I agree mostly with your article, but I don't understand why "Intelligent CEOs never split shares". If a single stock is worth too much, it might be a problem for example to give shares to employees, so it might make sense to divide them in that case don't you think?
Thanks! The main reason they don't split shares is that making more slices doesn't increase the size of the cake. Expensive shares tend to repel speculators while attracting long-term investors. In Buffet's words: "We will try to avoid policies that attract buyers with a short-term focus on our stock price and try to allow policies that attract informed long-term investors focusing on business values." It is also costly for shareholders. Quoting Buffet again: "For example, consider a typical company earning, say, 12% on equity. Assume a very high turnover rate in its shares of 100% per year. If a purchase and sale of the stock trades at book value, the owners of our hypothetical company will pay, in aggregate, 2% of the company's net worth annually for the privilege of transferring ownership. This activity does nothing for the earnings of the business, and means that 1/6 of them are lost to the owners through the “frictional” cost of transfer. (And this calculation does not count option trading, which would increase frictional costs still further.)"
Conclusion by Buffet: "Splitting the stock would increase that cost, downgrade the quality of our shareholder population, and encourage a market price less consistently related to intrinsic business value. We see no offsetting advantages."
I agree that it might be an issue if one share is worth more than $100k. Apart from Berkshire (number 1) and Lindt & Sprüngli AG (number 2), the third most expensive share is worth $3930 according to https://fxssi.com/top-10-most-expensive-stocks
OK I understand your point, it matters in the case of publicly traded companies.
It's funny to see on this top 10 that the world record is actually a Warren Buffet owned company, so it seems it is really a peculiarity of him to do never split shares!
I agree mostly with your article, but I don't understand why "Intelligent CEOs never split shares". If a single stock is worth too much, it might be a problem for example to give shares to employees, so it might make sense to divide them in that case don't you think?
Thanks! The main reason they don't split shares is that making more slices doesn't increase the size of the cake. Expensive shares tend to repel speculators while attracting long-term investors. In Buffet's words: "We will try to avoid policies that attract buyers with a short-term focus on our stock price and try to allow policies that attract informed long-term investors focusing on business values." It is also costly for shareholders. Quoting Buffet again: "For example, consider a typical company earning, say, 12% on equity. Assume a very high turnover rate in its shares of 100% per year. If a purchase and sale of the stock trades at book value, the owners of our hypothetical company will pay, in aggregate, 2% of the company's net worth annually for the privilege of transferring ownership. This activity does nothing for the earnings of the business, and means that 1/6 of them are lost to the owners through the “frictional” cost of transfer. (And this calculation does not count option trading, which would increase frictional costs still further.)"
Conclusion by Buffet: "Splitting the stock would increase that cost, downgrade the quality of our shareholder population, and encourage a market price less consistently related to intrinsic business value. We see no offsetting advantages."
I agree that it might be an issue if one share is worth more than $100k. Apart from Berkshire (number 1) and Lindt & Sprüngli AG (number 2), the third most expensive share is worth $3930 according to https://fxssi.com/top-10-most-expensive-stocks
OK I understand your point, it matters in the case of publicly traded companies.
It's funny to see on this top 10 that the world record is actually a Warren Buffet owned company, so it seems it is really a peculiarity of him to do never split shares!
Yes one share of BRK-A is worth almost $400,000! However, there is also BRK-B where one share is worth only $264.