Apple and Tesla Split
Why Retail Investors Guessed Wrong and Got Hurt
Several weeks ago, Apple (AAPL) and Tesla (TSLA) announced that they were doing a stock split. AAPL was a 4 for 1 split and Tesla a 5 for 1 split. What this means is that if you owned 1 share of Apple at $400 (not exact price) you would have 4 shares at $100 after the split and for Tesla if you had 1 share at $1500 (not exact price) you would have 5 shares at $300. These prices were about what the prices were at the time of the announcements but not exact because the exact prices at the time are not important to understand what happened.
I have multiple clients that wanted to buy AAPL after the announcement of the split and I know people that bought TSLA. The hype running up to the splits was crazy. It seems as if people jumped in expecting that after the split, the stocks would run up much higher due to the lower prices. What happened was the opposite as the stocks ran up so much before the splits that the profit taking after the split took the stocks down over 20% each. Depending when you bought the stock, your level of pain would be different.
Famed investor, Leon Cooperman, when interviewed,shared a personal story. His father, explaining stock splits to him when he was a child said, if you have one $5 bill or five $1 bills you were in the same place.
In my opinion, folks got this wrong on three levels:
- First, the stock was not any more valuable after the split so why buy more.
- Second, the majority of the buyers in both stocks are institutions and they don’t care about the share price. Additionally, with fractional share buying, most people can buy in even though the prices are high. So, based on this there wouldn’t be a surge of buying after the split as many individual investors expected.
- Lastly, I would argue that it was easier to sell after the split. For example, if you had 3 shares of TSLA at $1500 per share and want to lower your position by $500 to buy something else, without fractional shares you could not. But after the split you could sell 1 share to trim your position to lower your holdings. This meant that more individual investors could finally sell and take profits. It seems that this was in fact the case or the surge before the split just caused profit taking.
To anyone reading this, the market can be tricky. There is an adage, “Buy the Rumor Sell the News” and this is one of those instances. Sometimes, the obvious is not so obvious. Having an advisor that is more educated on market trading and trends can be helpful.
This article is for informational purposes only. It does not constitute investment advice and is not an endorsement or recommendation for any particular security or investment strategy. Please consult your financial advisor before making financial decisions. Investing involves risk and the potential to lose principal.(09/20)