The stock market is shrinking.

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Cloud
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The stock market is shrinking.

Post by Cloud » Sat Aug 04, 2018 6:31 pm

Is this a problem that the stock market is shrinking. Fewer and fewer publicly traded companies. What does this mean for investors?

The New York Times: The Stock Market Is Shrinking. That's a Problem for Everyone..
https://www.nytimes.com/2018/08/04/busi ... arket.html

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JoMoney
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Re: The stock market is shrinking.

Post by JoMoney » Sat Aug 04, 2018 6:39 pm

Funny.. I just posted a comment related to this in another thread, there are problems associated with it, but on the plus side (for investors) is I believe it's a sign that the public markets are relatively fair to low valuation relative to private equity. If investment banks and people looking to finance new companies saw the public markets as being high priced relative to other options (debt, private equity, etc..) then that's where they would be going to finance their needs.

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knpstr
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Re: The stock market is shrinking.

Post by knpstr » Sat Aug 04, 2018 7:22 pm

I don't think there is anything I can do about this phenomena so I don't worry too much about it.

I don't necessarily think there is anything inherently bad about the shrinking number of publicly traded companies and such trends may be temporary anyway.
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Re: The stock market is shrinking.

Post by Boglegrappler » Sat Aug 04, 2018 7:48 pm

Its an interesting topic for discussion and consideration, but the article doesn't do the topic justice.

For example, given the observation that the top 200 companies were the only ones that were profitable ( I doubt this), maybe having fewer of the money losing companies would be better for the economy, unless capital dissipation serves some social purpose.

One thing that is true is that the amount of "private" financing available to companies means that many go public at a much later stage of growth. Look at Facebook's numbers at the time of the IPO. That certainly changes what's available to mom and pop (me and you).

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gasman
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Re: The stock market is shrinking.

Post by gasman » Sat Aug 04, 2018 7:51 pm

1. Why is the number of publicly trade companies shrinking?
2. What can/should an investor do other than diversify as widely as possible?

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CyberBob
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Re: The stock market is shrinking.

Post by CyberBob » Sat Aug 04, 2018 10:25 pm

According to a Vanguard paper, the shrinking number of companies is due to micro-caps. And a lot of their delistings are simply mergers.
Basically not a big deal. From the article:
Despite the drop in the number of publicly listed companies, there appear to be few, if any, implications for investors. The investable U.S. equity market—the large-, mid-, and small-cap stocks that reflect investors’ investable opportunity set—has remained a relatively constant proportion of the total U.S. equity market, and it has also maintained a consistent level of concentration among its constituents. These proportion and concentration effects are measured in terms of a company’s value, and they are sometimes overlooked by a focus on the shrinking number of public companies.
https://advisors.vanguard.com/iwe/pdf/I ... omain=true

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Re: The stock market is shrinking.

Post by Raabe34 » Sat Aug 04, 2018 10:55 pm

gasman wrote:
Sat Aug 04, 2018 7:51 pm
1. Why is the number of publicly trade companies shrinking?
2. What can/should an investor do other than diversify as widely as possible?
Sarbanes Oxley - makes it expensive for a smaller company to be public and is incentive to stay private.

letsgobobby
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Re: The stock market is shrinking.

Post by letsgobobby » Sat Aug 04, 2018 11:02 pm

knpstr wrote:
Sat Aug 04, 2018 7:22 pm
I don't think there is anything I can do about this phenomena so I don't worry too much about it.

I don't necessarily think there is anything inherently bad about the shrinking number of publicly traded companies and such trends may be temporary anyway.
You could invest in private equity.

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Re: The stock market is shrinking.

Post by CurlyDave » Sun Aug 05, 2018 3:16 am

gasman wrote:
Sat Aug 04, 2018 7:51 pm
1. Why is the number of publicly trade companies shrinking?
2. What can/should an investor do other than diversify as widely as possible?
1. While there are lots of theories, I don't think anyone really knows for sure, and it certainly doesn't seem to be hurting the economy. My personal favorite reason is that computers and the internet have made dramatic changes in both the US and World economy. Companies that embrace the new ways are growing more rapidly, companies that fight the changes are struggling.

2. IMHO, concentrating is better than diversifying. The actionable, money quote is: "Aside from the top 200 companies, the rest of the market, as a whole, is burning, not earning, money."

