Money is cheap and easily available (to select few) which has helped players in private equity to borrow and spend. Consequence of this is that companies can stay private longer as there is more capital available in private funding rounds.
Take for example the case of Uber which has managed to raise $21.7B , something that in past would have only resulted from an IPO.
Was off by an order of magnitude on the amount Uber raised.
You can't include primary and secondary financings in the same total, because you would be double-counting. That would be like measuring a public stock on its total volume traded, not its market cap.
- Investor A invests £100M into Uber for 1M shares
- Investor B buys those 1M shares from Investor A for $400M
- Investor C buys those 1M shares from Investor B for $500M
There has been "$1B in fundraising" but:
(a) only $100M went to Uber and;
(b) the market cap of those shares is $500M
> Without deep knowledge of a company’s critical research — which businesses may be reluctant to share, for competitive reasons — it’s difficult for outsiders to evaluate a start-up’s worth.
In the presence of ZIRP --> greater fund availability, existing reasons for not going public dominate: not dealing with Sarbanes-Oxley, activist short investors, and other operational headaches of a public company. The other good reason for going public -- getting officers and employees regular liquidity -- is being undercut by increased availability of secondary offering platforms.
It is such an expensive pain to run a public company, the only reasons to do it are access to capital and ongoing liquidity for your shareholders. If you can get that another way, why bother?
But, share buybacks are basically “return capital to shareholders”. Put another way, it is an admission by management that they expect shareholders (at a given stock price) to be able to achieve higher return on equity/capital elsewhere. When a company buys its stock back, they are also saying something about how their long term prospects look.
Disciplined companies return capital. Bad ones squander it on bad projects.
All things equal, I would prefer a company invest my capital in new, good projects. But barring that, I would much prefer it's returned as a dividend/buyback than blown in silly, wasteful spending that doesn't do anything for the firm or its investors.
It takes a lot of courage and intellectual honesty to return capital. It's far easier to spend it on bad things.
Because loaned money effectively creates a preferred share class with buyout option (meaning if the debt can't be paid, company gets owned literally by the lender and shareholders lose everything, but shareholders can buy out the lender if they choose for a fixed amount)
I mean, you only answered the very easy questions, so I figured I'd throw a harder one out there.
In effect, you could be right, but, not all loans are secured the same way, and not all loans use equity as collateral. But, in the case of the above, you as a shareholder could be one of those that sells your share instead of keeping it. Corporations that use loans to buy their own stock are changing the picture of how their company is expected to perform. If you do not like this new picture, you are not obligated to own their stock.
If the company goes bankrupt, it is frequently true that the equity holders get hurt the most, but, that is reflective of the underlying math of equity ownership in the first place. A stock is worth some discounted value of the company’s future earnings. It is not a guarantee of some payment. A bond/loan is a guarantee of payment, but not reflective of future earning (though its market value may reflect the likelihood that it will be paid back).
Put another way, if the loan is a bad idea, and the company is not going to be able to pay it back, then that will probably be reflected in the stock price. For companies that take loans to do share buybacks, the risk of non payment of the loan is also priced in to the stock price by the market. If you don’t agree with this, and feel that the market has mispriced the stock, then there are abundant financial products (options, derivatives, etc) to allow you to express that opinion financially.
Further, low capital costs increase the amount of money that can be extracted and thus make this ever more enticing.
Like public companies sliding the scale towards private companies to give fewer people more power and returns.
Microsoft for example has had an enormous repurchase program over two decades. They've bought back something like $150 billion of stock. Yet they can have more shareholders today than when they began the first repurchase program. That's because new public investors can continue to come in. Also, formerly large ownership positions can be sold out of, de-concentrating it (eg Gates donating shares to his foundation, which then sells the shares, plausibly to a lot of new owners over time).
Consider Johnson & Johnson. They could buy back their shares for 50 years and still end up with more total shareholders, as people are very attracted to their persistently rising dividend.
I think e.g. Dell buyback was of this type.
The problem is small companies aren’t going public because of the much larger regulatory burden or cost, or they are being acquired before they go public, or they are staying private longer because of access to private capital.
Perhaps the better conclusion of the NYT article should have been that these markets no longer carry the economic significance they once did?
I witnessed first-hand a situation where executives engaged in outright fraud in an effort to kick the can far enough so that the VCs and execs could cash out. The aftermath of that fraud was two scapegoats who were sentenced to 18 months each and had to pay fines of less than 10% of the profit they made from their crime. If you're an individual who invested in the company and lost all your money, then fine...I can see the personal responsibility angle. But most of the losses were mutual funds and pensions where the losses were felt by people who had no hand in choosing that investment. Instead, that was financial professionals and the perverse incentives they're given that push them to seek outsized returns.
