In one sentence: A stock split changes the number of shares and the price per share but not the value of the business, so Phil and Danielle show how to keep your numbers honest (use whole-company figures, or restate history on today's share count) and open with confirmation bias and why a sceptical second voice helps.
Key ideas
- Buffett and Munger keep evolving inside their principles. Buffett once avoided tech because he didn't understand it, then bought Apple and Snowflake once he did. Their circle of competence grows as they learn, and saying something publicly doesn't stop you changing your mind. [06:00–10:30]
- Confirmation bias is unconscious. We explain away the bad earnings report without noticing. Buffett calls Munger the "abominable no-man" because a partner who isn't attached to your idea can say no easily. [10:30–13:00]
- A cheap trick for the lone investor. Ask a smart friend or relative with no investing background what they think of a company. Their off-the-wall questions often cover what your standard process missed. [13:00–15:00]
- What a split is. A company can set its share count however it likes. A 4-for-1 split turns one share into four, the pie stays the same size, and the price per share falls to a quarter at the next open. [16:00–18:30]
- The listener's problem is a real one. Historical per-share data (such as EPS from 10 years ago) is on the old share count, so after a split it looks four times too high. [18:30–20:30]
- Data providers fix it for you. Quality data sources restate the history by the split ratio when it takes effect. The original filings are not restated, so they still show old per-share figures. [20:30–22:30]
- Think in whole-company numbers. Danielle uses company-wide numbers (total earnings, total cash flow), so a split changes nothing in her calculations. This also keeps you thinking as an owner of the whole business. [22:30–23:30]
- Phil's toolbox goes one step further. He divides historical whole-company figures by today's share count, so older years show per-share results on the current share base. Provider-adjusted EPS only reflects the split, not dilution: if the company issued shares between then and now, adjusted history makes older earnings look better per share than an owner actually experienced. Buybacks and EPS-based talk can hide this. [23:30–28:00]
- Charts also get restated. A $460 price from years ago may show as $13 on a chart because of later splits. Some charts also adjust prices for dividends, so check the setting. Use a logarithmic scale so equal percentage moves look equal. [28:00–31:30]
- Reverse splits (two shares become one) are mostly cosmetic, often to stay above an exchange's minimum price. Think of the whole company, not the share. [31:30–32:30]
How it maps to RuleOne
- Splits are why the screen and the /stock/TICKER/ pages should be read in whole-company terms or on one consistent share base. The page's per-share history is only trustworthy if the data source adjusted for splits and dilution.
- The "ask a sceptical outsider" idea suits a thesis log for each holding in /holdings/.
Buffett, Munger and Graham links
- Munger's "inversion" and use of a devil's advocate fit the "abominable no-man" idea. See Buffett's Berkshire letters, where he credits Munger as a partner who says no.
- Buffett's owner-earnings view treats the business, not the share price, as the object of analysis (see the Berkshire owner's manual).
- Buffett's 1996 letter on circle of competence ties into the point that the circle can grow but you must still know where it ends. See also 001.
Words to know
- Stock split: a legal division of each share into several, leaving the company's total value unchanged.
- Reverse split: several shares combined into one, usually to lift a low share price.
- Dilution: new shares reduce each existing share's slice of the business.
- Logarithmic chart: a chart where equal percentage moves take equal vertical distance.
Try this
Open a stock page on /stocks/ for a company that has split in the past decade. Write down the earnings 10 years ago as total dollars (not per share) and compare the growth rate with the one you'd get from the provider's per-share EPS. If the two differ, the gap is dilution (or buybacks).
Check yourself
- What happens to a company's market value in a 4-for-1 split?
Answer
Nothing. There are four times as many shares, each worth a quarter as much. - Why does per-share history need care even after a split adjustment?
Answer
The adjustment only handles the split ratio. If the company also issued shares, old per-share earnings overstate what an owner got. - Why use a logarithmic chart?
Answer
So $5 to $10 looks the same as $1,000 to $2,000. A linear chart exaggerates moves at higher prices.
Short quotes
"The pie is the same size." (Danielle, on a stock split, ~17:30, auto-transcribed)