This tells me that the individual investor is better served to concentrate his holdings in the top 200 companies. Now, I don't believe for an instant that no smaller companies make money, but if I want to turn the odds in my favor, I look at the 200 largest companies. QQQ comes to mind as an strong possibility.

Is this enough diversification? Maybe, maybe not. I have seen, but don't have a link to, studies that say holding 30 individual stocks is enough diversification.

Is QQQ the right answer? I don't know, but I don't see a S&P 100, or S&P 200 index fund. If there were such an animal I would be very interested in it.

I can tell you that my QQQ shares have beaten the stuffing out of SPY or VOO over the past 5 years.

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JoMoney
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Re: The stock market is shrinking.

Post by JoMoney » Sun Aug 05, 2018 3:22 am

CurlyDave wrote:
Sun Aug 05, 2018 3:16 am
...I don't know, but I don't see a S&P 100, or S&P 200 index fund. If there were such an animal I would be very interested in it. ...
There is an S&P 100 index, there are S&P 100 futures, and there is an ETF tracker for the index (by iShares) Ticker: OEF
There's also Invesco S&P 100® Equal Weight ETF : OEW
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Re: The stock market is shrinking.

Post by triceratop » Sun Aug 05, 2018 3:27 am

CurlyDave wrote:
Sun Aug 05, 2018 3:16 am
gasman wrote:
Sat Aug 04, 2018 7:51 pm
2. What can/should an investor do other than diversify as widely as possible?
2. IMHO, concentrating is better than diversifying. The actionable, money quote is: "Aside from the top 200 companies, the rest of the market, as a whole, is burning, not earning, money."

This tells me that the individual investor is better served to concentrate his holdings in the top 200 companies. Now, I don't believe for an instant that no smaller companies make money, but if I want to turn the odds in my favor, I look at the 200 largest companies. QQQ comes to mind as an strong possibility.

Is this enough diversification? Maybe, maybe not. I have seen, but don't have a link to, studies that say holding 30 individual stocks is enough diversification.

Is QQQ the right answer? I don't know, but I don't see a S&P 100, or S&P 200 index fund. If there were such an animal I would be very interested in it.
A 2-second google search revealed the iShares S&P 100 ETF.

The small-cap SP600 (as measured by ticker IJR) has outperformed SP100 and SP500 over the following time periods: YTD, 1yr, 3yr, 5yr, 10yr, and since inception (10/23/2000).

The money quote is fairly meaningless and overhyped. It doesn't matter to an index investor that most companies fail.
I can tell you that my QQQ shares have beaten the stuffing out of SPY or VOO over the past 5 years.
Okay but what about the next 5 years? QQQ is a concentrated bet mostly on tech. This significantly increases your risk. From April 2000 to March 2009 QQQ lagged the overall market by 34%. I am glad your bet worked out well for you, though.
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Re: The stock market is shrinking.

Post by nisiprius » Sun Aug 05, 2018 6:01 am

letsgobobby wrote:
Sat Aug 04, 2018 11:02 pm
knpstr wrote:
Sat Aug 04, 2018 7:22 pm
I don't think there is anything I can do about this phenomena so I don't worry too much about it...
You could invest in private equity.
No, thanks.

LPEIX: Red Rocks Listed Private Equity Fund (blue)--expense ratio 1.68% :moneybag :moneybag :moneybag

PSP: Invesco Global Listed Private Equity ETF (orange)--expense ratio 2.75% Image

VTSMX: Plain old Vanguard Total Stock Market Index Fund (green)
Time frame is inception of LPEIX (12/31/2007), PSP is only a couple of months older (10/23/2006)
Source
Image

There's a big difference between losing half my money in 2008-2009 and losing 4/5ths of my money. Sliding my mouse along, Total Stock was back to even by 2012, four years... that seemed like a long time at the time. But it would have taken until 9/2017, almost exactly ten years for PSP to get back to even... by which time Total Stock would have doubled.

PEX, ProShares Global Listed Private Equity ETF (green in the following chart) had inception in 2013, and since then has underperformed the other two private equity funds (blue and orange) and Total Stock. Expense ratio 2.75%, what do I do, I already used "The Scream?"

Image
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Bacchus01
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Re: The stock market is shrinking.

Post by Bacchus01 » Sun Aug 05, 2018 6:09 am

Raabe34 wrote:
Sat Aug 04, 2018 10:55 pm
gasman wrote:
Sat Aug 04, 2018 7:51 pm
1. Why is the number of publicly trade companies shrinking?
2. What can/should an investor do other than diversify as widely as possible?
Sarbanes Oxley - makes it expensive for a smaller company to be public and is incentive to stay private.
This is a huge driver for many companies

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Re: The stock market is shrinking.