There's a very good possibility that we're in an over-regulated state at the moment, but it's important to remember that in the complete absence of regulation, the public gets fleeced. The focus should be on finding the right regulation rather than vilifying the general concept of regulation.
Do you mean, larger than staying private? Or larger than it used to be? Regarding either, I would guess that regulatory costs were much higher in the 1970s, before modern 'deregulation' and when the concept of government involvement in the economy was different, yet small companies' participation in the market was much higher then, according to the article:
* In 1975, 61.5 percent of publicly traded firms had assets worth less than $100 million, using inflation-adjusted 2015 dollars. But by 2015, that proportion had dropped to only 22.6 percent.
Also, are you aware of any evidence for it? (For other readers, the parent's link addresses another issue, the change in cost of small trades.) Unfortunately, regulation and its costs are such a politicized issue that I have a hard time finding reliable data (or any data).
EDIT: For a counterpoint, consider that regulation makes markets more attractive. For example, nobody would want to participate in a completely unregulated market, where theft and fraud were commonplace. Regulation, when implemented properly, makes markets safe for participants, protecting their investments.
I don't think this is necessarily a question of whether regulation as such is good or bad. It seems intuitively plausible to me that regulation like SOX can be both beneficial in terms of trust in the markets and a deterrent for smaller companies to go public.
While I agree, I think the problem here is that many, many things are intuitively plausible. Maybe market fraud is increased and the markets are less safe for small businesses, or maybe policies or custom or collusion have cemented big players who have less interest in small companies. We need data and reason to sort the wheat from the chaff.
Our intuitions suck. If they were good, we would have had the right physics in 1,000 BCE instead of 1900 CE. (Not my line, but a good one.)
I'd guess earlier than 1900, but I don't know. And of course, there are many gray areas.
Wake me up when people stop believing in homeopathy.
I don't envy economists. No double-blind lab trials here. Even if we had Putnams Twin Earth our experiments would probably fail for some weird semantic reason :)
With the rise of private equity funds, there has been a legitimate alternative to going public. PE certainly has its own bevy of issues, but I'm not sure it's not worthwhile...
Somehow (neo-classical) economists have convinced the world that shareholder wealth are sacrosanct, and thus corporations will do all kinda of short term idiocies to boost share value and by extension shareholder wealth.
More to the point, people have accepted Amazon as a growth company. So long as Wall St likes the story, the price goes up, everyone is happy.
On the other hand, AMZN is trading at ~230x earnings and ~4.6x revenue. For comparison WMT (Walmart) is trading at ~30x and ~0.5x respectively. Amazon is growing much faster, but there are no guarantees that it will do so forever. To reach ratios like Walmart's it will need to take in ~$3.8Tn of revenue.
For comparison, their revenue in 2017 was $178 billion, and in 2013 it was $74 billion.
It’s not entirely unreasonable as Walmart’s total revenue today is $0.5B.
(2 trillion dollars seems like a big correction to me, btw)
Similarly, if you buy shares in Apple, you do not directly own its cash, facilities, intangible assets etc. Apple owns these. But you own voting rights and the ability to participate in dividends or buybacks.
In both cases the company -- the company's management, really -- has a wide degree of freedom in what it does. Apple can buy companies or sell iPhones without consulting shareholders. ETFs can buy and sell shares similarly.
Similar-looking but quite distinct is the trustee/beneficiary relationship from trusts law. In that case the trustee legally holds property "for the benefit of" the beneficial owner. Again, as a beneficiary, you would not own the shares held by a trust on your behalf, but the trust would need to buy and sell them according to its view of your best interests.
Since both corporations and trusts have wide-ranging legal, financial and taxation implications, the details vary widely depending on where you are. Each jurisdiction has comparable but distinct caselaw and of course legislatures have tinkered quite feverishly with it too.
I am, of course, not a lawyer. I didn't even finish law school.
https://www.bloomberg.com/view/articles/2018-01-30/iss-tells... has some useful pointers.
Amazon's operating income is up to an annualized $10 billion now. Their profitability has exploded higher in the last three years (thanks heavily to AWS), drastically out of ratio with their sales growth.
Another three years from now, their operating income will very likely be up to $20-$25 billion (I'm using operating income here because of recent rule changes on what's included in net income). That would still be a rich multiple on today's market cap, no question. There's a massive gap between AMZN having a 40 or 60 PE ratio (ie a very rich multiple), and your claim that they'd need ~$1.5 trillion in revenue (Russia's nominal GDP for 2017) to justify their valuation.
