# Faulty investment logic - Corrected



## Just a Guy (Mar 27, 2012)

We've all heard some, in fact this forum is filled with people trying to correct it, so I thought it may be good to have a summary page.

From the other day in the Real Estate forum...

Low rent doesn't insure good tenants.

Always charge market rent. If your tenant proves to be good, don't raise it. I've never had a tenant tell me that they were going to trash the place, they all swear they'll take good care of it. If you lower your rent, you're at just as much risk, with less of a buffer in case things go wrong.


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## Just a Guy (Mar 27, 2012)

Stock splits mean the stock is more valuable. 

If a stock splits, there is no change to the value of the company, it's a zero sum move.

If the stock was worth $100 and there were 1,000,000 shares outstanding, then after a 2 for 1 split each stock is now worth $50 and there are 2,000,000 shares outstanding. If you owned 100 pre split, you now own 200. If it paid a dividend of $1/stock pre split, it now pays $0.50 per stock.

There is a psychological effect that may have people thinking that the stock is worth more because of a split, but no logical reason for it.


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## Just a Guy (Mar 27, 2012)

Buying <insert investment option> is a good/bad investment.

In my experience, you can make money at just about anything if you know what you are doing. Of course, you can also lose money if you don't know what you are doing. 

Anyone can luck out and hit a home run, that doesn't make them knowledgable. True experts can repeat their success over and over.

Investing is work, not sit back and collect the cheques. If you don't want to work, don't get into investing.

Trusting others with your money, especially those who get paid regardless of their success, is just foolish. 

If you don't understand your investments, why are you invested?

Investing and gambling are two different things. Investors know or expect the outcome, gamblers pray for an outcome.


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## Just a Guy (Mar 27, 2012)

I don't have any money to invest, and you need money to make money.

You can always find a way to come up with a little money. Wealth doesn't occur overnight and, for many, it doesn't come without sacrifice. 

There is a three pound, often unused muscle riding around on the top of your shoulders...exercise it.

Think of ways to make a little extra, then learn about ways to get that little extra working to make even more. Just like an avalanche can begin with a single snowflake, your wealth can grow very quickly....

But,

If you never start, you will ensure that it never happens.

Also, don't get stuck by analysis paralysis.


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## Just a Guy (Mar 27, 2012)

It's not the right time to buy...

While it's true that there are times when it is more difficult to buy stuff and make a profit, I've never seen a time where there wasn't something out there if you looked hard enough.

Right now, for example, everyone says there are no good investments in real estate. People are trying to buy $350k places to make 1200/month (yes these are stupid investments). But, if you expand your search, and are ready to go, you can pick up places for under $100k that generate 1200/month. There aren't many, they don't last long, but they do exist.

In a bull market, there are always sticks out of favour (think blue chip during the dot com bubble). 

In a bear market, when everyone is afraid, you can have your pick (BMO went down to $24 in the 2008 meltdown, while paying a dividend of $2.80, more than a 10% ROI, in a Canadian bank, pretty rock solid and government backed).

As I said above, investing is work.


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## Eclectic12 (Oct 20, 2010)

Just a Guy said:


> We've all heard some, in fact this forum is filled with people trying to correct it, so I thought it may be good to have a summary page.
> 
> From the other day in the Real Estate forum...
> 
> Low rent doesn't insure good tenants ...


It wasn't tenants but room mates for ten years ... but both said they were mowing the lawn or coming home early to be around for the furnace tech as an appreciation of what they knew was a bit below market costs.

If I was in the rental business permanently - then I agree.




Just a Guy said:


> Stock splits mean the stock is more valuable.
> 
> If a stock splits, there is no change to the value of the company, it's a zero sum move ...
> There is a psychological effect that may have people thinking that the stock is worth more because of a split, but no logical reason for it.


In terms of the investor - yes there is a psychological effect. 

In terms of management - it may be a calculated move to keep the share price in an affordable range (how many of us are willing to research and possibly shell out for $178K a share versus $60?).


So IMO ... while it's important for the investor to know that the split is neutral, the decision to split involves more than just the investor's point of view (or misunderstandings).


Cheers


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## richard (Jun 20, 2013)

In any business, if you lower your price to "give people a good deal" you will attract the people who think that's still too much and complain constantly. If you raise your price (and make sure it's worth it) you will attract people who think it's still cheap and appreciate what you're giving them. Exceptions are rare.


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## Eclectic12 (Oct 20, 2010)

^^^^

I can agree lower rent will attract people looking for it ... but I'm also not sure it automatically means people will undervalue it and complain.