Post by nisiprius » Sun Aug 05, 2018 6:10 am

P.S. I keep finding Google search hits on another mutual fund, "Vista Listed Private Equity Plus A (LPEAX)," but Morningstar isn't showing it and Yahoo! Finance is showing all zeroes, so I think it died. That means that the three funds I charted in my previous post are the beneficiaries of survivorship bias!
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: The stock market is shrinking.

Post by nisiprius » Sun Aug 05, 2018 6:19 am

Bacchus01 wrote:
Sun Aug 05, 2018 6:09 am
Raabe34 wrote:
Sat Aug 04, 2018 10:55 pm
gasman wrote:
Sat Aug 04, 2018 7:51 pm
1. Why is the number of publicly trade companies shrinking?...
Sarbanes Oxley - makes it expensive for a smaller company to be public and is incentive to stay private.
This is a huge driver for many companies
The cause came six years after the effect?

Image
Last edited by nisiprius on Sun Aug 05, 2018 8:39 am, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Bacchus01
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Re: The stock market is shrinking.

Post by Bacchus01 » Sun Aug 05, 2018 6:24 am

nisiprius wrote:
Sun Aug 05, 2018 6:19 am
Bacchus01 wrote:
Sun Aug 05, 2018 6:09 am
Raabe34 wrote:
Sat Aug 04, 2018 10:55 pm
gasman wrote:
Sat Aug 04, 2018 7:51 pm
1. Why is the number of publicly trade companies shrinking?...
Sarbanes Oxley - makes it expensive for a smaller company to be public and is incentive to stay private.
This is a huge driver for many companies
The cause came six years after the effect?
Image
Why not look at the rest of the line?

That drop was the dot com bubble, Y2K and the recession. The rest was SOX. The cost of SOX is enormous on mid to micro cap companies.

jminv
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Re: The stock market is shrinking.

Post by jminv » Sun Aug 05, 2018 6:28 am

Only a very, very small fraction of the number of companies in the USA are listed on the stock market. The ones that are tend to be the ones that are large and these aren't so much of an interest in the decline story here, which is really a story in the decline of small/microcap stocks. This could be due to the high cost of different regulatory requirements. These regulatory requirements tend to have scale effects so that the regulatory cost as a percentage of sales is less for the large company than the small company. Another part of the story is a changing in how the capital markets are where previously a stock listing was viewed as the best way to raise capital and arrange an eventual exit, now the VC path is very attractive and an exit can be arranged through a buyout before ever listing. A third part is the growing concentration in sectors of the economy over the last 20 years through mergers and relatively relaxed anti-trust concerns. A fourth part, on the micro side of things, might be that some of the get rich quick founders would prefer to avoid the regulatory limelight/scrutiny with their actions or realize that they can't get away with what they were once able to do, which decreases the desire for a listing.

Valuethinker
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Re: The stock market is shrinking.

Post by Valuethinker » Sun Aug 05, 2018 6:42 am

letsgobobby wrote:
Sat Aug 04, 2018 11:02 pm
knpstr wrote:
Sat Aug 04, 2018 7:22 pm
I don't think there is anything I can do about this phenomena so I don't worry too much about it.

I don't necessarily think there is anything inherently bad about the shrinking number of publicly traded companies and such trends may be temporary anyway.
You could invest in private equity.
Can I ask you to clarify?

The Private Equity industry in the USA (and globally) is generally composed of funds of 10 years life (longer for infrastructure and venture capital) that buy private companies: either growth stage (venture capital) or more mature companies bought with leverage (Leveraged Buy Out). The investors are the Limited Partners, the manager is the General Partner.

Such funds typically set a minimum size of $10m commitment (over 10 years: the first 5 years is when the money is spent and constitutes The Commitment Period).

This is certainly the context which Swensen et al. use. when they talk about Alternative Assets.

I don't know US regulation, but I think individuals can only invest in these funds as "accredited investors" (the European regulatory term was something like "intermediate investors"? That's not something the average boglehead investor is going to have?

Also $10m is a heck of a concentration in one fund - the dispersion of performance is much greater than for quoted equity funds, and there is essentially no liquidity. Once you sign that contract, you are on the hook for 10 years. LP default is ugly, but at the very least you lose the right to any further upside and you only get distributions to pay back your invested capital. The secondary market in fund units is not complete and efficient.

