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The Stock Market Is Shrinking (nytimes.com)
333 points by rchaudhary 6 months ago | hide | past | web | favorite | 285 comments

One of the main drivers IMHO, and not mentioned in the article, is quantitative easing or the ZIRP.

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 [0], something that in past would have only resulted from an IPO.

[0] https://www.crunchbase.com/search/funding_rounds/field/organ...


Was off by an order of magnitude on the amount Uber raised.

Quick note about secondary financings. Not targeted at you per-se as much as the large quantity of HN comments that seem to not understand the nuance.

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.

For example:

- 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

I don’t think anyone would say that there was 1B in fundraising. They’d say there was 100MM in fundraising. The market cap of those shares is indeed price * shares outstanding. But that’s not enterprise value either.

But aren’t most subsequent rounds, Series A, B etc putting money into the company, and not transacting with existing shareholders for an exit?

Yes, the article gives IMO a worse explanation for the delays here.

> 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?

I believe zirp results in higher secondary (and as you pointed out primary) markets. The stock market in the US is shrinking because of the shift in focus toward foreign markets. Namely those with higher returns (and risks) which again is partly due to low interest rates. From investor’s perspective, however, the secondary market really doesn’t give you much now. Shareholder rights/influence have diminished over the years especially among technology companies. Facebook is a primary example of this.

I agree. This is probably also the reason for the record amount of share buybacks. Credit has become cheaper relative to equity.

Yes, debt is a cheap way to drive up stock prices under ZIRP. If you are a qualified borrower (e.g. a large corporation) then you can borrow cheap and use the money to buy your own shares. If you are lucky, your reduction in dividend expense is greater than the cost of the debt.

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.

I read this differently.

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.

What about companies that loan a boatload of money to do buybacks ?

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.

By loaned, I assume you mean borrowed? Usually, a bank does the loaning, a company does the borrowing (I.e. is the recipient of the loan.

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.

If a company borrows money to issue a dividend then fails the owners have already gotten money. Buybacks are slightly more complicated in a subset of owners get that money but it's still often a net win for shareholders on average.

Further, low capital costs increase the amount of money that can be extracted and thus make this ever more enticing.

I think we agree. It does take bravery for management to admit that shareholder will achieve better return elsewhere.

Doesn’t this mean, fewer shareholders get to keep bigger profits?

Like public companies sliding the scale towards private companies to give fewer people more power and returns.

Not necessarily fewer shareholders. Fewer shares is the only certainty there. If the company is returning eg $6b per year in profit, in the form of a dividend, then that distribution is going to fewer shares as they're repurchased.

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.

Don't (nearly) complete buybacks also mean that company doesn't want to be ruled by the vote of (minority) shareholders?

I think e.g. Dell buyback was of this type.

Well, Dell didn’t do a buyback, the went private with funding from a consortium of investors including Silver Lake Capital and Microsoft. Similar idea (buying your own equity) but different in objective/degree. As a private company, you are shielded from the pressures and requirements of the public markets which can make certain corporate changes more efficient/effective/palatable.

This very thought crossed my mind, and with interest rates rising we are about to put this hypothesis to the test. Assuming this is the correct explanation, we should see an increase in IPOs over the next few years as the cost of borrowing grows.

Even an artificially low interest rate will do this, albeit as a slower burn

It is much easier now to invest and have access to the stock market. A few decades ago, not only did you have to have a human broker you would call on the phone to make a trade, the costs were vastly higher, so small trades were much cheaper.

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.


I think that's what the grandparent commenter meant. Early startups with large growth opportunity used to be abundant on the stock market. But now the burden is too great, so only larger companies can IPO. I even hear phases like "dump it on the public market" - the public market is where you go today after you have milked most of the major opportunity out already.

This. The public mkt used be the source of capital for companies like Facebook. Now it’s all private until most of the growth juice is squeezed out and now the public mkt is a liquidity event for the private investors. If/when they want to...

Facebook is up almost 500% from its IPO price, so even the very smart private equity and venture folks can misjudge when an opportunity has been completely milked.

Another reason to go public is because the SEC forces companies with 2000 stock owners (used to be 500 pre-2012) to file public disclosure documents similar to being public, so companies typically go public at that point. I’ve heard that some work around this limit by issuing IOUs indexed to the stock price.


You also can give RSUs, which don't actually become owned by the recipient until the company is acquired or become public. No fancy IOUs required. This IOU is denominated in stock units instead of a cash price.

You’re in agreement with gp- he’s saying that an IPO used to be an opportunity like facebook, but now they just stay private like Uber until they believe most of the value is locked in.

Isn't that because there a more wealthy individuals and many of them are connected to the same network?

Just the same, pub mrkts used to be about companies and investing. Now they're just datasets to be milked and manipulated by quants, automated trading, etc.

Perhaps the better conclusion of the NYT article should have been that these markets no longer carry the economic significance they once did?

OTOH, a lot of companies used to go public that had no business doing so. We went through a period where a lot of normal folks lost big portions of their retirement savings betting on public companies that really shouldn't have been in public markets. Yes, early-stage startups have the potential to return 100x, but they've also got the potential to lose 100%. That's the reason why we have the rules around qualified investors...they're people who are supposed to be in a position where losing their entire investment doesn't cause the kind of impact we were seeing when so many dotcom IPOs failed.