The co-worker who was the referral to get into a cheaper building renting apartments years ago both appreciated the lower rent plus was a good sales person (I think he found four quality tenants for the owner). Others in the same building did complain about the rents until they looked around.


At the end of the day, YMMV.

Cheers


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## Taraz (Nov 24, 2013)

Here's a good one:

"Stocks / Education / Houses are always a good investment."

While all of these types of investment tend to be a good investment on average, over time, it doesn't mean they will work out for you. It's easy to pay too much for stocks, houses, or degrees. It's also easy to buy the wrong stock/education/house. Or the wrong education or house for you.


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## wendi1 (Oct 2, 2013)

"I'm waiting for the stock to come up to the price I paid for it..."

Pretty self-explanatory, but I have caught myself doing this a couple of times. Freakin' Blackberry.


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## Taraz (Nov 24, 2013)

wendi1 said:


> "I'm waiting for the stock to come up to the price I paid for it..."
> 
> Pretty self-explanatory, but I have caught myself doing this a couple of times. Freakin' Blackberry.


Yeah, the "sunk-cost fallacy" is a classic.


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## Pluto (Sep 12, 2013)

Eclectic12 said:


> In terms of management - it may be a calculated move to keep the share price in an affordable range (how many of us are willing to research and possibly shell out for $178K a share versus $60?).
> Cheers


If a stock is over 100 per share, 10 shares is a board lot. At 178K per share, you should have no trouble buying 1 share, if that is all you want.


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## Taraz (Nov 24, 2013)

If your stock is over $1000/share, I can see the rationale behind a stock split. (Even Berkshire-Hathaway has their cheaper "Class B" shares for smaller investors.)

I realize it won't necessarily increase the value, but it does make it possible for smaller investors to get in.


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## andrewf (Mar 1, 2010)

"Averaging down"

You can't 'fix' a bad investment decision in the past by doubling down on it today. Only invest on the merits of the investment today.

"Yield on cost"

Totally meaningless. If someone gave me a share in a company that paid a dividend, my yield on cost would be infinity. I would be crazy to ever sell it and buy another asset, right? Right?

"Who cares about total return, I need yield"

I am so sick to death of this, I'm not even going to bother writing an explanation.


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## Karlhungus (Oct 4, 2013)

Just a Guy said:


> We've all heard some, in fact this forum is filled with people trying to correct it, so I thought it may be good to have a summary page.
> 
> From the other day in the Real Estate forum...
> 
> ...


I dont necessarily agree. Good tenants have their **** together and are looking for best value. If you have a great place at just under market rent, good tenants will flock to your place. This is what i have found.


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## Karlhungus (Oct 4, 2013)

Just a Guy said:


> Stock splits mean the stock is more valuable.
> 
> If a stock splits, there is no change to the value of the company, it's a zero sum move.
> 
> ...


Except if the stock jumps right after the split, you are ahead of the game. Now you might say well what if the stock would have went up anyway? Well lets use your example and lets say the stock goes up $50 either way. In the first case, you own 100 shares at $100. Stock goes up $50. You now own 100 shares @ $150 = $15,000. 

Now, second case is the stock splits. You now own 200 shares at $100 = $20,000


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## Eclectic12 (Oct 20, 2010)

Pluto said:


> If a stock is over 100 per share, 10 shares is a board lot. At 178K per share, you should have no trouble buying 1 share, if that is all you want.


IMO, you have missed the point as I wasn't saying anything about board lots or the technical ability to buy 1 share. 

If the share price is $178K per share - how many here are going to research and possibly buy it? I doubt many.
By having the steep share price, the corporation is limiting the pool of potential buyers.

Which do you think the average corporation is going to prefer - a deeper pool or shallower pool when they need to raise capital?


Cheers

*PS*

Or to put my point in a different way - there could be an all out blitz so that every investor in the market knows that a split does not change the value and corporations will still keep splitting shares regardless of what the individual investor thinks.


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## Just a Guy (Mar 27, 2012)

Karlhungus said:


> Except if the stock jumps right after the split, you are ahead of the game. Now you might say well what if the stock would have went up anyway? Well lets use your example and lets say the stock goes up $50 either way. In the first case, you own 100 shares at $100. Stock goes up $50. You now own 100 shares @ $150 = $15,000.
> 
> Now, second case is the stock splits. You now own 200 shares at $100 = $20,000


Except post split the stock should only go up $25/share...it's zero sum. If you're saying it goes up $50 post split, then it should have increased $100 without a split.