Amazon's net income margin now exceeds Walmart's and is heading higher due to the fat margins of AWS. At $400 billion in sales (five to seven years out), they'll very reasonably be able to generate $30 billion in net income (old net income calculation) on the path they're on. At $30b in net income, you're talking a ~30 PE ratio at today's market cap (ie a traditional valuation), and it requires nothing even remotely like an equivalent to Russia's GDP. Microsoft and Google both routinely sport valuations that are 30x multiples of earnings (as do dozens of large tech firms). The issue with Amazon, is that their future returns have been pulled forward, not whether they can ever justify a $900b market cap with a traditional multiple.
The requirements for such companies are nowhere near as onerous as those required of public companies. They need to file a 10-K and 10-Qs (as necessary), but most other filings are not required. They are also not subject to Sarbanes-Oxley or Dodd-Frank.
Employees own 31% of the firm through an employee share-ownership plan. (The rest of Publix, established in 1930 by George W. Jenkins, is largely owned by the Jenkins family, which still runs the firm.)
1: The article is cherry-picking for a headline. In 1980, there were 71 IPOs . In 1990, there were 110. In 1996, the year that this article points to, there were 677, the highest number since 1980. This was the center of the ".COM" bubble when many if not most companies had no business going public. To put a finer point on it, From 1981-1990, there were 2,153 IPOs. From 1991-2000, there were 4,361.
2: It was the backlash of A. 'shit equity' that was produced in the .com bubble, B. two recessions, and C.common sense, that led to fewer and fewer IPOs since 2000. Just consider YC itself. How many $100+ Million companies are in it's portfolio (25?)? How many are public (a: 1)? In the 2001-2010 decade, due to a., b., c., there were 1009 IPOs. Since 2011, 726.
The low number of public companies is due to market dynamics and the sentiments of founders that have ensued since the .COM bubble. Author cherry picked the peak IPO year.
Still contending that this move towards quality is the legacy of .COM mania and the ensuing Sarbanes-Oxley burden.
> When I say “shrinking,” I’m using a specific definition: the reduction in the number of publicly traded companies on exchanges in the United States. In the mid-1990s, there were more than 8,000 of them. By 2016, there were only 3,627, according to data from the Center for Research in Security Prices at the University of Chicago Booth School of Business.
So how many of those ~4400 publicly traded companies that disappeared between the mid-1990s and 2016 were .com IPOs?
- iTurf TURF*
- Autobytel ABTL*
- Extreme Networks EXTR
- iVillage IVIL*
- Priceline PCLN
- Vignette VIGN*
- Web Trends WEBT*
- Healtheon HLTH*
- VerticalNet VERT*
* No longer trading
One (unsurprising) solution might be to fuse decentralized technologies in to today's stock market architecture . Countries like Malta are doing that already with technologies like the Neufund/Binance platform. 
How about the "accredited investor" limitation?
In order to invest in something that can generate great wealth (eg., a startup, I believe futures, a number of securities), you need the accreditation, which means either making 200K+ US two years in a row, or having 1 mil US in non-primary-household wealth.
Now, one could argue that it's intended to protect people from themselves - the guy or gal mortgaging their house because a snake oil salesman convinced them to invest in something shady. But doesn't it also block off a whole set of possibilities to a select few in the name of protecting the little guy?
Preventing small time retail investors from buying into high risk startups is a good thing. Unfortunately the general public has proven over and over again that they lack the financial sophistication to comprehend the difference between a scam and an investment opportunity. Remember even VCs lose money on a vast majority of deals.
The ICO mania over the last year provided an excellent reminder of why these regulations exist and why they are important.
Since they lack the sophistication to understand they were being scammed...why do you think they would have any understanding of classical valuation models?
That's an extremely elitist, if utilitarian perspective. It doesn't make it wrong. However, consider that having a lot of wealth as a pre-req for obtaining wealth is, of course a circular problem. It's a legalized entrenchment of wealth sort of situation and the justification is, the public good.
No it's not, there are plenty of rags to riches stories (they had to get their wealth in the first place and most wealthy people didn't just stumble upon oil).
On the point of unregulated securities, if you are so interested in investing in them, why don't you just join a VC? Once you make partner, you get your share in the returns and can make a lot more money since you will have way more capitol to invest than the spare change you have in your bank account.
Which part is controversial?
No, generating wealth from wealth is proportional to your wealth. A middle class persons wealth in the sp 500 generates the same percentage returns as that of a billionaires does.