Yes, so punish the 98% who invest responsibly because 2% go ape? I know plenty of people who lost their shirts investing in real estate in the 00's because supposedly that's a "safe" investment that retail investors can be trusted with since there's so many checks and balances. Gimme a break. All investments are risky. Public companies can go bankrupt. Real estate markets can crash. Shit hits the fan. People are either adults and take responsibility for their financial decisions or they're not. The legal distinction between who can buy what assets based on net worth is absolutely ridiculous.

I'm not saying I agree with the current restrictions on accredited investors, but there should be a middle ground between what we have now and what we had back when the dotcoms collapsed the market. Back then, there were stocks so risky they'd make today's ICO investors nervous if they'd been presented honestly. But they were sold as being relatively safe in a way that allowed early-stage investors to foist their failed bets on to the public.

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.

Right, so for one, perhaps requiring a certification course for people to become accredited investors might be a much fairer alternative. The course could cover risks, go over the history of scams, teach people fundamentals of stock valuations, etc. And with this accreditation then one can go invest their own money on startups. That's a reasonable regulation that anyone can satisfy if they feel compelled to.

Nanny state is killing public markets with regulation. The regulatory burden goes only one way- up and up. Only the largest established companies are semi-comfortable with this regime: it sets a barrier to entry. After all, they helped to lobby these regulations. That's all.

Woah woah are you recommending personal responsibility here? Careful.. ;)

> small companies aren’t going public because of the much larger regulatory burden or cost

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 have no hard evidence one way or another, but I do remember that the introduction of Sarbanes-Oxley (2002) was a very big deal in terms of IT spending for years. SOX came as a reaction to Enron and WorldCom.

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.

> 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.)

Not your original point, but as a physicist, I chuckle at the proposition that we had "the right physics" in 1900 CE. The turn of the century marks the discovery of quantum physics and relativity, demonstrating that we're not even close to "the right physics".

Yeah, I thought for about 15 seconds before choosing that date, but then decided it wasn't too important. Perhaps the better way to express it is, 'when did we not have the wrong physics'? When did we jettison alchemy and the rest forever in favor of modern science?

I'd guess earlier than 1900, but I don't know. And of course, there are many gray areas.

> When did we jettison alchemy and the rest forever in favor of modern science?

Wake me up when people stop believing in homeopathy.

I agree. Unfortunately it is extremely difficult to measure the effects of any particular regulation. It's a one-off, under very specific historical circumstances and it interacts with a huge number of equally unrepeatable events.

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 :)

Having worked at several public companies, one of the biggest reasons companies don't go public... is the incredible workload and productivity loss of being a public company. Audits by the Big 4 accounting firms, Quarterly Filings, constant revenue and EPS projections.

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...

I was looking for a comment similar to this before I commented my own. Going public means you give up a ton of control and incur a recurring cost. Being public has its own costs.

You also totally give up privacy (and add accountability), which might be very important for some business owners to maintain.

Dell took the namesake company private some years back because he felt that being public didn't allow the company to make long term plans.

Would that be because regulatory pressure or because the market encourages short term thinking?

I suspect kinda the latter, even though all legal literature on the subject claims that shareholders are the least important entities.

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.

It's argue it's the idiotic practice of tying C-level pay to short term stock performance AND golden parachutes on top of that. You could say we're witnessing market forces at work and I won't disagree, but we're also witnessing crawling self destruction or a variant of tragedy of the commons.

Dell recently announced plans to go public again, though with a much smaller piece of the pie available than when it went private.

Bezos doesn’t seem to have that problem.

He holds the largest shareholding by a wide margin: 3x as much as Vanguard, the next largest, who will generally not interfere.

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.

Small correction: to have a ratio of 0.5x revenue with their current market cap they would need annual revenues of $1.8T (obviously, still a very large number).

For comparison, their revenue in 2017 was $178 billion, and in 2013 it was $74 billion.

This is a great way to think about it. Amazon is priced the same as a $1.8T company, so the assumption is that they will grow that big.

It’s not entirely unreasonable as Walmart’s total revenue today is $0.5B.

I see what I did: crossed the wires on earnings and revenue between the steps.

(2 trillion dollars seems like a big correction to me, btw)

When you say Vanguard has the next largest, does that mean they are holding it for their clients or own it themselves? If I invest in a Vanguard ETF which contains AMZN does Vanguard maintain voting rights? Can it leverage its holdings on behalf of its customers to take over a company if it becomes the largest shareholder?

Shares grant a lot of rights, but the basic concept of an ETF is to hold shares proportional to an index and leave it at that. They will generally not be activist holders. This reduces the cost of holding. Nobody needs to be hired to do research, to lobby, to plan etc. You basically have people babysitting a computer program, which is relatively cheap.

I understand they generally will not be activist holders, but can they be? If I buy a Vanguard ETF they hold the rights to all the stocks in the ETF, not me?

Buying into an ETF is buying into a company that owns shares. The ETF owns the shares in other companies, you own shares in the ETF. You do not own the shares that the ETF owns.

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.

Yes, and they do vote.

https://www.bloomberg.com/view/articles/2018-01-30/iss-tells... has some useful pointers.

Amazon is pumping out 40% YOY growth rates which Dell is not. Long term ain't so long term when your company doubles in size every 2 years.

To have a more traditional valuation, Amazon would have to have a GDP roughly the size of Russia (https://news.ycombinator.com/item?id=17691875), (https://en.m.wikipedia.org/wiki/List_of_countries_by_GDP_%28...)

