Do stock splits confuse you, as if they don’t make any sense? Yet another company finds their stock sliding and tries to make it better by splitting the number of shares to raise the price, as if the price was the problem. I want to lose weight, but my weight gain has less to do with what I eat and more to do with how I exercise. AMSC’s board approved a reverse split of the stock, as if the price of the stock will affect the health of the company. Theoretically that should work. In decades of investing, I have yet to find an example where a reverse split in the stock made the company healthy. Cutting back on what I eat hasn’t been nearly as effective as exercising regularly. I plan on working out more. I don’t know what AMSC is planning to do differently, yet I know that they probably felt like it was the only choice they had. They had other choices.

Stocks aren’t companies. Stocks represent partial ownership of a company, but the movements in the stock can be completely irrelevant to the operation of the company. Someone buys a share at a slightly higher price, the market cap goes up, but that doesn’t affect the people on the assembly line, in the office, or in the field – unless they let it.

Stocks do, however, influence financing; so, they do influence a few folks in the offices. The Chief Financial Officer and the Chief Executive Officer are definitely aware. A low stock price is not an encouraging sign to suppliers and customers. A low stock price also affects employee compensation. Getting loans becomes more difficult. Convincing people of the viability of the company becomes harder. So, when a stock falls far enough, long enough, to possibly be de-listed from the stock exchange, action is taken.

A reverse split is a simple mathematical trick. Assuming the total value of the company doesn’t change, decrease the number of shares by 1/x  and increase the share price by x. The share price stays above delisting criteria, and everything’s fine.

Except that everything isn’t fine. Everyone involved knows what happened. The concerns amongst financiers, investors, customers, suppliers, and employees are the same before and after the split; though now, the reverse split becomes an event that heightens the awareness.

The argument is made that delisting is something to avoid. Ideally, delisting should be avoided, but: 1) the fundamental issues are unresolved, 2) the share price shift doesn’t change anyone’s actions that I’ve witnessed, and 3) delisting isn’t as traumatic or final as the act of a reverse split.

My two favorite stock split stories are at opposite ends of the market. Berkshire Hathaway (BRK-A) is a $347B company with a stock price of $217,000. One share buys a modest house in most of America. Three shares buys a nice house almost anywhere. Berkshire Hathaway does not split its stock. Splitting the stock has more to do with trading than investing. Berskshire Hathaway wants investors, not traders; so, as the company has grown the stock has truly reflected the advance. GigOptix (GIG) is at the other end of the spectrum. GIG trades at $1.24 and is a $40M company. Sell 200 shares of BRK-A and buy 100% of GIG. GigOptix encountered a sliding share price, was advised to conduct a reverse split to maintain the listing criteria, and decided against it. The GigOptix management decided to accept the delisting and concentrate on running the company. They were delisted, and … the only thing that happened was that the stock was traded on a different part of the exchange. People could still buy and sell the stock. The company saved the money and hassle of arranging for a reverse split. Now, GigOptix is making about $33M per year.

I always vote against stock splits. From what I’ve seen, splits are expenses with no benefits. Theoretically, benefits exist, but they sound more like the sales brochure from a finance house rather than useful business advice.

Trying to convince me that a stock split is a good idea is like trying to convince me that, instead of buying something for $1,000, I’ll somehow be better off buying in ten 10% chunks of $100. That sounds like the easy payment plan from late night TV (another anachronism.)

I look forward to hearing about renewed efforts to sell AMSC’s superconducting cables, motors, voltage regulators, or any of their products. Those products, their potential, and their positive impact on the world are what I am invested in. (check my Semi-Annual Exercise EOY 2014) Improving the company will improve the stock price. ‘Improving’ the stock price, well, that improves the stock price, but only for a little while, and even that will fail unless they improve the company.

Now, as I look in the virtual mirror, I am going to make sure I get in my walk tonight. The best way to get my pants to fit better has more to do with how I move my legs than with buying a different belt.