I'm Irrational

During the tech bubble it was normal for a stock to explode higher when there was a stock split. I remember thinking how irrational that was because all they are doing is splitting the shares in half. Nothing about the company changed and the shares now reflect half ownership of the old shares.

Recently, Berkshire Hathaway split their stock and I bought the shares because I thought they would get added to the S&P 500. Since the announcement of their addition, I have been trading the stock and am currently long.

Before Berkshire split their stock I never owned the stock and suddenly it has become my favorite trading vehicle. Subconsciously, I was not willing to own a $4,000 stock but because of the split I am now willing to own it. I know, its irrational. The stock price should not matter. I believe I act more rationally than most in the stock market. If I was not willing to own a $4,000 stock than it is likely the case with many other people. I am going to press my Berkshire long because it is being added to the S&P 500 and because people will be willing to own it that have shunned it in the past because of the high price.


Anonymous said...

I will also press my Berkshire long - until Friday. After it enters the indexes, it is likely to follow the typical pattern and fall back some. My question is: is it a short then?

Chaos! said...

Usually the new entrants into the indexes underperform for a couple of months after their inclusion, but this one, post split, will draw buyers on strength from those who would have hesitated to own a $4000 stock.
I wouldn't touch it as a short. I'm long and may stay long depending on what kind of ramp up it gets going into the S&P.

nicasurfer said...

I am thinking this will be a long term holding for me as well. I wonder how many others are thinking this way.

Anonymous said...

Interesting...Ok, I may hold past Friday. I noticed that VISA in December rose in the 1st hour on the day following S&P inclusion before falling (which allowed me to short). In Berkshire's case, this pattern could be extended due to the large number of shares the indexes need to buy. A caveat: The Gates Foundation could well make a deal to sell in bulk after Wednesday when the 10 day averaging period for valuing B's shares ends.