> join a VC
If you really think you can beat the market, then you should join the VCs and you can make a bunch of money IF YOU ACTUALLY CAN ACTUALLY BEAT THE MARKET. However, I HIGHLY doubt you actually can because most people do not and yet there are tons of people like you that think they can especially the most uneducated which is why they are the most susceptible to scams and why we have laws to try and product them because having an economy based on scams has lots of negative externalities.
> does accreditation requirements help or hurt the ability for individuals to ascend economically. It obviously hurts them
This is a condescending attitude that keeps people outside the financial class on the fringe and destroys their ability to take control of their lives. If you treat people like children they will forever remain children.
As a struggling low-income millennial, FATCA and accredited investor requirements have easily set me back a decade.
How? Are you wanting to be one of the scammers because those are practically the only people that would get rich if we got rid of these laws? Almost everyone would make less returns than an index fund and a lot would even lose more money to the scams than they would make from the good investments. There would be a few outliers who just got plain lucky but if you want to be one those people, just play the lotto or go to vegas where your odds would be better.
I have a serious disability that is not recognized as such by the government. No one will hire me. I am completely isolated from civil society. The only way I can make money and pay for my medical expenses is to start my own businesses. I can only start businesses in unregulated markets because the barrier to entry is impossibly high elsewhere.
Without Uber/Lyft or cryptocurrency I would probably be dead. Like seriously not alive. Gone. Not existing anymore as a human. So when people whine about how they've been scammed because they made ignorant decisions and got involved with things that they shouldn't have, I do not feel sorry for them. They got greedy, gambled, and lost. That's on them. I am not gambling. I am making legitimate transactions with people who need my services. Just because some people scam does not mean that I am.
What has happened to me just happened through no choice of my own, and it feels like regulators are doing everything they can to keep me down, all in the name of protecting people who refuse to put in the work to make wise decisions. People who have more than me. People who are healthier than me.
If everybody suddenly has a chance to invest in a round, investors will compete on price, bidding up those early-stage valuations and compressing future returns.
Just what barrier to investing in the stock market is there, besides for having money to invest? It's easy to setup an IRA or 401K or just setup your own brokerage account.
Even if investors shouldn't pick stocks, it might be wise for them to invest in an index of companies that they are now prevented from investing in.
Returns from private companies go up -> more VCs enter the market with higher returns increasing competition -> valuations get higher (meaning founders/employees get to keep more stock while investors get less) -> returns deflate and we are back at a balance.
There is a reason VCs have been complaining about sky high valuations and it's because most VC's don't even beat the sp 500.
The returns in those index funds are driven primarily by growth stocks.
 I assume due to the prevalence of venture capital; that absorbs the returns of early startups.
Also, it creates a two-tiered system with self-perpetuating A and B economic classes, rather than a merit-based free market that allows social and economic mobility and opportunity. Generally, that is seen as antithetical to democracy and to American values in particular (not to exclude other countries).
The median annual household income in the US is around $60k.
(Yes, growth equity is a category of private equity, but it's a developing middle ground between VCs and more traditional PE which is usually focused on cost cutting and loading up on debt to juice returns from mature companies.)
Edit: Got to like the down voters who think individual investors should be out picking stocks. Even though experts and basic investing advice tells people they should not be picking individual stocks.
There are ETF's for everything today. If more small companies were available on public equities markets, then they would be included in a variety of different ETF's. The problem is that today you need to be an "accredited investor" to buy any of the high-growth potential private companies' equity, and even then, the best companies are usually raising capital from a small number of people and organizations.
This means the majority of the high growth in equities markets is captured by high-wealth individuals, and private organizations owned and operated by high-wealth individuals.
Without strong connections, it's difficult to gain access to any solid high-growth private companies.
The days where the economy was relatively stable and large companies had wide moats against competition are largely over. The last 15 years has seen a large number of huge household names go bankrupt entirely, from Kmart to Sears to Toys'r'us to Chrysler to GM to MCI/Worldcom to Bear Stearns to Lehman Brothers to Wachovia to virtually every airline. Many more are now at risk, from Visa & Mastercard to Walmart to every hotel chain.
All of these huge returns for private tech companies are coming at the expense of their competitors, which are largely the big public companies that many people have their retirement money invested in.
That is the core problem.
10% YoY for index funds = healthy. Far lower for rigged economy reasons = a large scale societal problem.
What do you mean? The current market has many problems but recent returns being low is not one of them (of course returns going forward are something else entirely).
S&P 500 total returns (annualized) are:
17% over the last one and two years
13% over the last three and five years
11% over the last ten years
9% over the last eleven years (roughly corresponding to the peak of the previous bull market)
Take them out and you're much closer to the historical 10% return, and that's in a bull market.