So I cannot see how the average reader here can just "invest in private equity"? Essentially, you cannot?*

Personal investments in private companies don't meet diversification criteria. Plus not everyone has access to good personal investing opportunities. My own record is pretty mixed - I now just invest in index funds (one investment, I have been waiting 18 years for realization; I also have quite a few complete writeoffs).

* there are a very limited number of quoted vehicles a US investor might invest in. You cannot use the UK listed ones, AFAIK, because of IRS PFIC rules. Most of those US quoted ones did not look attractive when I looked into them -- you are giving huge value away to the GPs or employees of same.

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Re: The stock market is shrinking.

Post by vineviz » Sun Aug 05, 2018 6:49 am

Bacchus01 wrote:
Sun Aug 05, 2018 6:24 am
nisiprius wrote:
Sun Aug 05, 2018 6:19 am
Bacchus01 wrote:
Sun Aug 05, 2018 6:09 am
Raabe34 wrote:
Sat Aug 04, 2018 10:55 pm
gasman wrote:
Sat Aug 04, 2018 7:51 pm
1. Why is the number of publicly trade companies shrinking?...
Sarbanes Oxley - makes it expensive for a smaller company to be public and is incentive to stay private.
This is a huge driver for many companies
The cause came six years after the effect?
Image
Why not look at the rest of the line?

That drop was the dot com bubble, Y2K and the recession. The rest was SOX. The cost of SOX is enormous on mid to micro cap companies.
Or maybe Sarbanes Oxley is the scapegoat for a macroeconomic correction that needed to happen anyway?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Valuethinker
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Re: The stock market is shrinking.

Post by Valuethinker » Sun Aug 05, 2018 6:55 am

Bacchus01 wrote:
Sun Aug 05, 2018 6:24 am
nisiprius wrote:
Sun Aug 05, 2018 6:19 am
Bacchus01 wrote:
Sun Aug 05, 2018 6:09 am
Raabe34 wrote:
Sat Aug 04, 2018 10:55 pm
gasman wrote:
Sat Aug 04, 2018 7:51 pm
1. Why is the number of publicly trade companies shrinking?...
Sarbanes Oxley - makes it expensive for a smaller company to be public and is incentive to stay private.
This is a huge driver for many companies
The cause came six years after the effect?
Image
Why not look at the rest of the line?

That drop was the dot com bubble, Y2K and the recession. The rest was SOX. The cost of SOX is enormous on mid to micro cap companies.
I don't disagree about the costs of SOX. One quote I heard was $1m p.a. for a shell company listed on Nasdaq.

However the charts don't really give a feeling for that because the drop is not that dramatic compared to what came before. Hard to make a case for it.

I suspect another factor has been the reduction in capital deployed by trading firms for these stocks. Liquidity has declined. And trading volumes: you get lots of index funds that just hold them. Analyst coverage is sharply less.

At that point, if you are a Board, the listing gives you major regulatory and legal headaches, increased risks of shareholder lawsuits etc, but it does not give you liquidity for your stockholders and therefore it is not a ready access of cheaper capital (more liquid => lower risk => lower demanded return by investors). IPOs are also not cheap, in the USA averaging 6-7% of new money raised.

In short, then, why bother?

In addition, the capital available to the Private Equity industry is much much larger than it was (probably 20x+ what it was in the 1990s). Thus, there are far more options in terms of institutional investment besides IPO.

Valuethinker
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Re: The stock market is shrinking.

Post by Valuethinker » Sun Aug 05, 2018 6:56 am

vineviz wrote:
Sun Aug 05, 2018 6:49 am
Bacchus01 wrote:
Sun Aug 05, 2018 6:24 am


Why not look at the rest of the line?

That drop was the dot com bubble, Y2K and the recession. The rest was SOX. The cost of SOX is enormous on mid to micro cap companies.
Or maybe Sarbanes Oxley is the scapegoat for a macroeconomic correction that needed to happen anyway?
One thing we have learned in economics is that transactions costs count, a lot, even if small.

So if transactions costs have increased via: less analyst coverage (thus increasing information costs); fewer market makers with less capital committed etc. then that's going to have a significant impact.

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tadamsmar
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Re: The stock market is shrinking.

