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Comment by nknealk | Hacker News Reader

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

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Sum it up for us.

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.

"[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.

Not really? Everyone would look at the split adjusted price for the past?

I know plenty of people who dont understand that 100 $1 stocks is the same as 1 $100 stock

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.

nope, the lower number tricks your mind.

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 :)

"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.

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).

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