock. It probablywould have been responsible for 25% of the Dow's move each day. And nobodywants that because then that takes away the Dow Jones, his ability to trulycapture what the stock market did that day. So Apple orchestrated a seven forone stock split, brought the price from 800 down to a hundred dollars in changeand was admitted into the Dow Jones 30 shortly after.

[00:04:14] So there are legitimate reasons.Now what a hate. Is somebody saying you should buy this stock because they'llprobably split that's Adobe stuff that people should not be dealing with. It'sgambling. It's not investing, it's not wise. And I'm just not a big thing.