No it wouldn't.

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.

I think you could argue that Bezos is an outlier and not representative of the majority.

Yep. The price went up a lot after Dodd Frank, too.

So the loss of public companies also includes the loss of companies who were milking the market via shady accounting. There is a persistent narrative that Dodd-Frank was just some kind of punitive punishment of big capital for being too big - the reason was to give average investors better visibility into the companies in the public markets because of widespread abuses.

I can argue both sides of this. Most companies have some questionable accounting practices so yes, oversight is necessary. But the cabal of the Big 4 firms is far more dangerous than any individual company's practices. I'm just waiting for the day that the next Enron happens. Been on both sides and I promise everyone, it's a matter of time.

Sometimes you have no choice. There are limits on shareholder counts for private corporations in some countries, including the US. But I agree with you, it's a real problem.

That's not correct re the US. You don't have to IPO or list your company (eg on the NYSE) publicly due to shareholder count. You can remain private, you have to publish financials publicly (above 1,999 shareholders).


Yeah, but at that point you incur many of the costs with little of the benefit, so it works like a de facto push to IPO. Is anyone aware of any companies that have stayed in that "over shareholder threshold but still remained private" boat for any considerable length of time (i.e. greater than a year or 2)?

Publix Supermarkets comes immediately to mind. There are others, if you dig through the Fortune 500.

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.

It should be noted that Publix is one of the largest employee owned companies in the US.

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.)

Two things:

1: The article is cherry-picking for a headline. In 1980, there were 71 IPOs [1]. 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.

[1] https://site.warrington.ufl.edu/ritter/files/2017/03/IPOs201...

So, the number of IPOs between 2001-2010 was less than half that of 1981-1990?

Yes, due to the .COM bubble bursting (2001-2003) and the sub-prime mortgage crisis (2008-2009). Take a look at page 3 in [1].

And it's on track to be half of the 1981-1990 number again in 2011-2020?

Yes. Reason being that companies are waiting much longer to IPO. Take a look at Table 12b on page 34 [1]. In the 1980s, the average number of companies that offered an IPO with sales >$1BB was under 5%. In the 2010s, it averages about 15%. (in 2005 $)

Still contending that this move towards quality is the legacy of .COM mania and the ensuing Sarbanes-Oxley burden.

Are you arguing that .com companies came to comprise a substantial share of the stock market? I'm not disagreeing. Just surprised.

Yes, in the same report, page 27, in 1999, 78% of IPOs were tech companies (that was the peak year for .COM IPOs).

I don't mean just IPOs. From the article:

> 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?

I couldn't find an accounting, but here are a few names from a 1999 Wired article[2]. The only one I recognize is Priceline:

- iTurf TURF*

- Autobytel ABTL*

- Extreme Networks EXTR

- iVillage IVIL*

- Priceline PCLN

- Vignette VIGN*

- Web Trends WEBT*

- Healtheon HLTH*

- VerticalNet VERT*

* No longer trading

[2] https://www.wired.com/1999/04/hot-ipos-are-flaming-out/

This trend, imo, is connected up with the deeper issue of ever-widening rift between the (shrinking) middle class and the calcifying wealth of the upper classes -- there isn't a lot of opportunity for folks in the middle class to invest in quality 'fast-rising upstart' stocks (like the article talks about) today relative to, say, a couple decades ago -- the barrier of entry has become unbelievably steep.

One (unsurprising) solution might be to fuse decentralized technologies in to today's stock market architecture [0]. Countries like Malta are doing that already with technologies like the Neufund/Binance platform. [1][2]

[0] https://www.investopedia.com/terms/d/decentralizedmarket.asp

[1] https://techcrunch.com/2018/07/19/malta-paves-the-way-for-a-...

[2] https://cryptoslate.com/binance-and-neufund-to-build-first-d...

This trend, imo, is connected up with the deeper issue of ever-widening rift between the (shrinking) middle class and the calcifying wealth of the upper classes -- there isn't a lot of opportunity for folks in the middle class to invest in quality 'fast-rising upstart' stocks (like the article talks about) today relative to, say, a couple decades ago -- the barrier of entry has become unbelievably steep.

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?

Laws and regulations are intended to create a greater good. Sometimes we have to stifle a few exceptional people for the good of everyone else.

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.

No the ICO mania just underscored a point: people want access to capital markets. They're so hungry for it that they're willing to accept tokens backed by nothing. If companies could issue security tokens without excessive regulatory burden they would do so, and we could use classical evaluation models for arriving at fair market value for said tokens.

I think you just proved my point. These people were so enticed by the idea of “getting rich quick” that they bought worthless tokens that gave them ownership rights to nothing.

Since they lack the sophistication to understand they were being scammed...why do you think they would have any understanding of classical valuation models?

Nobody understands cryptocurrency valuation, this is a brand new asset class. Whereas, stock investing is pretty mature at this point. People bought and flipped real estate in the 00's in a bull market only to see it all crash in 2008. Bubbles happen. Doesn't mean you cut out everyone who doesn't have $1 million in the bank. That's like only letting skinny people eat healthy food.

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.

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.

> However, consider that having a lot of wealth as a pre-req for obtaining wealth is, of course a circular problem.

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.

