The Downside of Stock Splits

As I get older, I find myself coming around more and more to Warren Buffett’s view that stock splits are not something to view favorably. Everyone knows that the mechanics of a stock split don’t themselves create wealth; they just take alter the number of shares outstanding to alter the share price while keeping the common stock economic interest the same.

Despite this, I maintained a lukewarm positive view towards stock splits because the desire to split a stock usually signals some type of management belief that earnings will be rising at a nice clip in the near-term future. It’s irrational, but it causes a lot of psychological tumult for investors to see a stock do a 2 for 1 split and then fall 50% in value (if Chevron had done a 2 for 1 split in 2014 when it crossed $100, then a 100 share position at $100 would … Read the rest of this article!