Stock Splits And How We Behave
Photo by Ishant Mishra on Unsplash
Stock splits are a funny thing.
The fact of the matter is that when they are announced, the underlying fundamentals of the company haven’t changed and, if you happen to be an investor at the time (and when they actually occur), the value of your holdings hasn’t actually changed either.
(In other words: if you own 10 shares of a stock that is trading at $10 per share, and it announces a 2-for-1 split, then post-split, you’ll own 20 shares of the stock, but with each share valued at $5 a share. The value remains unchanged.)
But the market reality is different. Stock splits generally tend to be followed by an increase in the share price. When Apple and Tesla announced stock splits a couple of years ago, their shares were up 3.4% and 12.5% around the announcement. Amazon recently announced a 20-for-1 split and their share price has reacted accordingly, going up around 10%.
Of course, as I mentioned, nothing about the companies has actually changed. The nature of their businesses is exactly the same as is their economics. But the value of the company has gone up.
Of course, that’s down to investor sentiment. Investors tend to see the split as a positive signal from the company. There’s also the perspective that the split makes the stock price “cheaper” and more affordable for a broader range of retail investors. I can’t afford the stock at $3,000, but I can at $150.
I get that that approach made sense years ago, but today fractional share ownership is a thing, so even if you couldn’t afford a $3,000 per share stock, you can buy a fraction of it if you like the company.
And yet, the pattern prevails. Because we often make decisions on the basis of sentiment - even when the underlying data remains unchanged (and was always available to us).
In the case of the stock market, you can (possibly) use this pattern to make some money, but when it comes to decisions we make in the context of our own organizations, we’d be wise to think carefully.
Of course, that sounds like an obvious statement, but how many times have we allowed sentiment to drive our own behavior and decision making?
If a particular event or action makes us anxious, nervous, confused, or even if we’re excited, curious, hopeful, we’ll react on the basis of those sentiments. We’ll let those feelings govern our response and what we say and do.
We’ll do so because those events and actions align (or not) with our own prior knowledge or belief systems or ideas. Because it’s reflexive and natural, which is exactly how we shouldn’t react.
The key is to not let prior ideas - our baggage - impair our ability to assess our actions in the moment. Whether we take a decision or not has to be governed by the facts and the underlying data, not by emotion, or the movements of the masses.
The more calmly we think through the situation and assess the facts on the table, the better the decision(s) we’ll take.