You're saying that the answer to the problem of inherent advantages in the game of wealth creation -- which boils down to existing wealth generating much more much faster than far less wealth -- is to 'join a VC'? It's difficult to tell if you're being moralizing or humorous. The question we're chewing over is, does accreditation requirements help or hurt the ability for individuals to ascend economically. It obviously hurts them and the other side of the coin is that it reduces a wider fallout should things go wrong.

Which part is controversial?

> which boils down to existing wealth generating much more much faster than far less wealth

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


I'm ignoring you after the 'people like me' comment as it's irrelevant to the discussion (and also actually false). You also completely ignored the point, but inserted your own arbitrary standard that claims to prove billionaires and average-Joe's create wealth equally, proportionally, because of 'the s&p 500'. That level of depth speaks for itself.

I find your comment offensive.

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.

> 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'm not trying to get rich. I'm just trying to survive. Making money in finance is not about luck. It takes hard, consistent, painstaking work.

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.

Not really. Private market valuations depend on the scarcity of funding sources.

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.

Some of this can be attributed to the relatively few opportunities raising money last year. Some of it is due to uncapped raises, which should not be done, in my opinion.

> -- there isn't a lot of opportunity for folks in the middle class to invest in quality stocks today relative to, say, a couple decades ago -- the barrier of entry has become unbelievably steep.

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.

The barrier is that the valuable growth stocks aren't actually stocks, they're privately held, due to fewer IPOs and more private capital available without recourse to public markets.

You don't need Growth stock to retire, index funds and income/dividend stocks are all that's needed to retire comfortably. Individual investors should not be trying to pick individual growth stocks because it's highly risky.

The indexes themselves might underperform an index+VC strategy though if they don't have access to high-growth companies that are staying private.

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.

Supply and demand

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.

> You don't need Growth stock to retire

The returns in those index funds are driven primarily by growth stocks.

The point of the article seems to be that the pool of stocks available to funds, etc., is shrinking.[1] You have a good point, but it isn't addressing this specific issue.

[1] I assume due to the prevalence of venture capital; that absorbs the returns of early startups.

If only a fraction of investments are available to the public, it creates economic inefficiencies: Resources are not flowing to the best investments.

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).

You're assuming nothing like the Nikkei index from 1989 - present will ever happen to a US stock index. I agree with you but stock market growth is not a law of nature. Other tactics (e.g. dollar cost averaging) are also needed to ensure a secure retirement.

index funds are made out of stocks. If there are fewer companies offering stocks for the funds to use, they are weaker.

what income ranges are you imagining is the middle class?

Over a 40-year career, assuming 4% real capital growth after inflation and a 3% safe withdrawal rate in retirement, a worker has to invest 25% of their gross income every year to have the same net income in retirement (assuming identical taxation rates).

The median annual household income in the US is around $60k.

That doesn't leave much left to eat and cover up from the rain with.

Thanks mom.

It's not investing in the currently public companies that's the issue...it's all the private companies that never go public...or go public so much later than they would have in the past that all the value has already been extracted by VCs.

I think what has changed is the shocking amount of money that recent start ups are burning. Snap burns more in a year (~$1 billion) than Facebook did in it's entire life. Uber has burned ~$10 billion during its existence. It's hard for me to picture a company raising that amount of money on the stock market.

Tesla has lost several billion dollars since its IPO in 2010, and that hasn't seemed to have slowed the stock down at all.

Tesla only raised $270 million in their IPO. They've subsequently raised more, but their initial a pretty far cry from the billions Snap/Uber needed.

Tesla has raised billions of capital from the public markets

It's not that hard to picture Snap raising billions in the stock market: the company got $2.7bn at the $3.6bn IPO last year. Twitter raised $1.8bn in 2013. Their problem is not lack of financing.

It's not just VCs (who will be looking for an IPO eventually); it's also growth equity, which has a more moderate payout expectation, more easily achievable with acquisition, or even straight up sale to private equity.

(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.)

He means there are fewer stocks at an early stage in their lifecycle where you can book a 1000x return by investing well.

Don't need 1000X return to retire. Index funds and income stocks are all that's needed.

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.

Who says they necessarily need to be picking stocks? Retail investors could still utilize the same vehicles they're using on large blue chip stocks if they had access to newer, higher growth-potential companies.

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.

Individual investors don't need to pick single stocks to benefit from growth. These companies also don't have a presence in various etfs and mutual funds that people can invest in, and it's not unreasonable to think that a wider selection of say small-cap growth companies might make for a better selection of small-cap stocks to put in an index.

There's another societal trend at play here, and that's the increasing pace of technological change and market disruption. Increasingly, "income stocks" are becoming "death stocks" - rather than companies with stable income streams for the foreseeable future, they are companies whose products and business models have become obsolete and who are just awaiting a competitor to replace them.

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.

Historically, the stock market would return 10% YoY (after averaging out). The problem is that that number has dropped. Decades ago, companies IPOed with $50m to $100m in revenue and citizens could enjoy the growth from there (like MSFT). But now, they tend to have to IPO with $1b+ in revenue (like Facebook). Many unhealthy economic factors drive down the public stock growth rate.

That is the core problem.

10% YoY for index funds = healthy. Far lower for rigged economy reasons = a large scale societal problem.

> Historically, the stock market would return 10% YoY (after averaging out). The problem is that that number has dropped.

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)

Roughly 28% of the S&P500's 2017 advance was due to FAANG, and 40% due to tech in general:


Take them out and you're much closer to the historical 10% return, and that's in a bull market.