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## Eclectic12 (Oct 20, 2010)

Taraz said:


> If your stock is over $1000/share, I can see the rationale behind a stock split. (Even Berkshire-Hathaway has their cheaper "Class B" shares for smaller investors.)
> 
> I realize it won't necessarily increase the value, but it does make it possible for smaller investors to get in.


+1 .... which is why regardless of what the individual investor thinks about splits & value - corporations will continue to split their shares.


Cheers


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## Just a Guy (Mar 27, 2012)

Karlhungus said:


> I dont necessarily agree. Good tenants have their **** together and are looking for best value. If you have a great place at just under market rent, good tenants will flock to your place. This is what i have found.


I know plenty of bad tenants also looking for value. You may get more applicants, but you'll never know if they are truly good or bad until they are in.


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## Just a Guy (Mar 27, 2012)

If a "good" company crashes, it should recover...get in while it's down 99%. 

Think Nortel, breX, worldcom, Enron, sino forest...then realize a dog is a dog.


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## Just a Guy (Mar 27, 2012)

When talking heads explain the "why" behind what's happening in the market...

They have no clue, if they did, they'd all be rich. The market is unpredictable period. No one can predict it 100% of the time, and their explanations are just guesswork like the rest of us.


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## BlackThursday (Apr 25, 2011)

Just a Guy said:


> No one can predict it 100% of the time


So you believe the inverse of this?


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## Just a Guy (Mar 27, 2012)

Even a broken clock is right twice a day.


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## Eclectic12 (Oct 20, 2010)

Just a Guy said:


> If a "good" company crashes, it should recover...get in while it's down 99%.
> 
> Think Nortel, breX, worldcom, Enron, sino forest...then realize a dog is a dog.


What? 

You didn't like me buying Nortel for $3 and selling 2/3 for $11 and the rest for $9? ( ... wished I hadn't been talked out of buying for $0.77).




Just a Guy said:


> ... The market is unpredictable period ...


So on one hand, you think the market is efficient so that a non-split share is going to rise the same as a split share and on the hand it's unpredictable?
Doesn't it have to be predictable for that to be true?

What's your theory on why a split share that was worthless traded for $1 for over a year when it expired in three year's time?


Cheers


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## Just a Guy (Mar 27, 2012)

I never said people were smart, or logical...probably why the market is unpredictable.

To be fair, I meant more short term...like a daily basis. I think some things in the market are fairly predictable, and seem to be over a long term basis.


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## RBull (Jan 20, 2013)

Just a Guy said:


> Even a broken clock is right twice a day.


I like that. Good answer.


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## Eclectic12 (Oct 20, 2010)

Just a Guy said:


> I never said people were smart, or logical...probably why the market is unpredictable.
> 
> To be fair, I meant more short term...like a daily basis. I think some things in the market are fairly predictable, and seem to be over a long term basis.


If people can make the market unpredictable where value and the market aren't in line - why can't the same happen with splits?

I'm not saying it happens with every split or that there won't be a correction down the road ... but if people make a worthless split share worth $1 for a year - they have the same power to decide the split makes the shares affordable, start buying and drive the price up more than if they'd decided that at twice the price, it wasn't worth buying.


After all, we saw a dying Nortel propped up for a long time when better businesses were being ignored.


Cheers


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## james4beach (Nov 15, 2012)

Faulty logic: the stock market is logical, rational and moves in sensible ways. Most actors are honest. All information is available to everyone.

(This view appeals to scientists)

I think these were the biggest mistakes I made in my early years. I used to think it was a scientific kind of atmosphere. Now I know it is an irrational system, often driven by moods and psychology. On top of that there is a lot of dishonest actors and a lot of information you simply don't know. The result is that you really can't expect a stock to move in a certain way due to"logic". Bottom fishing a beaten up stock is particularly dangerous due to this.


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## underemployedactor (Oct 22, 2011)

james4beach said:


> Most actors are honest.


...and brave, and smart, and beautiful...well, need I go on?


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## jcgd (Oct 30, 2011)

Karlhungus said:


> Except if the stock jumps right after the split, you are ahead of the game. Now you might say well what if the stock would have went up anyway? Well lets use your example and lets say the stock goes up $50 either way. In the first case, you own 100 shares at $100. Stock goes up $50. You now own 100 shares @ $150 = $15,000.
> 
> Now, second case is the stock splits. You now own 200 shares at $100 = $20,000


The perfect example of faulty investment logic, for the faulty investment logic thread!


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## RBull (Jan 20, 2013)

^Indeed.


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## Just a Guy (Mar 27, 2012)

What is scary, no offence, is that it persists despite numerous explanations.


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## Pluto (Sep 12, 2013)

One of my favourite fallacies: When the economy is doing well, and unemployment low, that is good for stocks.