But if understand correctly, HashThis' claim is that the market is not even returning the historical 10% average.
Something like Wilshire Index returns 7% CAGR over the last 20 years. Interestingly, Russell and Dow are about the same 7%.
As the economy becomes ever more permanently unequal, the concept of one number representing inflation becomes less meaningful because there is no longer one standard of living or one cultural expectation. Something like M2 is 14000 now and 4000 in 98 so thats 6.4% annually. After tax the Wilshire would only return maybe 3% or so, minus 6.4% inflation, whoops... Or you could use the famous Big Mac price index which is about 2.8% over the same time period, leading to a very slight profit of a fraction of a percent. Are you part of the separate subset of society that lives off M2 or off big macs or ...?
So investing in "the market" depending on hand waving provides a modest negative to approximately zero return. If you can pick the subset of winners in advance, the SP500 is quite profitable, although if you can pick winners in advance there's probably more profitable things to predict.
Also remember the market can remain irrational longer than you can remain solvent over all values of "irrational" or "solvent" or "longer". I have a medical insurance bill to pay next month, not over ten twenty or hundred year average. Pulling out a constant sales price from the market to live draws down a balance faster than pulling out a constant small percentage of total value over a long time period.
Then of course there's long term demographic issues. The USA is supposed to be richer in the future because... why exactly? You might get a bigger slice of the pie, but theres no particular reason to expect the pie overall to expand.
Another thing you may find surprising: the long-term historical average return for small cap indices is higher than for large cap indices.
When you invest in the SP500 and companies drop out of it, your investment in those companies ALSO drops out.
And the publicly stated "return" of the SP500 takes this into account.
Even more simply, just imagine how the market might look different if you could invest in a VC. You don't pick startups, you pick a VC- kind of like picking a fund today.
The answer is not to do the same thing that’s been done for the last several decades. That’s insanity. The solution is to empower the individuals.
People don't want that, they want to get rich quick. See the recent (bit)coin hype train(s).
And to top that off most of the people are absolutely without disposable money. They don't even have rainy day savings, and talking about investment portfolios is laughable. Again, millions are without basic health care and we want to make empower the individual.
Yeah, let's do that, but before turning everybody into an junior investment banker on coke let's educate folks. (That'd help with having a middle class again too.)
The assertion that Americans do not, on average, have money to invest is a false one.
That is the exact barrier of entry I'm referring to. Ballooning stock prices of well-performing stocks and shrinkage of the number of listed companies in a stock market narrow the opportunities for middle-class investors.
That means there should be more potential buyers, not fewer.
The premise of a shrinking middle class isn't strictly a myth, however it ignores the fact that what is actually happening is that the middle class is moving up faster than the bottom economic tier is expanding. That process is contracting the middle class - it's not contracting due to eg increased poverty, as poverty in the US has gone down over time. The sole reason there has been any net expansion in the bottom economic tier, is due to extreme low skill / low wage labor importation since the late 1970s.
Here is an alternate viewpoint on the “shrinking” middle class: http://www.aei.org/publication/yes-the-us-middle-class-is-sh...
I don't see any reason why the current exchanges pose in any way some kind of problem to the creation of smaller, more healthy, competitive and robust firms.
Yes, there are regulations, and each exchange has a bunch of rules, but that's generally for the benefit of everyone involved. Any kind of decentralized system would have to have rules.
The exchanges do make money, but it's trivial relative to the underlying financial transactions.
I suggest 'the problem' has more to do with globalization and the consolidation of mature industries, and the availability of large, private funds. Both activities have advantage and disadvantages.
Agreed. Kinda. The question is: which is causing which? Or is there something else for which these are symptoms?
A history of financial laws designed to protect consumers has actually reduced the number of investment opportunities except for ultra-rich people.
Look up the definition of 'qualified investor' from the Securities Act of 1933. It prevents people below a threshold of wealth from being able to invest in certain things.
Similarly, based on my own experience having worked with proprietary trading outfits in the past, the FATCA laws just caused European banks to no longer want to do business with Americans which reduced the number of available investment opportunities again.
A 25 year old who loses a $10K investment in Myspace, or Digg can easily bounce back. It's well worth the chance of investing early in a company like Snapchat or Facebook which could give them a shot at a 10-100X return.
There's a reason so many people poured money into Bitcoin and crypto. Most of the projects are pointless, but young people have very little interest in earning 5-10% in stocks, since they don't have a ton of capital to invest.
The trade off is that Theranos would be public, but so would, for example, Stripe and Slack.
I agree with you that there are trade-offs.