Sure, that's one of the problems with the current market.

But if understand correctly, HashThis' claim is that the market is not even returning the historical 10% average.

The problem with SP500 is survivorship bias, obviously the "top 500" companies is continually redefined every year and is, after all, the top companies, so you'd expect a much better return from a subset of the best companies rather than the market in general.

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.

This may be a suprise for you but you can invest in an S&P 500 tracker and get the S&P 500 returns. You don’t need to pick the winners in advance.

Another thing you may find surprising: the long-term historical average return for small cap indices is higher than for large cap indices.

I don't think you understand how the SP500 works.

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.

A better explanation is that stock market growth has slowed because real GDP growth has slowed [0], which it should match [1]. Why has it slowed? Well, economists have hotly debated this so you'll have to read into the dozens of theories but not once have I heard it is related startup IPO time.

[0]: https://en.wikipedia.org/wiki/Economy_of_the_United_States#G...

[1]: https://www.wise-owl.com/investment-education/is-there-a-cor...

I think the point is if early-stage growth was still part of the stock market, index funds & the like would all perform better for it. The argument is by removing early-stage growth from the market & conducting it privately, the entire open market as a whole is less lucrative.

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.

I think the point is it's not possible to even build a high growth index fund anymore - at least not one based on US companies. Existing funds skew towards emerging markets, and would never include a Facebook 2008-2012 or a Dropbox 2012-2015, for example.

Experts suggest this so they can remain "experts".

Actually no, it's very well known in investing that index funds tend to outperform actively managed funds over the long term[1].

[1]: https://www.thebalance.com/index-funds-vs-actively-managed-f...

Agreed. Clearly what’s been done for the last 40-50 years hasn’t led to more companies spreading more wealth. It’s led to fewer companies spreading the wealth more narrowly.

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.

That requires education. What's investing, how to invest, how to look for investment opportunities, fundamental analysis, risk management, counterparty risk ("invest in housing, because it'll always go up!"), etc.

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.)

That’s the most shocking part of the other commenters for me. Just having the ability to own stock moves someone well beyond the median - When I say “empower individuals” I mean everyone from the homeless to the families with kids and a mortgage. We need an approach that can’t be robbed or is directly given to the few.

The median US household has $12k/year in disposable income. That is income after all other taxes and living expenses -- housing, transportation, healthcare, food, clothing, etc -- are paid for. In other words, beer (or investment) money. You can build a real investment portfolio from that basis.

The assertion that Americans do not, on average, have money to invest is a false one.

I'm aware of stats, but maybe 12K is barely enough to dispose of for goals - such as going out, or buying presents to others, etc. (Saving rate is around 5%, which is less than 1K/year, that's nowhere near enough for anything. Though allegedly it's not calculated "properly".)

At the median they’re probably not paying for healthcare. Also national well being distribution is a place statistics fail. The median is just slightly more useful than talking about actual income levels and worker benefits. Either society finds a way to house, bathe, feed, and tend the basic healthcare needs of everyone or we really are not better than we were in the 1860s.

I’m not sure empowering individuals is the solution when they’re operating inside a major attractor space.

> besides for having money to invest

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.

Fewer but higher-quality companies helps retail investors.

The middle class + upper classes have expanded, not shrank. [1][2]

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.

[1] https://www.washingtonpost.com/opinions/is-the-middle-class-...

[2] https://i.imgur.com/TwQhMaT.png

Are there more poor people in America percentage wise than there was 80 years ago? Are standards of living higher today than they were 40 years ago? The classist argument that the middle class is disappearing fails to address where those middle class people actually went. One less person in the middle class does not represent one person “losing” but just as much of a likelihood as that person winning.

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 think for a moment that the centralization or decentralization of exchanges themselves has anything to do with the problem.

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.

> "This trend, imo, is connected up with the deeper issue of ever-widening rift between the (shrinking) middle class and the calcifying wealth of the upper classes -- there isn't a lot of opportunity for folks in the middle class to invest in quality 'fast-rising upstart' stocks (like the article talks about) today"

Agreed. Kinda. The question is: which is causing which? Or is there something else for which these are symptoms?

A better solution would be to require companies to prioritize employee compensation above shareholder profits. There has been a trend since the '80s for executives and investors to team up and line one another's pockets at the expense of the rank-and-file workers, and it's the biggest and most direct contributing factor to the decline of the middle class.

Ironically, one of the core reasons for less IPOs is Sarbanes-Oxley, which was meant to protect retail investors but instead has had the second order effect of reducing the number of IPOs and limiting the available higher growth / higher risk opportunities these same investors.

This is very accurate. It is extremely costly for companies to have an IPO. The regulatory burden is very high for publicly traded companies.

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.

For young people especially, the investment opportunities are an absolute bore. It makes a lot more sense to take big risks when you are young, and by implementing the 'qualified investor' requirements, many young people will never have a chance to invest in the exact companies which interest them the most.

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 obvious but unpopular solution would be to make it easier for companies to go public.

The trade off is that Theranos would be public, but so would, for example, Stripe and Slack.

We have large "private" markets today, the sectors financing companies outside of public markets. This is less regulated, and a lot less transparent.

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.

What about deincentivizing mega-companies and instead putting into law that there is a maximum size a corporation can be and if exceeded demands it to be split into two or more companies?