Post by tadamsmar » Sun Aug 05, 2018 7:03 am

Seems like earnings would be more important than just totaling up the number of small companies.

I suppose this takes some earnings and earnings growth off the table.

The biggest private firm is Samsung. If it were traded, it would probably have a cap value exceeding Apple (the traded firm with the highest cap).

There is one other private firm with more revenues than Apple and I bet you've never even heard of it.

If the Samsung instead of Google had a big AI breakthrough and started sucking up a larger proportion of earnings, that would make a difference. Or some state-owned enterprise could do it, maybe in China.

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Re: The stock market is shrinking.

Post by jeffyscott » Sun Aug 05, 2018 7:04 am

Bacchus01 wrote:
Sun Aug 05, 2018 6:24 am
Why not look at the rest of the line?
You might want to do that yourself and notice that it levels off for about 4 years immediately AFTER the dashed red vertical line.
Last edited by jeffyscott on Sun Aug 05, 2018 7:12 am, edited 1 time in total.
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columbia
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Re: The stock market is shrinking.

Post by columbia » Sun Aug 05, 2018 7:04 am

Owning just the SP500 seems to have worked out well for a lot of investors, so I’m not sure what the real problem is (related to that article).

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Re: The stock market is shrinking.

Post by jeffyscott » Sun Aug 05, 2018 7:10 am

tadamsmar wrote:
Sun Aug 05, 2018 7:03 am
The biggest private firm is Samsung.
:?:

It is the largest holding in my emerging markets fund at 5.53% of the portfolio.
press on, regardless - John C. Bogle

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Re: The stock market is shrinking.

Post by HEDGEFUNDIE » Sun Aug 05, 2018 7:21 am

So it seems to me this is the key question w/r/t public vs private equity:

Does the shrinking number of public equities mean that an investor only invested in public equities would be missing out on an important engine of future US economic growth?

If the answer is yes, this implies that an investor only invested in public equity would have lower average returns going forward than one who is also able to tap into the private equity markets.

How one would most effectively invest in private equity is a secondary question. Although I suspect a substantial number of Bogleheads are in fact accredited investors.

columbia
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Re: The stock market is shrinking.

Post by columbia » Sun Aug 05, 2018 7:37 am

The author of that article warns about companies smaller than Russell 200 index. This chart is limited in time by the life of the IWL etf, but is that really an issue?

https://www.portfoliovisualizer.com/bac ... ion3_3=100

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Re: The stock market is shrinking.

Post by tadamsmar » Sun Aug 05, 2018 8:51 am

jeffyscott wrote:
Sun Aug 05, 2018 7:10 am
tadamsmar wrote:
Sun Aug 05, 2018 7:03 am
The biggest private firm is Samsung.
:?:

It is the largest holding in my emerging markets fund at 5.53% of the portfolio.
I was referring to Samsung Holdings. But now I see that 70% of their revenues come from the publicly traded Samsung Electronics. So, much of the earnings growth would be captured by the market.

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Re: The stock market is shrinking.

Post by nisiprius » Sun Aug 05, 2018 9:13 am

HEDGEFUNDIE wrote:
Sun Aug 05, 2018 7:21 am
So it seems to me this is the key question w/r/t public vs private equity:

Does the shrinking number of public equities mean that an investor only invested in public equities would be missing out on an important engine of future US economic growth?

If the answer is yes, this implies that an investor only invested in public equity would have lower average returns going forward than one who is also able to tap into the private equity markets.

How one would most effectively invest in private equity is a secondary question. Although I suspect a substantial number of Bogleheads are in fact accredited investors.
Why aren't the actual results, shown above, of four private equity mutual funds and ETFs--LPEIX, PSP, PEX, and LPEAX--germane? Not one of them beat Total Stock since inception, not one of them has beaten it in the last ten years, five years, three years, one year, year to date, three months, or one month. Well, I have to assume that's true for LPEAX since it's defunct, but I'm imagining that it would still be around if it had performed well.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: The stock market is shrinking.

Post by jeffyscott » Sun Aug 05, 2018 9:27 am

tadamsmar wrote:
Sun Aug 05, 2018 8:51 am
jeffyscott wrote:
Sun Aug 05, 2018 7:10 am
tadamsmar wrote:
Sun Aug 05, 2018 7:03 am
The biggest private firm is Samsung.
:?:

It is the largest holding in my emerging markets fund at 5.53% of the portfolio.
I was referring to Samsung Holdings. But now I see that 70% of their revenues come from the publicly traded Samsung Electronics. So, much of the earnings growth would be captured by the market.
Oh, I didn't know there was a holding company. I guess it's actually even a bit more complicated than that (though this chart may be out of date):

Image
https://qz.com/223755/samsungs-bizarre- ... ted-chart/
press on, regardless - John C. Bogle

letsgobobby
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Re: The stock market is shrinking.