On one hand, making it harder for companies to go public creates a more QA-ed public market and prevents some very questionable fundraising. OTOH, the stricter criteria & controls exclude smaller companies from public markets altogether, either because they don't qualify or don't want the extra hassle, transparency or outside scrutiny.
Public markets are more transparent and more open to the "retail investor." So, there are real reasons to worry about trends towards staying private.
However.... I don't think this is all or mostly about securities regulators or policy. First, wealth is increasingly concentrated. "Retail" investors are not as important a source of finance. Where they do need access (pensions, etc.), this can be had 2nd hand via the complex "corporate structuring" of most large piles of aggregated wealth.
Basically, the problem that public markets centralize and solve is proportionally smaller in this generation than the last. If public markets didn't exist today, "private" alternatives could probably fill most of the void comfortably.
I do think it's time for fresh ideas. I would not object to a more active regulator, but in different ways, than we've seen up to now. How about regulators inventing new types of securities, instead of leaving this to the shadow sector.
Edit: This is wrong, see below.
I have been looking for other ways to invest than putting my money in the stock market. Luckily today there are new ways to invest that were not available 20 years ago.
I think way too many stocks' prices are disconnected from their actual value (or even future value). To some extent, the stock market has become a legal gambling platform.
Also the market is biased towards the professional traders and it's not serving the average person that worked hard for their small money and it's way too easy to loose a big chunk of your $$$.
Also, i would have loved to see the article talk about the increase in private investments (ie VCs and Angels)
Elon Musk said it himself: he tried his hardest to keep Tesla private but he just couldn't, he had to let go and IPO.
He swore to not make that mistake again with SpaceX (more here: https://www.quora.com/Why-did-Elon-Musk-make-Tesla-go-IPO-bu...)
You have more opportunity to trade now, in more markets, with more information & instrument options, for cheaper than ever.
> I have been looking for other ways to invest than putting my money in the stock market. Luckily today there are new ways to invest that were not available 20 years ago. I think way too many stocks' prices are disconnected from their actual value (or even future value).
Good luck retiring. It's seems like this attitude is growing in the United States which is unfortunate because lot's of people will be working through their "retirement" years.
Constantly checking and panicking about a single days loss is a route to failure as an investor.
Dell's privatizations comes to mind. It was taken private temporarily, not to hoard all the gains, but to allow a single stakeholder to call all the shots and attempt a turnaround. Now it's going public again.
And the stock market offers the option to reduce volatility through diversification. You have no such option with gambling.
Only rather superficially, if you're randomly choosing stocks, randomly buying and selling them, then maybe on the surface they both seem like they have similar odds. But they really don't.
If you had said binary bets are gambling but I would agree with you.
Maybe this what the 1% want you to think ?
Biggest producers of most consumed products are on the stock market.
People buy procter & gamble stocks because everyone is buying the products.
I did very well out of a Uk listed one that was on a massive discount (electra ELTA) I would have hit the tax free limit for divi income on a single stock investment of £2k.
Ppl have been saying that for years. It's possible for future values to increase. That was what happened in 2016-2018. In 2015 profits had been to flat line, and then they inexplicably began to rise in 2017, breathing new life into the market. I would rather invest in a slightly overvalued market than miss out, especially giving how terrible people are at timing the market. Had you sold in 1996, when the market was already getting overvalued, you would have never ever been able to buy back at a cheaper price.
10% discount in Q4 2002 and Q1 2003.
30% discount in Q1 2009
This is in part because private VC funding has matured...but also because there's all sorts of regulations about raising money that completely exclude non-accredited investors from early-stage investments.
No wonder the rich get richer...
Presumably you wouldn't be buying one stock, but a portfolio of other public companies, including Real Networks, Enron, and MCI/Worldcomm.
Backtesting the portfolio built on the thesis "buy every single stock at its IPO" has been shown to lag the market.
Or will all the explosive early gains in future companies' growth be captured by the private equity ecosystem before the companies go public?
Sarbanes-Oxley's aim was to de-risk the market, and lower risk generally brings lower returns.
VCs reduce the personal risk (at the cost to the personal upside). I suspect this compromise is helpful to very many.
Moreover, VC terms are far better than they were 20 years ago. It is not at all hard to get funding with 1x liquidation vanilla terms, something that used to be quite challenging.
By that do you mean that etfs which people might buy are overvalued compared to the stocks which compose the etf? Or that overinvesting in the etf results in the stocks getting overvalued?
Because as somebody that works on etf market-making, no liquid etf is trading outside of a reasonable fair-value spread based on the underlying components, unless you count situations where markets for the underlyings are closed so there's no exact fair value.