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## donald (Apr 18, 2011)

Discounting a stock/company because of it reaching new 52 week highs(favoring to look at out discounted companies/vaule/metric's ect) or trimming winner's in a portfolio and adding to your loser position.
Some great companies have strong headwinds and imo(formed as some who is in business outside of the market)it makes no logical sense to reduce/book quick profits on a company solely on metric's.
Often winner's take care of themselves and I find it is more dangerous buying companies making new 52 week lows than the opposite.


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## Just a Guy (Mar 27, 2012)

While true for the most part, when companies like apple become the most valuable company in the world, expecting it to go higher just seems stupid in my opinion. I remember people calling for it to go to 1000 when 700 made it the most valuable. Is it really worth 30% more than any other company on earth?

Which leads me to my next faulty logic...

Common sense. It's really not very common.


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## donald (Apr 18, 2011)

I'm just using a ''general'' example just a guy,not using a specific example like aapl.
what I mean is you have to review(maybe @least once a quarter,maybe more ect)
and see the entire picture and if the thesis has not changed and thing look the same going forward it ''might'' be worth sticking to your convictions and not getting shaked out because the metrics don't look good ect(or because it is showing a 20% profit from where you bought it to get out and the famous ''I never lost money taking a profit'' Only mths later to see a continuation of the trend/tailwinds rebalancing of metrics ect
Apple is a tech company that is ''hard'' example.
a softer example might be a pipeline like Enbridge which everbody for the last 5 yrs says is grossly overvalued but keeps climbing ect(some companies you can wait for a correction but they might not come soon enough.
It's like Livermore saying he made money being right and than sitting tight(which is uncommon)or buffet saying saying he would rather over pay slightly on a good business than buy a bad business cheaply....that is what I mean.
I am sure all of us have bailed/trimmed ect on a stock only to kick our selfs because we didn't hold for the full cycle ect and got enticed to book a quick profit and went reversed and look at beat up stocks only to lose worse than the original play at hand.


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## Karlhungus (Oct 4, 2013)

jcgd said:


> The perfect example of faulty investment logic, for the faulty investment logic thread!


Im open to someone explaining why my example isnt true, but no one has proven why it is wrong. Example, TD stock after the split is rising just as fast as it did pre split. Probably even faster since the price was getting too high for investors.


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## Pluto (Sep 12, 2013)

Karlhungus said:


> Im open to someone explaining why my example isnt true, but no one has proven why it is wrong. Example, TD stock after the split is rising just as fast as it did pre split. Probably even faster since the price was getting too high for investors.


TD probably would have gone up anyway, even if it didn't split. The price wouldn't be too high for investors if it didn't split, as there is nothing wrong with buying 50 shares, or even 10 shares. Individual investors don't have the buying power to move stock prices. The increase in TD is most likely due to buying by mutual funds, pension funds and the like. Stock splits do nothing to enhance the value of a company. The value of a company has to do, essentially, with its earnings. Its earnings don't change because of a stock split. 
It is true that after a split, it is easier for small investors to get a board lot, but small investors can not move the market.


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## Pluto (Sep 12, 2013)

I get what donald is saying. Don't sell just because a stock hit 52 week highs. It could be just the beginning of a terrific run of many 52 week highs. It would have been a mistake to sell aapl many years ago just because it hit 52 week highs. The fact that it topped out and is consolidating doesn't really contradict what he means.


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## Just a Guy (Mar 27, 2012)

You'll note, I started off by agreeing with Donald in most cases. I did point out a single exception where common sense may have let you realize that this particular stock should have been an exception.


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## Pluto (Sep 12, 2013)

Yes, I see your point.

Good thread, by the way.


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## jcgd (Oct 30, 2011)

Pluto said:


> TD probably would have gone up anyway, even if it didn't split. The price wouldn't be too high for investors if it didn't split, as there is nothing wrong with buying 50 shares, or even 10 shares. Individual investors don't have the buying power to move stock prices. The increase in TD is most likely due to buying by mutual funds, pension funds and the like. Stock splits do nothing to enhance the value of a company. The value of a company has to do, essentially, with its earnings. Its earnings don't change because of a stock split.
> It is true that after a split, it is easier for small investors to get a board lot, but small investors can not move the market.


In other words, if the after split price increase $50 as per the example, the pre-split price increased $100, not $50. The stock could reverse split and your back to your number of old shares that all increased by $100.


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## Eclectic12 (Oct 20, 2010)

Pluto said:


> TD probably would have gone up anyway, even if it didn't split ... The value of a company has to do, essentially, with its earnings. Its earnings don't change because of a stock split ...