Post by letsgobobby » Sun Aug 05, 2018 9:30 am

nisiprius wrote:
Sun Aug 05, 2018 9:13 am
HEDGEFUNDIE wrote:
Sun Aug 05, 2018 7:21 am
So it seems to me this is the key question w/r/t public vs private equity:

Does the shrinking number of public equities mean that an investor only invested in public equities would be missing out on an important engine of future US economic growth?

If the answer is yes, this implies that an investor only invested in public equity would have lower average returns going forward than one who is also able to tap into the private equity markets.

How one would most effectively invest in private equity is a secondary question. Although I suspect a substantial number of Bogleheads are in fact accredited investors.
Why aren't the actual results, shown above, of four private equity mutual funds and ETFs--LPEIX, PSP, PEX, and LPEAX--germane? Not one of them beat Total Stock since inception, not one of them has beaten it in the last ten years, five years, three years, one year, year to date, three months, or one month. Well, I have to assume that's true for LPEAX since it's defunct, but I'm imagining that it would still be around if it had performed well.
The results are germane. I myself do not invest in private equity but I haven't spent any time investigating it as an option. These articles about a shrinking publicly traded market come out regularly and from time to time I say to myself I ought to look more into the alternatives. Like you, I then see these terrible returns and decide, why bother?

But there are probably more options than these four funds, and to Valuethinker's point I suspect a disproportionate share of Bogleheads are in fact accredited. I got pretty far down the road to investing in SoFi but then decided I just didn't understand the offering well enough and pulled the plug. I wonder how I would have done. Well, that's water under the bridge, but if half of all future economic growth will be driven by private equity, it's perhaps an investment class I ought to bother myself to learn something about.

columbia
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Re: The stock market is shrinking.

Post by columbia » Sun Aug 05, 2018 9:43 am

If an “outsider” can get greater than market returns from the private equity sphere (though a publicly available trading vehicle), it stands to reason that would require some evidence of it actually being true.

Like that old Wendy’s commercial: “Where’s the beef?”

That’s entirely different than having enough money and access to buying in to one of these firms, of course. That certainly won’t ever be true for me....

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"The Market is Shrinking, and That's a Problem"

Post by Sagefemme » Sun Aug 05, 2018 9:52 am

[Thread merged into here, see below. --admin LadyGeek]

I was interested and alarmed by this short, pithy piece in the New York Times business section today. I guess I should know this is happening, but Jeff Sommer explained what it is, and why it's worrisome, so well that I feel like I've suddenly woken up.

I would love to know what all you seasoned stock market investors think: Is this just another type of the "gloom and doom" stock market predictions we ignore all the time, or is there something more fundamentally worth considering, and maybe acting on, here?

Of course I know that trying to reduce one's stock market exposure, when, how, etc., is still the bugaboo.

https://www.nytimes.com/2018/08/04/busi ... ctionfront

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Re: The stock market is shrinking.

Post by golfCaddy » Sun Aug 05, 2018 10:11 am

Valuethinker wrote:
Sun Aug 05, 2018 6:42 am
letsgobobby wrote:
Sat Aug 04, 2018 11:02 pm
knpstr wrote:
Sat Aug 04, 2018 7:22 pm
I don't think there is anything I can do about this phenomena so I don't worry too much about it.

I don't necessarily think there is anything inherently bad about the shrinking number of publicly traded companies and such trends may be temporary anyway.
You could invest in private equity.
Can I ask you to clarify?

The Private Equity industry in the USA (and globally) is generally composed of funds of 10 years life (longer for infrastructure and venture capital) that buy private companies: either growth stage (venture capital) or more mature companies bought with leverage (Leveraged Buy Out). The investors are the Limited Partners, the manager is the General Partner.

Such funds typically set a minimum size of $10m commitment (over 10 years: the first 5 years is when the money is spent and constitutes The Commitment Period).

This is certainly the context which Swensen et al. use. when they talk about Alternative Assets.

