6 ms·

There's a great Acquired podcast episode about Warren Buffet and his obsession with compounding returns. After listening to that episode, it totally makes sense

There's a great Acquired podcast episode about Warren Buffet and his obsession with compounding returns. After listening to that episode, it totally makes sense why he'd be opposed to a stock split. I highly recommend it for those curious about Buffet

tantalor 5y ago
Sum it up for us.
- paulyacoubian 5y ago
  The high stock price directly signals the power of compounding. If you split it down to $10 per share the lesson of buying and holding is lost.
  - smabie 5y ago
    Not really? Everyone would look at the split adjusted price for the past?
    - throwaway69123 5y ago
      I know plenty of people who dont understand that 100 $1 stocks is the same as 1 $100 stock
      - runawaybottle 5y ago
        It’s not the same. Depends on total shares. No one likes messing with stuff that’s never gonna move, doesn’t matter if it’s $1 of $100, it might as well not even be an investment opportunity. The returns on these high priced and low volume stocks will always be shit.
    - edoceo 5y ago
      nope, the lower number tricks your mind.
  - throwaway2037 5y ago
    "[S]ignals the power of compounding" -- only to unsophisticated (frequently, retail) investors. Institutional investors always have historical data that is split-, and even dividend-, adjusted. If I had to guess, refusing to split is like a form of virtue signalling, nothing more. When I was a kid, IBM usually had a high stock price, over 100 USD. I never understood why; nor did my father, a stock broker.
  - chrisan 5y ago
    How is the lesson lost? Don't you own the same amount after the split? Isn't the total value of compounding the same after x year? I feel like I am either missing something big or Buffett just has one of those "I'm gonna do it my way b/c" things here. And since I am a fool with finance I must be missing something big :)
    - adamhp 5y ago
      "Unsophisticated" investors see the big number and the price history (which is much simpler without splits) and see the power of compounding plainly. There's not much more to it than that.
morelandjs 5y ago
A common misunderstanding is that if a bunch of investors pool their stocks, they’ll earn more compounding interest on the larger pooled principal than they would individually, or conversely that a stock should not be split or it will earn less interest. The continuously compounding exponential return formula is P(t) = P0 e^rt Note that only time enters the argument of the exponent, not the principal. So the returns are invariant to divisions of the principal (ignoring human behavior effects).

tantalor 5y ago

Sum it up for us.

paulyacoubian 5y ago
The high stock price directly signals the power of compounding. If you split it down to $10 per share the lesson of buying and holding is lost.
- smabie 5y ago
  Not really? Everyone would look at the split adjusted price for the past?
  - throwaway69123 5y ago
    I know plenty of people who dont understand that 100 $1 stocks is the same as 1 $100 stock
    - runawaybottle 5y ago
      It’s not the same. Depends on total shares. No one likes messing with stuff that’s never gonna move, doesn’t matter if it’s $1 of $100, it might as well not even be an investment opportunity. The returns on these high priced and low volume stocks will always be shit.
  - edoceo 5y ago
    nope, the lower number tricks your mind.
- throwaway2037 5y ago
  "[S]ignals the power of compounding" -- only to unsophisticated (frequently, retail) investors. Institutional investors always have historical data that is split-, and even dividend-, adjusted. If I had to guess, refusing to split is like a form of virtue signalling, nothing more. When I was a kid, IBM usually had a high stock price, over 100 USD. I never understood why; nor did my father, a stock broker.
- chrisan 5y ago
  How is the lesson lost? Don't you own the same amount after the split? Isn't the total value of compounding the same after x year? I feel like I am either missing something big or Buffett just has one of those "I'm gonna do it my way b/c" things here. And since I am a fool with finance I must be missing something big :)
  - adamhp 5y ago
    "Unsophisticated" investors see the big number and the price history (which is much simpler without splits) and see the power of compounding plainly. There's not much more to it than that.

morelandjs 5y ago

A common misunderstanding is that if a bunch of investors pool their stocks, they’ll earn more compounding interest on the larger pooled principal than they would individually, or conversely that a stock should not be split or it will earn less interest. The continuously compounding exponential return formula is P(t) = P0 e^rt Note that only time enters the argument of the exponent, not the principal. So the returns are invariant to divisions of the principal (ignoring human behavior effects).