Monday, February 23, 1998
Austin, TX (Feb. 23, 1998) -- Well it's Monday (a fact for which I take no responsibility), and that means two things. First, it's time for a nostalgic look back at a time when it wasn't Monday (I.E. last week). Secondly, we rotate in a new Fool to write the Cash-King Reports (dizzy yet, Al?). Unfortunately we've run out of accountants, lawyers, and Motley Fool founders, so we're down to someone who (on the web boards at least), claims to be a tree (my screen name is "Oak.") My name is Rob Landley and it's great to be here working on Cash-King.
The biggest news in our portfolio today is that Microsoft has been broken in half. Unfortunately, this has nothing to do with the Department of Justice (although personally, I still have hope :), it's a 2-for-1 stock split.
For those of you new to investing (or just plain bored enough to read a daily column about a decade long buy-and-hold strategy), I'm going to talk about stock splits. If it starts getting too obvious or repetitive, feel free to skip to the end, where there's a link to the link to Dave Barry's web page.
A stock split is where a company decides its stock price has gotten so high that it starts to impact liquidity. The theory is that when stocks start costing more than a certain amount per share (generally from $100-$250, although it's really a matter of what the company's board of directors is comfortable with), this scares away individual investors who may not have a lot to invest at any one time.
So what the company does, to keep its shares trading in its comfort zone, is break each share of stock in half (cracks the sucker right over its knee, cleanly down the middle), doubling the number of shares outstanding, and giving the owner of each of the original shares a second, matching share. (Color coordinated and everything.) If you own a stock certificate for ten shares, they literally mail you second stock certificate with ten more shares. (If your stock's in a brokerage account, the details are generally handled behind the scenes, but it works out about the same.)
Notice that the total value of the company hasn't changed. There are twice as many shares of it now, but each owner now has twice as many shares too. Each share now represents half as much of the company, thus each share is worth half as much money. So the next day, the stock opens trading at half the price and startles the HECK out of everybody who hasn't been paying attention.
So what does the stock split actually mean regarding our investment in Microsoft? Nothing whatsoever! (That's very important! Jurors, write that down! Everybody who got the Alice in Wonderland reference gets to stay after class and clean the erasers.) The percentage of the company you own hasn't changed: if you owned 1/1,000,000th of it yesterday, today you own 2/2,000,000ths of it. In the long run, the price people are willing to pay for your chunk of the company is based on what people are (collectively) willing to pay for the company as a whole, and a split doesn't change that.
Expect ALL of our cash-king stocks to split during our ten year holding period, probably more than once. This doesn't mean that a company that splits is necessarily a cash-king: any company can split its stock, and sometimes companies do so in hopes of convincing the market that it's on the way up. (Many "penny stocks" get made this way: Nobody makes an Initial Public Offering under around $5 per share, but if your stock splits a couple times and the total value of your company goes DOWN afterwards, you can wind up under $1 per share, where no reputable investor will touch you.)
And of course I can't get out of this discussion (soliloquy? Lecture? Okay, one-sided rant) without mentioning Berkshire Hathaway, a company that hasn't split its stock in decades. Shares of BRK (now BRK.A) were around $15 each when Warren Buffett gained control of the company. It's now trading at over $50,000 per share. In this extreme example, a lot of individual investors (myself included) really ARE prevented from owning the stock because of the price. In May 1996, Berkshire issued a new class of stock (Class B shares) that started out at $1000 per share. Still expensive, but not as far out of reach as the other stuff! As much as we dismiss stock splits as noise, I'm glad I can buy a share of Coke for under $200,000.
Day Month Year History C-K +0.94% 2.31% 2.31% 2.31% S&P: +0.38% 3.68% 3.68% 3.68% NASDAQ: +1.37% 5.98% 5.98% 5.98% Rec'd #