Facebook was worth $35/share at $100 billion in 2013. Now make that $170/share, far exceeding the S&P 500 in that period. Same for Google, Microsoft, and Amazon, which were already very big but became even bigger.
And yet trivial compared to what MS, Oracle, AOL, Yahoo and Amazon generated in the 90s (or 80s as well in the case of MS). The best part of Facebook's growth went to founders and accredited investors such as Peter Thiel, not the public markets the wider public could invest in.
A five-bagger is nothing when you're cherry-picking winners.
So it's unlikely that any one who invested in Facebook post-IPO will ever see 1000x returns ($100T market cap?)...or even 100x ($10T market cap) returns.
It still might be a buy...but is it life-changing returns?
Similarly, people are free to jump into GOOG or FB or AMZN, and if they want to accept the risk of paying sky high prices for the equity, then they might be rewarded with "life changing" returns.
There's never a free lunch. And most people don't have enough set aside where they can gamble it on large returns. If they did, they would have access to VC, PE, or HF.
If capital markets existed then as they do today, both of those companies probably would have waited until hitting $10B-$100B market caps before going public (although, McD being a non-tech company might be more difficult for them to raise money through VCs), totally squeezing average joe out.
100-1000x returns are life-changing even with as little as $500-$1000 invested. Plenty of retail investors with sub-million net worth have more than a few thousand dollars in disposable income.
There's college educated, six figure a year producers out there who don't qualify for "accredited investor" status because they didn't happen to be born into the lucky sperm club with a paid-for free ride to an ivy league school and a trust fund to boot. The regulations, as they are, are excessive and total bull shit.
"■ The companies on the market today are, on average, much larger than the public corporations of decades ago. Fast-rising upstarts are harder to find."
"■ Profits are increasingly concentrated in the cluster of giants — with Apple at the forefront — that dominate the market."
Consolidation is also not unprecedented. Standard Oil? AT&T? The Sherman Act , which established antitrust, was passed in 1890.
As for not having much visibility into what a company is doing, well that was always true. Why do you think so much importance is placed on the reputation of executives? I would argue that it's far easier to find out what a company is doing today that at any previous time.
Take Apple, a now $1T company. Does anyone really not know what Apple is doing? Really?
If you want to talk about consolidation or transparency or compliance costs of publicly listing then sure, go ahead. Those are all topics worthy of discussion. But "shrinking" is not only inaccurate, it's arguably clickbait.
> But "shrinking" is not only inaccurate, it's arguably clickbait.
I don't see how it can be called inaccurate. Just because you (think you) know an explanation for the observed phenomenon does not render that observation inaccurate. I also don't quite believe "the stock market is shrinking" has any of the qualities usually attributed to "clickbait". Let's remember the term was coined for headlines such as "There are ten reasons you will die tomorrow, #12 will be the funniest you've ever heard".
> As for not having much visibility into what a company is doing, well that was always true.
The article argues rather specifically that being public leads to far better public availability of information for public companies vis-a-vis private ones. It's hard to argue with that point, considering that, yes, we know far more about Apple than, say, Koch Industries.
(Being VC-funded has its own skewed incentives, of course, like financially unsustainable growth.)
Doing more for the stock to rise by the end of the current quarter, and less to make company successful in longer term, is not so good. But this is known to happen, is it not?
I agree, and Apple is a perfect example of the direction of the larger market.
Apple use to report sells of laptops and desktops separately, Apple Store revenue and profit, iPod sells (until they became meaningless), iPhone and iPad sells.
But they saw that Amazon didn’t suffer any harm by only posting “Bezos charts” - showing that sells are moving up and to the right without posting unit volume - that they started doing the same thing with new product categories.
Big Companies Can Keep Big Secrets: https://www.bloomberg.com/view/articles/2018-02-28/big-compa...
Add to that the fact that promising tech startups stay private it is irrational to invest in anything else as a public investor.
These days we have Kickstarter instead and investors get swag instead of equity. Really good deal for getting a little project to go, but sometimes too bad since it means willing investors can’t participate in long-term gains from the successful business launches.
Also if you’re complaining that exchanges delist penny stocks, I fail to the see the tragedy. The microcap pink sheets are the home of scams and pump and dump schemes.
When people invest in these things and lose their life savings, it creates huge social problems and a burden on the welfare system.
2. Relax the barrier to entries that only allow big players to compete and win at the top (IPO)
3. Incentivize more people to participate by broadening investor classification.
4. Decrease capital gains taxes.
5. Break up monopolies.
How much capital would it take for “small upstarts” to effectively compete with any of the FAANG companies? A small upstart may be able to go viral and overtake Facebook, but the rest of the companies are much more capital intensive.