Theranos wouldn’t have been public because it would have had to undergo much more scrutiny and if it did get to the public markets (not the pink sheets) smart investors would have shorted the hell out of it. The fundamental problem was that blood is too heterogeneous at the sample size they were drawing from for many (most?) of their tests. There’s lots of scientific literature out there. 60 minutes figuring out the right question to ask and then another 60 minutes googling would have been sufficient due diligence to pass on this investment. For the most part Theranos was not made up of sophisticated investors and any professional money that came in late should be fired.

Or, the ability to invest in and profit from private companies.

Pink sheets.

Sarbox screwed up perhaps more than it helped.

SOX proves there are adults running the business. There are some bad parts of SOX, but most of it is good. Also, companies can define their own policies and standards under SOX, unlike say PCI where you must adhere to an industry standard. This means companies that are run well can make decisions about doing a user access review yearly instead of quarterly.

Yes - we punished 1,000’s of good honest companies for the deliberate misdeeds of a few bad apples. Terrible policy.

Those "few bad apples" caused the worst global recession since the Depression. Let's not minimize the circumstances that led to Sarbox.

Edit: This is wrong, see below.

I thought SOX came out of Enron and WorldCom which didn't have much to do with the 2008 recession?

The 2007-2008 financial crisis led to Dodd-Frank, which is much more concerned with banking practices than public investment.

Sarbox was enacted in 2002.

Regulation isn't punishment.

This is my personal opinion: The stock market system is obsolete and needs to be revamped for the online world where the world's population is always on, and connected.

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...)

By what metric is the market more biased towards professional traders? By the metrics of cost to trade, spread, barriers to entry, expense ratio etc. it’s never been better to be a small scale investor.

You have more opportunity to trade now, in more markets, with more information & instrument options, for cheaper than ever.

> This is my personal opinion: The stock market system is obsolete and needs to be revamped for the online world where the world's population is always on, and connected.

> 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[1] which is unfortunate because lot's of people will be working through their "retirement" years.

[1]: https://www.cnbc.com/2018/05/16/gallup-why-younger-americans...

And why would "always on, and connected" change the way the stock market works ?

Constantly checking and panicking about a single days loss is a route to failure as an investor.

The S&P 500 has good risk -adjusted returns. Look at Bitcoin, which fell 70% this year. People are always looking for the next big thing, and often these fall short.

The Elon Musk style private founder is not really a new thing. Plenty of companies have been started & run privately, and in Elon's case there is a strong argument for that- it gives the founder more control of the company which can be necessary for the success of a risky business.

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.

Or dell is in the option of insiders under valued and you can take it private at a discount the a few years go ipo again and make $bank.

Don't be fooled, the stock market has always been a legal gambling platform. Investing is a form of gambling with hopefully better odds.

totally agree. I may add that with the emergence of super computers and data mining, the dice has never been more piped in favor of big companies than ever.

I don’t understand how someone could overlook that the stock markets are all gambling.

The metaphor is completely specious. Every game in gambling is either you win or you lose, it's completely binary. And you own nothing. Stocks, you own a part of a business, and there's effectively no chance it goes to $0 value on a single "hand". Maybe you could lose 30% on a bad day, as an on paper "loss", but you hold it or buy more, and in the long run you will end up ahead. The odds are biased in your favor with stocks, they are biased against you with gambling.

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.

And what do you base this "challenging "assertion on? Its not gambling to take advantage of special situations eg the overhang on WTAN 18 moths ago where its discount was artificially high.

If you had said binary bets are gambling but I would agree with you.

Maybe this what the 1% want you to think ?

What else is there?

Biggest producers of most consumed products are on the stock market.

People buy procter & gamble stocks because everyone is buying the products.

Can you expand on your first paragraph? Sounds like you think there should be a global stock market that’s open 24 hours? Or do you think the concept of public listing of companies is outdated as a whole?

How do you imagine smart scale investors to participate then? The rich getting even richer by keeping all successful startups private? I don’t wanna live in that world

I never said i had a solution to any financial markets problems. I just pointed out things that irritated me. Maybe someone here has a better picture and could start Stock Market 2.0 for the digital age

The digital age allows for actual ubiquitous information. A new start at a stock market could require public companies to operate completely in the open - zero asymmetric information. It’s a radical idea I just had, so it’s not a fully formed idea. But information does concentrate power and thus wealth.

Invest in PE/VC funds/trusts.

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.

Tokenization of assets

In what world does this solve anything? Tokenize it! You mean assign the worth of an asset to an arbitrary symbol of value? Like, say....a dollar?

It's simpler and cheaper to buy and sell tokens than complex paper contracts. It also works better for small amounts of money. The difference in owning a token of a real estate to owning a dollar is that the token owner is entitled a fraction of the rental income and enhancement of value. https://www.nasdaq.com/article/how-tokenization-is-putting-r...

I think way too many stocks' prices are disconnected from their actual value (or even future value).

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.

That's only true if after selling you kept the cash under the mattress. If you sold the SPY S&P 500 ETF in January 1996 and invested the proceeds in the Treasury-heavy Vanguard Total Bond Market Index fund (there were no bond ETFs back then) you would have seen better entry points waiting for you in the future:

10% discount in Q4 2002 and Q1 2003.

30% discount in Q1 2009

This is a big problem. There are fewer promising, early-stage investments available to retail investors than ever. More and more, private VC money captures all the value created by promising upstarts. Buying $1000 Microsoft stock in 1986, you'd have seen a more than 1000x return in that amount of time. Today, tech giants like Facebook IPO at $100B market cap, leaving very little room for big returns.

