Transcript
Jomana Selehin (0:00)
The 6040 mix of stocks and bonds in a portfolio model has been the default approach over the years and survived many critiques. But is it still relevant today? Join Vanguard's Jomana Selehin, head of Investment Strategy Group Europe and chief European economist, at the break to hear her thoughts about this well known model and whether 6040 even means the same thing to all investors.
Mehdi Hosseini (0:24)
The beauty of covering semiconductors or electronics hardware is nobody can forecast end market demand. It's always a black box.
Jack Howe (0:34)
Hello and welcome to the Baron Streetwise podcast. I'm Jack Howe and the voice you just heard is Mehdi Hosseini. He's a semiconductor analyst at Susquehanna International Group, and he says that spending on computing power is about to peak, maybe dip, and that might have big implications for the stock market. In a moment, Mehdi will tell us more about his view, including which types of semiconductor companies he thinks spending will flow toward. That's later. First, we'll say a few words about stock splits. Listening in is absolutely no. 1. Our audio producer, Jackson Cantrell is off this week. He's traveling. Can't say where. Rhymes with Bratemala. Can't say any more than that. Rather than bring you a rerun, I thought we'd bring you a quick, fresh episode. I've never done this by myself before. I don't know how this works. Who's going to be there to reel me back in if I get sidetracked? If I start talking about it's probably going to be an old TV show, $6 million man, right? If I start singing, who's going to tell me if I triggered royalties? How's that work? All by myself. Is that. Was that expensive? Feels like that one should have been free. Let's see how it goes. I'm going to bring you to start with what I think is a bad investment strategy from really smart people. I'm not going to recommend it, but I do think it's interesting and it has to do with stock splits. Does everyone know how stock splits work? A stock split is just where a company arbitrarily says, our stock's been doing really well. We've got a high price, we're going to split it into more shares at a lower price. It's pretty simple. But I have overheard conversations from people who don't seem to quite know. You ever heard someone who's an investing novice and they say, well, they want to buy this stock over here because it's trading at $750, so it must be doing really well. It's Doing a lot better than that other stock over there that's only $30. And then someone else will come along and say, no, no, that's the wrong approach. What you should do is buy low and sell high. You should buy the $30 stock maybe to become a $750 stock, and then you sell it and you can kind of see where both parties are coming from. If you were talking about some other type of good, if you were talking about a sport coat or a smartphone, then a higher price might mean it's probably a better thing. And also, if a stock is $750, maybe it's a big recent gainer and it's been doing well. That's not always the case. I saw a little while ago, Regeneron Pharmaceuticals, it was in the 680something dollar range. It was down 28% over the past year. I saw Adobe, it was trading a while back in the 440s, that was down 30%. So not everything that's trading at a high nominal price is on a rip roaring run. But also, experienced investors know that share prices are kind of arbitrary things, right? Companies can just make them up to a point anyhow. When they go public for the first time, they or their investment bankers can just pick a price and then they can adjust that price every so often through stock splits. Or if things go poorly, they can do reverse splits. The nominal share price doesn't really tell you too much about a company. You have to know how many shares are outstanding and that tells you the market value. And as for the buy low, sell high part, I can't stand that saying. It's kind of a truism. A truism is something that's like. It's correct, but it's so obvious that it's unhelpful. Like someone who says it is what it is. Well, yes, it in fact is what it is. Thank you. I appreciate you telling me. But with buy low, sell high, I think that might actually be an untruism. I think it's both unhelpful and not especially true. First of all, it's really difficult to tell what's low and what's high. That's the whole thing that makes up a market. Every trade that you have is basically a disagreement between two parties about whether the given price for a stock is too high or too low. But also, stocks tend to rise over time. If you're an s and P500 index investor, you have made out beautifully for four decades by buying high and then holding out for higher. If I wanted to rewrite, buy low, sell high, probably go something like buy often and ideally hold until it's someone else's problem because either you're dead or you're rich enough to give it away. That's not very pithy. So I don't think it's going to catch on. But the point is, neither of these two well meaning people in the conversation that I laid out earlier really has it quite right. But I want you to forget all that because at the moment the first person in the conversation might be pretty darn right, the one who wants to buy the $750 stock. And this is according to some recent observations by the Research Investment Committee at B of A securities. Let me share some of those observations. Number one, more stocks than usual have been splitting. There were 17 split announcements last year in the S&P 500 companies like Nvidia, Broadcom, Walmart and Chipotle. And that is the most since 2013. And if you're thinking that 17 doesn't sound like a lot, it's not a lot if we're using a longer lens. In other words, we've seen 44 splits over the past five years. It's a large portion of that, but it's nothing compared with the 364 splits that we saw over the five years that ended with when that.com stock bubble popped all the way back in 2000. But there's a reason to suspect now that splits will become more popular from here because, and this is observation number two, stock splits have been leading to big returns. Since 1980, stocks have returned an average of 25% over the year following split announcements. That's versus 12% for the market overall. And as good as those returns for splitters have been lately, they've been even better. Last year's class of splitters, they returned an average of 17% in the six months following the announcement. There's one more piece. Observation number three. There are a lot of split candidates now. That's what happens when you go a long time with no splits and the market goes way up. You end up with stocks with high share prices. Among S&P 500 companies, there were recently 40 trading above $500 a share. I've got some thoughts on why stock splits might have dried up decades ago. Trading odd lots, that's fewer than 100 shares. It could be a little cumbersome, a little more costly. And there was no one out there buying fractional shares. Maybe if you had a drip plan or a dividend reinvestment plan but nobody called their broker and said, I'd like 10.4 shares of whatever. Today. When you put an order in online, a lot of brokerage firms ask, do you want to buy a number of shares or do you want to buy a dollar amount? Trading in odd lots and decimals is no big whoop. Which means nominal prices are less important than ever. And even B of A, who produced this research on splits, points out that splits don't really affect fundamentals. Warren Buffett famously avoids splitting Berkshire Hathaway A shares. Those were recently more than $700,000 per share. His belief is that the high price attracts only long term investors, not flippers. My hunch, and this is only a hunch, I think that not splitting shares just became kind of big tech fashionable over the years, like wearing those alpine vests to work. But now share prices are super high. Splits are bringing big gains and big gains are certainly fashionable, just like alpine vests. Are those still fashionable? I feel like probably, which probably means definitely not. So even if the whole thing doesn't make sense, splitting your shares into more shares, that should not make your stock price go up. But if it is making stock prices go up all around you, you maybe you're going to do it. There could be a coming split for Lance and that raises the question of who's next. I want to stress again, I don't like this very much as an investment strategy. It's gimmicky. You should buy into good companies you want to hold for a long time, not try to guess who's going to split. Anyhow. A lot of sensible things aren't working at the moment. You know what's doing great? Gigachad. Gigachad is a meme coin and it represents, and I am quoting here from Gigachad.com, tokenized masculinity. Gigachad is up thousands of percentage points over the past year. It has a market value of hundreds of millions of dollars. I am leaving out some key fundamentals here. There's also a picture of a guy with a beard on the website and there's phrases like quote, I don't care, I win. A phrase like that feels like it's worth about 14 million right there. I'm not an expert on tokenized masculinity valuation. One last thing to point out is that the list of split contenders, it reads a lot like the high flyers that investors are chasing. Anyway, the biggest commonality among past splitters is that they had rapid price run ups before the announcements. So if you start with the $500 plus stocks and you sort for ones that have done better over the past one, three or five years than the average company that then decided to split. You find according to BofA names including Netflix, Fair, Isaac, Eli Lilly, Meta Platforms and Goldman Sachs. The point is that I don't recommend split chasing, but you do.