Why is there a need for small companies to take those large companies head-on? Maybe slow the ability for the large companies to impede competition in tangential areas.
On the bigger picture - is investing in high growth startups a right everyone should have? Value stocks outperform growth over the long haul.
The interest portion only, not principal. This deduction was also limited substantially in the recent tax reform. See:
I've seen a paper asserting the opposite. I don't remember any names, but I don't think this is something that can just be assumed to be true.
Many people in this discussion repeat this claim, but what I would love is citation of evidence. We know that regulation has been politicized, with one party trying to eliminate regulations as much as possible. That kind of situation leads to claims that gain currency through repetition - through talking points - not evidence.
I'd love to see the actual research and data (from non-partisan sources, not the AEI or Cato, for example). Particularly, we need evidence of the costs, of their relative size compared to (when? increased since when?), and of their impact. For example, according to the article the market was much larger and had more small participants in the 1970s, when the U.S. government in general (I don't know about the stock market) regulated business much more.
"SOX after Ten Years: A Multidisciplinary Review" by John C. Coates and Suraj Srinivasan http://www.aaajournals.org/doi/abs/10.2308/acch-50759?code=a...
> We review and assess research findings from more than 120 papers in accounting, finance, and law to evaluate the impact of the Sarbanes-Oxley Act. We describe significant developments in how the Act was implemented and find that despite severe criticism, the Act and institutions it created have survived almost intact since enactment. We report survey findings from informed parties that suggest that the Act has produced financial reporting benefits. While the direct costs of the Act were substantial and fell disproportionately on smaller companies, costs have fallen over time and in response to changes in its implementation. Research about indirect costs such as loss of risk taking in the U.S. is inconclusive. The evidence for and social welfare implications of claimed effects such as fewer IPOs or loss of foreign listings are unclear. Financial reporting quality appears to have gone up after SOX but research on causal attribution is weak. On balance, research on the Act's net social welfare remains inconclusive. We end by outlining challenges facing research in this area, and propose an agenda for better modeling costs and benefits of financial regulation.
The decrease in the number of listed firms is a recent
phenomenon. Figure 1 shows the evolution of the number
of listed firms since 1975.1 The number of listed firms
follows an inverted U-shape: It increased by 54 percent
from 1975 to the listing peak in 1997 and decreased
strongly since then.
Looks like the data set is only NYSE, AMEX, NASDAQ...
A. have those exchanges strengthened their listing criteria, making it harder to list
B. Has the number of firms listed on alternative exchanges taken up the slack?
C. Are companies deciding to list in other jurisdictions because of inversions or regulatory concerns
D. Looks like they exclude certain types of securities - what are the securities excluded? ADRs, MLP, REITs, etc could also be part of the story
E. What about the semi-private 144a market? How does one factor that in?
F. How has the elmination of regional stock exchanges played a role?
Making Sense of the Changes
The changes in public firms likely hold the key to understanding why the number of public firms has fallen so much. Participating in public markets is not as beneficial for firms that invest in intangibles as it is for firms that invest in fixed assets, especially when these firms are small and young. If a firm builds a recognizable product and requires capital to expand its production, it is relatively straightforward for it to explain to potential investors how their money will be put to use. As the firm explains its needs, it does not endanger its ownership of its assets. It is rather difficult to steal a firm's plants. If a firm invests in intangibles, it is much more difficult for its management to convince investors that it will make good use of its money. If the firms give too much detail, which they could be forced to do by disclosure laws if public, their competitors can use the information. If they give too little detail, investors will pay little for their shares. It is not surprising, therefore, that for such firms, participation in public markets with their disclosure requirements is likely to be onerous. It is much easier for such firms to provide detailed information to a handful of private equity investors who have specialized knowledge that enables them to assess a firm's investments in intangibles. This evolution of firms and of markets has many implications. Many of these implications have yet to be investigated.
A great example of this is the lack of splits. It used to be that companies would split their stock if the price got above $100 a share or so. The idea was you wanted an individual investor to be able to trade even lots (100 shares) of your stock. Now individual investors hold your stock through a fund or ETF so stocks like Google, Alphabet etc. are expensive per share, but no one cares.
There are two ways to look at this. The article paints a negative light on these statistics. But as a small firm, it would be nicer and less troublesome to just get funding through private firms than having to jump through hoops of going to the exchange. It might be more efficient.
Americans in the top 10% (approximately people over a networth of 350K per person) own about 85% of the stock (includes pension plans, 401K, etc).