Page 305 - How to Make Money in Stocks Trilogy

182 A WINNING SYSTEM

going on at the customer level. And for companies competing in a capitalist
economy, the ultimate boss is the customer.
Communication of information continues to change at an ever-faster rate.
A company that has a hot new product today will find its sales slipping
within two or three years if it doesn’t continue to bring relevant, superior
new products to market. Most new products, services, and inventions come
from young, hungry, and innovative small- and medium-sized companies
with entrepreneurial management. Not coincidentally, these smaller public
and nonpublic companies grow faster and create somewhere between 80%
and 90% of the new jobs in the United States. Many of them are in the ser-
vice or technology and information industries. This is possibly where the
great future growth of America lies. Microsoft, Cisco Systems, and Oracle
are just a few examples of dynamic small-cap innovators of the 1980s and
1990s that continually grew and eventually became big-cap stocks.
If a mammoth older company creates an important new product, it may
not help the stock materially because the product will probably account for
only a small percentage of the company’s total sales and earnings. The prod-
uct is simply a small drop in a bucket that’s now just too big.

Excessive Stock Splits May Hurt
From time to time, companies make the mistake of splitting their stocks
excessively. This is sometimes done on advice from Wall Street investment
bankers. In my opinion, it’s usually better for a company to split its shares
2-for-1 or 3-for-2 than to split them 3-for-1 or 5-for-1. (When a stock splits
2-for-1, you get two shares for each share you previously held, but the new
shares sell for half the price.) Oversized splits create a substantially larger
supply and may put a company in the more lethargic, big-cap status
sooner.
Incidentally, a stock will usually end up moving higher after its first split
in a new bull market. But before it moves up, it will go through a correction
for a period of weeks.
It may be unwise for a company whose stock has gone up in price for a
year or two to declare an extravagant split near the end of a bull market or
in the early stage of a bear market. Yet this is exactly what many corpora-
tions do.
Generally speaking, these companies feel that lowering the share price
of their stock will attract more buyers. This may be the case with some
smaller buyers, but it also may produce the opposite result—more sell-
ers—especially if it’s the second split within a year or two. Knowledgeable
pros and a few shrewd individual traders will probably use the excitement