After yesterday’s close, Amazon’s stock jumped 10%…
But the company didn’t release earnings. It didn’t sign a new major deal for AWS, either.
The reason for its more than $150 billion increase in market cap overnight?
Amazon announced a 20-for-1 stock split.
All a stock split does is take a high-priced stock and break it into smaller pieces.
This would adjust Amazon’s current share price of $3,000 to around $140. And current shareholders would now own 20 shares instead of one.
But it does nothing to increase the worth of the business. So, I’ve never understood why investors get excited by stock splits.
For some reason, they believe that 20 nickels are worth more than a dollar.
But having 20 nickels instead of a dollar bill really doesn’t make you any richer…
The fundamentals of Amazon’s business remain the same. Nothing has drastically changed overnight.
So, it doesn’t make sense for its market cap and share price to spike.
But these kinds of mispricings are common in the markets.
In fact, this week is a great example of Mr. Market’s mood swings…
With wild swings like that, why would I let Mr. Market tell me the worth of anything?
So, if you let Mr. Market guide you, you’re in big trouble…
The Golden Rule
The market is there to serve us — not guide us.
If you’re buying a stock just because it’s going up, that’s one of the quickest ways to lose money.
That’s why, instead of focusing on daily price swings, I look to the underlying value of the business to tell me everything I need to know.
I ask myself: Can I buy the stock for less than my estimate of its worth? If I can, I’m golden.
The same applies when selling.
If you’re wondering if you should sell, ask yourself: Did any fundamentals of the business change? If not, stay put.
The bottom line: Look to the fundamentals to tell you the worth of the business, not the price.
That’s what we do in Alpha Investor. It’s why we’re seeing this market volatility as a buying opportunity for several great companies.
And if you’re not part of the family yet but want to get in on these companies at bargain prices … find out all the details on how to join us right here.
Founder, Alpha Investor