Discover more from Investor Charts / P1 Analytics
Does the GME Split Create Value?
Amazon, Google and Tesla rose nicely on stock split announcements. Finance theory says that no matter how you slice a pizza, you can't create more food. Changing the share-count does not alter the value of the company. The value of the company is independent of the number of shares. Theory and practice differ greatly. Business and Economic theory assume that people are constantly optimizing economic outcomes. Reality is different. When was the last time you woke up in the morning and thought "I am so excited about my job today, I work for a boss who is a rational, optimizing economic person!". Of course not. You wake up thinking "my boss is an idiot". Markets are a collection of these idiots, which make them very efficient and difficult to outsmart. Its tough to outsmart someone who is unpredictable, self-destructive and makes decisions on bad information.
Even though its tough to outsmart the market, you can still ensure that you do well. If you consistently make bad decisions combined with shoddy research, you WILL underperform and you will destroy value. Making good decisions based on solid research does not guarantee results but it maximizes the chances that you will do better than average and it really maximizes the chance that you don't do poorly (i.e. a bit below average is not that bad but you don't want to do poorly).
The recent action in AMZN, GOOG, TSLA and now GME demonstrate both the unpredictability and irrationality of the markets. Even more interesting is that people are painting GME and AMC with the same brush. No way that GME's stock split should add 5% to AMC's pre-market price, but it did.
A lot of crazy things are happening: Covid closed down the world, oil prices went negative then rose over $100, and now Putin invaded Ukraine and got "cancelled". One way to stay safe is to focus your investing on utility and focusing on what you need. You need food, shelter and power. A portfolio of food companies, REITs & Homebuilders, and utilities should perform admirably in almost any market environment. Stocks like GME and AMC are speculative at best. A DCF on AMC shows a valuation range between $0 and $15 per share, assuming it is a movie cinema company. AMC deftly is trying to become a conglomerate, but in reality that is not going to be that important for a long time. GME is more interesting, as it has a plan to get into NFTs and other exciting areas to offset its declining core business. Still, neither movies, video-games or NFTs are necessary items. These are products you want, not products you need. In a bull market, products you want usually do fantastic. But, in times of risk like today, re-positioning your portfolio away from wants and towards needs is helpful. Stocks of utilities are likely to make money whether interest rates go up or down, and they should make money in most geopolitical environments. In a massive bear market, they will lose the least. You can't sit on cash in 7% inflation, so look for conservative stocks that are still growing.