On Stock Splits

I never really understood the arguments for splitting a stock. The pro-split camps will bring up the point that it creates more liquidity for the stock. I’m not sure that’s true. A stock like Netflix (NFLX) trades at lot at $700. It doesn’t need more “liquidity”. There’s plenty of buyers and sellers. One thing that’s true is that you are not creating any value. Unfortunately there are some investor that really think that splitting a stock in ten makes them richer. Netflix went up on the announcement that it was splitting its stock. I really just don’t get it. A stock split is like trading $1 for 4 quarters. What’s exiting about that? Sure, by having a “lower” stock price you might attract more investors, but is that the shareholder base you want? The minute you hit a rough patch they will dump your stock. I don’t see anything attractive about it. Actually I would encourage a reverse stock split. With a higher stock price you could attract a shareholder base that shares your long-term philosophy. I never of heard of anyone day trading Berkshire Hathaway Class A share (BRK-A).

The cartoon below reflects my line of thinking.

Dilbert

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