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...

> Buying $1000 Microsoft stock in 1986, you'd have seen a more than 1000x return in that amount of time.

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.

The question is, looking back 30 years from now, will there as many (or any) public stocks that will have performed as well then, as MS has from 1986 to today?

Or will all the explosive early gains in future companies' growth be captured by the private equity ecosystem before the companies go public?

I lean towards the latter option.

Sarbanes-Oxley's aim was to de-risk the market, and lower risk generally brings lower returns.

Call me crazy, but maybe the first step to reversing that trend is for the startup founders to stop seeking VC funding as their first major milestone in their development. After all, the biggest coup counted by the VC world was convincing an entire generation of entrepreneurs that their way was the only way.

I hear you, but startups are extremely risky ventures. So risky that many don't even try. And if you have a family, it gets even harder.

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.

The only way to get big returns is secrets, just like always. Insider trading has given way to insider investing or insider hiring, which is insidery just like always. The problem with the stock market is that it is too easy for people to invest in, relative to other options (private companies) where you are still welcome to (encouraged?) to learn about secrets. So people blindly buy indexes (past returns = future results somehow, even though by definition people are overvaluing whatever is in the bucket) instead of finding secrets.

> even though by definition people are overvaluing whatever is in the bucket

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.

The major threat to indeed investing is if the index ceases to represent its sector of the economy. As implied by this article.

Fang stocks have generated enormous returns relative to the S&P 500 though.

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.

> Fang stocks have generated enormous returns relative to the S&P 500 though.

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.

Sure, $35->$170 over the course of 6 years is a solid return. But it's not obvious to me that Facebook will be able to maintain that same growth rate over the next 6 years...(that would put them at a $2T market cap).

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?

Why should there be life changing returns unless there are proportionally high risks? There might be huge returns to be had, but it's not likely going to be with an established company that already has solid cash flow.

1986 Microsoft certainly had plenty of cash flow and was already nearly a decade old company at that point. You can go back in time to 1960s McDonald's or whatever corporate success story you want. It was still a risk to invest in MS in the 80s. Its still a risk today. But retail investors had the chance to bet that desktop computing was the next big thing...or that fast food was the next big thing...

Absent corruption, higher returns are correlated with higher risks. If everyone knew MSFT in 1986 or McD in 1960s was what it would be today, then everyone would have jumped in and brought the returns down.

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.

It wasn't exactly a secret that desktop computing and computing in general was going to go big. Microsoft and computers were hyped up in the 80s, and Microsoft stock did pop right after the IPO. It continued to pop all through the 90s. And a savvy retail investor could have predicted the same with McD's in the 60s. McD's was a viral success.

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.

Not only that, mechanisms exist for you to leverage the hell out of yourself and you'll be able to see your life changing 1000x return.

The reasoning:

"■ 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."

Better reasoning: increased regulation, both in terms of legislation, regulation, and regulatory action; plus greater concentration of wealth and greater pool of private investments / private equity.

This article is complaining about the dearth of small companies and blames... big companies and R&D, ignoring that the biggest issue for most companies is the increased regulation requirements that make it uneconomical to be publicly traded until you're so big that you need to follow most of those regulations for internal purposes anyway.

This make no sense. The regulatory threshold under Dodd-Frank is $75M in annual revenue. So it should be no harder now than it was 20 years ago for smaller companies to go public. And the SEC is changing this to $100M I think, so we should see a pop in public filings if there is some pent-up demand in midcap companies going public but for muh paperwork.

It's not really just Dodd-Frank that is the cause of this, it's also the SEC slowly tightening the screws for the last 15 years since the .com bubble. Nobody wants another bubble but instead of trying to get at the root cause they've just pushed it out of the public eye, now a bunch of PE investors are gonna lose money once it pops.

Ugh, please. At least use the right terminology. It's not "shrinking", it's "consolidating". It's also true that it's not only harder for smaller companies to list (with greater compliance) but it's also less necessary. The article mentions this. With the rise of venture capital, private equity, crowdfunding and even ICOs there just isn't as much need for a company to raise funds by going public.

Consolidation is also not unprecedented. Standard Oil? AT&T? The Sherman Act [1], 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.

[1] https://en.wikipedia.org/wiki/Sherman_Antitrust_Act

I don't need to comment, because you wrote exactly what I was thinking. The claim that the stock market is shrinking is click bait. There is more capital in the world's markets than ever before, "shrinking" is not the right term at all. Consolidation is part of the cycle.

"Consolidation" says more than "shrinking" – the latter just concerns itself with the easily visible headline number, while the former implies the mechanism by which that number has changed. Because mergers and acquisitions aren't a new invention, "consolidation" would be hard to proof as the actual cause: quite possibly, m&a has been steady but IPOs have been lower?

> 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.

I agree without all the smugness. The stockmarket isn't shrinking (or consolidating) because there are less American companies; it's shrinking because it's easier for companies to receive funding while staying private.

The latter may also be for the better. Publicly traded companies are notorious for their being short-sighted and only caring for the next quarter results. Maximizing profit, or at least stock price, right now is the fiduciary duty of executives; long-term strategies are harder to implement.

(Being VC-funded has its own skewed incentives, of course, like financially unsustainable growth.)