I don't know US regulation, but I think individuals can only invest in these funds as "accredited investors" (the European regulatory term was something like "intermediate investors"? That's not something the average boglehead investor is going to have?
Private equity is both more and less exclusive than you describe. $10M may be the minimum if you wanted to invest directly in a fund. However, the big banks, such as Morgan Stanley pool money from many of their rich clients to invest in private equity funds. Through that route, the investment minimums can be as low as $250k. For SEC purposes, Morgan Stanley still requires investors to be qualified purchasers($5M+ in investments).
Last edited by golfCaddy on Sun Aug 05, 2018 10:36 am, edited 1 time in total.

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Re: The stock market is shrinking.

Post by nisiprius » Sun Aug 05, 2018 10:11 am

I file the whole "number of listed stocks decreasing" thing--first brought to my personal attention in 2011 in this forum by Rick Ferri--in the category of "I know something you don't know, and since you don't know it, I can claim it means anything I like."

The number of foreign stocks in the S&P 500 is now up to 14, spanning the globe from Amsterdam to Zurich. Up from I think four just a few years ago. Therefore, we're all doomed.

The number of companies in the Dow Jones Industrial Average with the word "International" in their name has declined 75% since 1932 (International Business Machines Corporation, International Harvester Company, International Nickel Company, Ltd. and International Shoe Company). Therefore, we're all doomed.

This article is full of spin, starting with the rhetoric that "the stock market is shrinking." Only by the third paragraph does it disclose that
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...
And the choice of starting point is disingenuous. Those were the days when my MIT alumni notes always led off with several stories of classmates starting up companies. I think the "fewer stocks" thing is just roundabout way of saying "the tech bubble is over."

To me, micro-caps are just penny stocks in Armani suits. So I don't know if I should be terribly upset about limited choices in stocks I don't put much weight on, anyway.

How much difference was there between VTI, the Vanguard Total Stock Market Index Fund, covering 3,654 stocks in a "total market" index, and SCHB, covering 2,402 in what is merely a "broad" market index and thus is missing over 1,000 of the smallest-cap stocks? In nine years, have SCHB investors missed out on anything important?

If the stock market listings shrink to 2,402 stocks, is there any reason to think it will look or behave very differently from the 2,400-stock "broad" market of today?

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Re: "The Market is Shrinking, and That's a Problem"

Post by Sagefemme » Sun Aug 05, 2018 10:18 am

Whoops, didn't see this was posted yesterday!! I guess I'll read those replies.....

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Re: The stock market is shrinking.

Post by AlohaJoe » Sun Aug 05, 2018 10:26 am

nisiprius wrote:
Sun Aug 05, 2018 9:13 am
HEDGEFUNDIE wrote:
Sun Aug 05, 2018 7:21 am
So it seems to me this is the key question w/r/t public vs private equity:

Does the shrinking number of public equities mean that an investor only invested in public equities would be missing out on an important engine of future US economic growth?

If the answer is yes, this implies that an investor only invested in public equity would have lower average returns going forward than one who is also able to tap into the private equity markets.

How one would most effectively invest in private equity is a secondary question. Although I suspect a substantial number of Bogleheads are in fact accredited investors.
Why aren't the actual results, shown above, of four private equity mutual funds and ETFs--LPEIX, PSP, PEX, and LPEAX--germane?
If you want to do some extra legwork you could download the Cambridge Associates Private Equity Index and see how that has fared -- https://www.cambridgeassociates.com/pri ... enchmarks/

"Over the period 1986 to 2014, the mean excess return on the private equity index, before fees, is 18% per year with an annualized volatility of 17% and a market beta of only 0.7", so at a high level I know it has done well -- but there are questions about whether those kinds of numbers are really an apples-to-apples comparison for S&P 500 funds. In particular, PE uses leverage (which boosts returns) & hold-to-maturity accounting (which reduces reported volatility) -- and you could do that in your own accounts in you really wanted to.

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Re: The stock market is shrinking.

Post by grayfox » Sun Aug 05, 2018 10:37 am

It seems to me that the overall trend is for small firms to merge into larger firms and larger firms to take over smaller firms. If no new companies were started, over time the number of companies would shrink and eventually there would be a mere handful of mega-mega-corporations that are responsible for most of commerce.

I read an article about a Swiss study that showed that 147 transnational corporations were responsible for something like 40 percent of world economic activity. They started with a database of 37 million companies, but found that they were largely controlled buy only 1318 companies which had 60 percent share of global revenue. But then those 1318 companies were largely controlled by only 147 super-giants.