I always have mixed reaction to this. On one hand, more often than not it's true ... on the other hand, this depends on the market correctly valuing the stock yet over the years, I've watched many examples where the market value is dramatically out of whack for extended periods.

So I'm less convinced than I used to be.




Pluto said:


> The price wouldn't be too high for investors if it didn't split, as there is nothing wrong with buying 50 shares, or even 10 shares. Individual investors don't have the buying power to move stock prices ... It is true that after a split, it is easier for small investors to get a board lot, but small investors can not move the market.


 ... unless the share price has grown to something astronomical so that only the big players can afford to buy. That would essentially remove the smaller players from the market.

IAC ... it's moot as it's what the company management decides as well as what their competitors are doing that will determine if splits are declared or avoided.


Cheers


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## andrewf (Mar 1, 2010)

Splits really don't matter. Stocks don't up by $5 per share. They go up/down by a %. A share is just an arbitrary division of the ownership of a company.

TD won't trade at a different P/E just because they split their shares. That's crazy. Institutional investors don't care whether shares cost $5, $50 or $500, and they would exploit any anomalies in the price due to splits.


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## Eclectic12 (Oct 20, 2010)

^^^^

If splits truly don't matter, then why haven't the bean counters convinced management to stop paying for the overhead of splits?

There has to be a cost and in a perfect world - I'd expect it would a slam dunk to say "let's fatten the bottom line by cutting out this unnecessary expense and allow the share price to ride up as high as it will go".


Cheers


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## andrewf (Mar 1, 2010)

Splits don't really cost anything. There is a very slight liquidity benefit to having share prices in the $20 - $100 range. The effects described of share prices going up by $5 regardless of whether the share price is $500 or $5 (with 100 times the shares) dwarfs this benefit by many orders of magnitude.


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## CPA Candidate (Dec 15, 2013)

If were to offer something it would be for investors to stop being so focused on accrual earnings (EPS) and more concerned with cashflow. Considering how many accounting estimates are baked into EPS, I find it humorous and sad that markets react so strongly to these figures. This is coming from someone studying accounting. Unfortunately in the press and books most people are exposed to, the focus is soley on EPS and P/E. They are probably the most abused figures in finance.

I just finished a challenging course in coporate finance that involved a lot of analyzing investments in capital assets (capital budgeting) and the only thing we were concerned about was after-tax cashflows in making our decisions. The most effective methods of evaluating securities is not much different, discounted cashflows.


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## Eclectic12 (Oct 20, 2010)

andrewf said:


> Splits don't really cost anything.


Hmmm ... so the board member's time as well as accounting, communication, IT and all the various parts of the corporation that has to review, decide, notify the security authorities, update the record keeping etc. are all free, right?


Cheers


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## Just a Guy (Mar 27, 2012)

If splits did play a role In the price of a stock, why wouldn't companies split on a regular basis just for the stock boost?


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## andrewf (Mar 1, 2010)

Eclectic12 said:


> Hmmm ... so the board member's time as well as accounting, communication, IT and all the various parts of the corporation that has to review, decide, notify the security authorities, update the record keeping etc. are all free, right?
> 
> 
> Cheers


On the scale of the corp balance sheet, these costs are immaterial. They might as well be free.


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## Eclectic12 (Oct 20, 2010)

... because a split is a crap shot ... if management is correct and business is growing, the split might work in their favour as those who believe splits are a benefit or those looking for a cheaper per share price jump on board. If the business can keep pace, then there won't be a benefit as the share price stay stagnant or drops.


I'm curious as to what you see as a regular basis.


The banks have split 14 times in thirty years, if I recall correctly - an engineering firm I owned split three times in twelve years, I don't recall how many times Enbridge and TransCanada have split while I've held them and I believe Fortis has split regularly.


Either way - I suspect splits are here to stay for certain corporations regardless of what the investor thinks of the split.


Cheers


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## andrewf (Mar 1, 2010)

Splitting shares has no impact on enterprise value or how the business operates. People misconstrue share splits with good stock returns because stocks that have good returns tend to split at some point (with notable exceptions like aapl).


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## Just a Guy (Mar 27, 2012)

The index is a good indicator of historical market performance...

While in a way this may be true, there aren't many indexes which still have the same stocks as when they started. To me it seems similar to grabbing a bunch of random people (say 50) and determining the average IQ for the world...then, randomly replacing a few of those people every few years...and saying the historical trend for the world's IQ is...

Also, as the dot com bubble proved, it doesn't work if an entire sector isn't represented...


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