Imagine that you and I decide to go into the lemonade stand business.
We pool our funds together—each of us puts in $20—and we start the lemonade stand. To represent our ownership, we take a piece of paper and split it in half…50/50. Imagine that our lemonade stand is wildly successful (the recipe is a proprietary secret with a couple of special ingredients) such that it’s value goes up from our initial $40 to the point where a couple of kids from the neighborhood offer us $80 for the lemonade stand.
The next day, we take those pieces of paper and cut each half into four pieces, so our ownership goes from being represented by two pieces of paper to eight. Now, the neighborhood kids offer us $150.
Makes no sense, right? We didn’t increase the value of the company by changing the number of pieces of paper. The neighborhood kids would be silly to increase what they’d pay for the company.
Take a look at the chart to the right. On the day that the stock splits are announced, the stocks each punched the launch mode button.
This makes no economic sense whatsoever. Neither company has made any announcements that would have significantly increased the value of the company. Maybe there’s speculation that Apple’s likely September announcement of new products could do that.
This is not investing; this is speculating, and you should only do it with money that your significant other won’t miss.
I struggled to find one quote from someone famous that crystalize all of this and couldn’t. Instead, here’s a bunch of ‘em. Take your pick.
“Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.” – George Soros
“Behind every stock is a company. Find out what it’s doing.” – Peter Lynch
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.