What A Pizza Tells Us About Investing

Here is something for you to mull over. It’s about food. So no surprises, if you are a regular reader of the Motley Fool’s Take Stock Singapore.

Let’s say, one day you order a pizza from your favourite pizzeria. But when you get it home, you find – to your disappointment – that the restaurant has forgotten to slice the pizza.

But it is, nevertheless, still a very appetising pizza.

So the question is whether you eat the pizza before or after you slice it. And if you do decide to slice it, how many slices should you cut?

Not hungry

US baseball legend, Yogi Berra, was once faced with the same “pizza” problem. He joked that the pizza would be better cut into four pieces because he wasn’t hungry enough to eat six slices.

He was going to eat the whole thing anyway. So did it matter whether the pizza was cut into four or six separate pieces?

Something similar happens in the investing world, when it comes to stock splits. This is when a company increases its outstanding shares by issuing additional stock to its shareholders.

People seem to get very excited about stock splits because they think that somehow it could make a material difference to the share price.

Same but different

It does make a difference but not in the way that some people might like to think it does.

So, when they ask about a stock split, what they are really asking is whether the company will be worth more or less after the split.

But the question they should really be asking is whether the company is good one.

The two questions are not the same. They are also mutually exclusive.

A rubbish pizza that is cut into many pieces is still a rubbish pizza.

Why split?

But many companies do split their stock from time to time. They do so for a variety of reasons, though.

For instance, a company that announces a two-for-one split will double the number of outstanding shares and in turn halve the share price.

But a half times two is still one. So the market value of the company remains – arithmetically speaking – unchanged.

So why do companies even bother to split their shares if, mathematically speaking, it doesn’t make any difference to the market value?

That is a question that only the company can answer. Some companies might want to have a lower share price, so they can attract a wider group of shareholders. Singapore Press Holdings (SGX: T39) did precisely that in 2004. It carried out a 5-for-1 share split when its shares cost around $19 each at the time.

Not convinced

That might have helped when the board lot size in Singapore was 1,000 shares. But that line of thinking really doesn’t hold water anymore, now that board lot sizes have been cut to 100 shares.

What’s more, if you can’t afford to buy 100 shares in one go, it is still possible to slowly build a wide portfolio of higher-priced shares through share-builder accounts, by investing little and often.

So the argument of ending up with “odd lots” in our portfolio doesn’t convince me. In fact, I have “odd lots” in many of my holdings.

More is better

I rarely, if ever, sell my holdings anyway. So, I am more than happy to accumulate more shares through company Dividend Re-Investment Plans, even if it might mean ending up with odd lots.

But many investors have been programmed to believe that having more shares at a lower unit price is somehow better. By the same token they believe that having a high share price but fewer units is somehow bad.

Neither is correct.

It is never about the share price. Nor is it about the number of shares. Instead it is about the company and how it could perform from now to infinity. That is how we should be valuing shares.

A version of this article first appeared in Take Stock Singapore. Click here now  for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock - Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

Like us on Facebook to keep up to date with our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.