Shortsightedness has nothing to do with regulation and everything to do with incentives (options) and liability. Strong regulations for disclosure with protection from liability seems like a good idea.

Disclosure is indeed good!

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?

Take Apple, a now $1T company. Does anyone really not know what Apple is doing? Really?

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.

Does anyone know in any detail how Apple Pay or the Beats brand are doing?

Big Companies Can Keep Big Secrets: https://www.bloomberg.com/view/articles/2018-02-28/big-compa...

Apple is literally the most notoriously secretive of the tech giants.

They are still better at reporting than most other tech companies. They publish separate numbers for iPhones, iPads, and Macs. They don’t separate out Beats, Watches, etc. but no other electronics company is even as transparent as they are.

Some is consolidation, some is delisting, and some is leveraged buyouts.

I think the real trend here is that small, fast-growing companies "cash out" not by having an IPO, which might get you an annoying "activist shareholder" lawsuit in a year or two as soon as you do something they don't like, but rather by selling to an existing, large company (Apple or Facebook or Google or whoever). Then, in many cases, the founders of the original company go out and start another one, using the money (and experience) they got from founding the first one. I'd say the real issue here is the amount of headaches involved in doing an IPO and being a publicly traded company.

I remember learning of the Fama French model saying small cap companies deliver outsized returns due to being higher risk and deciding that probably won’t hold in a world where companies can be deemed too big to fail and propped up by the govt. Why invest in companies that can fail when the large cap stocks have the backing of the federal government?

Add to that the fact that promising tech startups stay private it is irrational to invest in anything else as a public investor.

It's interesting how there used to be publicly traded apartment buildings, and now it's more the place the financiers go to cash out once the real money has been made. The exchanges delist low cap and low price stocks, and the idea of starting a company with a public offering is now considered absurd.

Yeah I think this is key. The entire concept of what the public market is for has changed significantly. Historically the stock market had a kickstarter like function, which meant that there were opportunities for people to bet on neat new ideas and recognize enormous gains - but also a lot of chances to lose the entire value of a bad bet.

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.

You can still buy publicly traded REITs with residential real estate in them.

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.

1. Increase competitive opportunity and capital at the bottom (give easier chances for small upstarts to compete and win)

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.

Increase competitive opportunity and capital at the bottom (give easier chances for small upstarts to compete and win).

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.

Providing more liquidity for people to start with, coupled with making it more difficult for big companies to participate in anti-competitive practices, might make for a new renaissance in growth and perhaps even produce more middle class opportunity again.

That didn’t answer the question. Apple and Amazon in particular are able to be successful because they both have businesses that require a large capital outlay up front.

These companies were successful small businesses before they were large businesses. They were able to compete in new industries because they had access to capital, talent, and identified areas that were important and aggressively maintained innovation in those areas by way of investor capital or profits.

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.

One big issue is debt payments are counted as an expense. So on the margin it’s economically better for companies to have more debt. This leads to more debt than equity for public investors and more debt fueled LBOs. This is all fine and good until the companies get in trouble.

On the bigger picture - is investing in high growth startups a right everyone should have? Value stocks outperform growth over the long haul.

> One big issue is debt payments are counted as an expense

The interest portion only, not principal. This deduction was also limited substantially in the recent tax reform. See:


Yes - just the interest, and they can perpetually roll the principal. So the cost of debt becomes tax deductible versus dividends.

Also, the interest rates for quality corporate debt have been artificially depressed post-QE.

Indeed! With a long equity runup the risk premium for Corp debt drops too.

>Value stocks outperform growth over the long haul.

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.

Increased regulatory burden in combination with rise of significant alternative sources for raising capital prob. played a role too.

Not sure if this is addressed in original paper: The cost of regulatory compliance has massively increased. This is not a judgement of whether those regulations are good or bad for society, just a simple fact that regulations increase the cost to run a business, and large corporations are better able to distribute and manage those costs - sometimes lobbying for additional regulations which become barriers for small companies.

> The cost of regulatory compliance has massively increased

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.

This is not evidence regarding the claim, I simply want to know more about subject. I searched the literature and found the following paper (synopsis below). I still need to find the full paper elsewhere but it looks like it provides a good overview of the impact of SOX. This only concerns SOX though and there might be other regulatory burden (although I can't recall anything significant). Moreover, regulatory burden (if it exists) is only one of many reasons why companies don't go public (which I believe the abundance of private equity played the biggest role).

"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.

Hey - thanks! That's what HN is great for. And I like the nuance of the report (or the abstract) - of course reality is never simple.


    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.
Somehow, both the NYT piece and this paper manage not to mention at all the increase in regulations since the late 90s.

[1]: https://www.nber.org/reporter/2018number2/stulz.html

Before reaching any conclusions I might ask:

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?

The summary of the Stulz's article that is the source of this article[1] left me with a new insight into one factor why, in the current system, the companies with the highest growth potential (tech) don't IPO early. Sommer's article tries to leave me worrying about the decline of democracy. Unfortunately this worry is constantly repeated and is nothing new or useful for me.


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.

There is also a factor where investors, individual and institutional, invest more through funds and ETFs rather then individual securities. Investors in funds sometimes get exposure to growth sectors through investment in VC funds.

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.

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Maybe smaller companies just don't need to go public as early as before because they are able to get funding through private investors. Also, if they show potential, they might just us easily get bought out.

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.

To quote an oft-mentioned study:

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).





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