Stock splits truly boost stock prices—but not for the reason you think.

The rise in stock price following a split reflects correlation rather than causation. Stock splits are enjoying a resurgence, and markets are quickly rewarding companies that announce them. Alphabet (Google’s parent company), Amazon, Tesla, and GameStop are among the latest batch of firms seeking shareholder approval for splits—each saw its share price rise after the announcement. Beyond increasing the number of shares outstanding, a stock split changes nothing fundamental—making the subsequent price increase puzzling, especially for those who subscribe to the efficient market hypothesis. Ultimately, the market’s enthusiasm stems less from the split itself and more from the split serving as a signal that the company is poised for success—not as a cause of future gains. Companies tend to initiate splits precisely because their share prices have already risen significantly; stocks exhibiting positive momentum often continue to rise. “Stock splits themselves neither create nor destroy any value,” says Christopher Harvey, Head of Equity Strategy at Wells Fargo Securities. “Stocks that split typically exhibit positive price momentum, reflect strong overall company health, and show improving fundamentals. That’s what the market focuses on—and splits tend to occur precisely under such conditions.” In other words, the relationship between splits and price increases reflects correlation—not causation. But the numbers speak for themselves: According to Bank of America Securities researchers, since 1980, S&P 500 stocks announcing a split have, on average, outperformed the index by 16 percentage points over the following 12 months. In recent years, major tech firms—including Apple, Nvidia (NVDA), and Tesla—have announced splits, all while trading at high valuations. Yet lesser-known names have also joined the trend, including Sherwin-Williams (SHW), Amphenol (APH), and McCormick (MKC). Dow Jones Market Data shows that, on average, roughly 20 U.S. publicly listed companies execute splits annually over the past decade. The true golden age of stock splits was the late 1990s tech bubble. From 1997 to 2000, an average of 65 U.S. companies split their shares each year as the market surged toward its peak. Split activity revived again in the years leading up to the global financial crisis—and rebounded once more near the end of another bull market. Today, the median share price among S&P 500 constituents stands at approximately $118. Yet several firms trade far above this level—making them potential split candidates. The most expensive U.S. stock is Berkshire Hathaway’s Class A shares (BRK.A), which have never been split and recently traded at $517,000—changing hands only a few thousand times per day. Warren Buffett may never split these shares, but investors have another option: Berkshire’s Class B shares, equivalent to 1/1,500th of a Class A share—or roughly $350 recently.

To clarify: All references to ‘investment’ here pertain specifically to securities investment, and all statements reflect personal understanding. In *The Most Important Thing*, Howard Marks categorizes investment approaches into two fundamental types: All methods of analyzing corporate securities fall into two basic categories: those based on company characteristics—i.e., ‘fundamentals’—and those based on the security’s own price behavior. In other words, investors face two fundamental choices: (1) estimate a security’s intrinsic value and buy or sell when its market price deviates meaningfully from that value; or (2) base decisions entirely on expectations about future price movements. I quote the definition directly: ‘Estimate a security’s intrinsic value and buy or sell when its market price deviates from that value.’ At its core, this view holds that every security possesses an intrinsic value—and that its current market price frequently diverges from that value. Value investing rests on the belief that, in securities markets, such price deviations will ultimately revert to intrinsic value. Determining a stock’s intrinsic value thus becomes central to value investing—i.e., security valuation. From a valuation perspective, two figures stand out as foundational: Benjamin Graham and John Burr Williams. Graham introduced the price-to-earnings (P/E) ratio method; Williams proposed the discounted cash flow (DCF) model. Williams’s framework laid the groundwork for professional valuation practice in securities markets. Both methods have strengths and weaknesses: P/E valuation is inherently relative, whereas DCF is absolute. Each enjoys dedicated adherents—and each faces inherent limitations. Crucially, both rely on forecasts of future corporate earnings, yet predicting a company’s future profitability remains highly uncertain. Among value investors, price-to-book (P/B) valuation is often viewed as more reliable: it estimates a company’s present value while retaining comparative utility—but even P/B valuation has its own drawbacks. Each valuation methodology attracts its own cohort of value-investing proponents, and each confronts distinct market-related challenges. In my view, all such methodologies must grapple with several key questions: 1. When intrinsic value diverges from market price, how can we more effectively judge when—and how quickly—reversion will occur? 2. How do we address the inherent limitations of any given valuation method? 3. How do we cope with the unpredictability of corporate operations? 4. How do we respond to market irrationality? Faced with these questions, every student of value investing develops their own framework—and many also draw insights from non-value-investing analytical traditions.

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