So the trend is for greater and greater concentration and fewer companies. I recall an episode of the Simpsons where Homer started an internet company and Bill Gates immediately "bought him out". So there's an actual example of it happening right there.

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Re: The stock market is shrinking.

Post by HEDGEFUNDIE » Sun Aug 05, 2018 10:44 am

nisiprius wrote:
Sun Aug 05, 2018 9:13 am
HEDGEFUNDIE wrote:
Sun Aug 05, 2018 7:21 am
So it seems to me this is the key question w/r/t public vs private equity:

Does the shrinking number of public equities mean that an investor only invested in public equities would be missing out on an important engine of future US economic growth?

If the answer is yes, this implies that an investor only invested in public equity would have lower average returns going forward than one who is also able to tap into the private equity markets.

How one would most effectively invest in private equity is a secondary question. Although I suspect a substantial number of Bogleheads are in fact accredited investors.
Why aren't the actual results, shown above, of four private equity mutual funds and ETFs--LPEIX, PSP, PEX, and LPEAX--germane? Not one of them beat Total Stock since inception, not one of them has beaten it in the last ten years, five years, three years, one year, year to date, three months, or one month. Well, I have to assume that's true for LPEAX since it's defunct, but I'm imagining that it would still be around if it had performed well.
The results are not germane. Investing in a private equity ETF (or an underlying private equity stock) is not at all the same as being an LP in an private equity fund. This is because the GPs and LPs of the private equity fund get distributed the vast majority of the carry (the 20% of profits) first. The publicly traded vehicle is a separate entity that is then left with only the management fee (table scraps in comparison to the carry).

Earlier this year WSJ did a comprehensive study of private equity fund returns (using data from Preqin). PE funds of a common “vintage” (year of launch) beat a S&P 500 investment also made in that year 21 out of 26 years (between 1990-2015).

https://www.wsj.com/articles/does-priva ... 1518520639

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Re: The stock market is shrinking.

Post by vitaflo » Sun Aug 05, 2018 10:58 am

I think this really only matters if you're an individual stock picker. The reason it's a "problem" is because private equity has already extracted most of the value out of companies before they go public (if they go at all). This means that the general public gets a much lower share of the returns and that companies going IPO are much more mature than they used to be.

As a market cap investor, a bunch of microcap companies going IPO with 100x gains won't move the needle much. Most of our returns come from large caps anyway. Missing out on these companies doesn't really matter unless you're a stock picker.

On the other hand, because acquisition has become the hot exit strategy over going IPO, it means most investors get some benefit anyway. Instagram and WhatsApp could have easily gone IPO on their own, but instead were bought by Facebook. Their growth is now part of Facebook's growth (and some might say this is the only part of Facebook that's still growing). So while we may have less microcap stocks to pick from, many of them get rolled up into the large cap stocks we all own anyway.

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Re: The stock market is shrinking.

Post by LadyGeek » Sun Aug 05, 2018 11:05 am

I merged Sagefemme's thread into the on-going discussion.
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Re: The stock market is shrinking.

Post by Dottie57 » Sun Aug 05, 2018 11:16 am

vineviz wrote:
Sun Aug 05, 2018 6:49 am
Bacchus01 wrote:
Sun Aug 05, 2018 6:24 am
nisiprius wrote:
Sun Aug 05, 2018 6:19 am
Bacchus01 wrote:
Sun Aug 05, 2018 6:09 am
Raabe34 wrote:
Sat Aug 04, 2018 10:55 pm
Sarbanes Oxley - makes it expensive for a smaller company to be public and is incentive to stay private.
This is a huge driver for many companies
The cause came six years after the effect?
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Why not look at the rest of the line?

That drop was the dot com bubble, Y2K and the recession. The rest was SOX. The cost of SOX is enormous on mid to micro cap companies.
Or maybe Sarbanes Oxley is the scapegoat for a macroeconomic correction that needed to happen anyway?
Sarbanes Oxley was a reaction to the egregious greed displayed by Enron, Worldcon etc.

Sarbanes Oxley implementation at the company I worked for was extremely expensive. The reason? Every improvement in security and process was labeled as necessary because of SOX. The improvements were formerly deemed as too expensive. So SOX compliance became more expensive.

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Re: The stock market is shrinking.

Post by Bacchus01 » Sun Aug 05, 2018 11:59 am

jeffyscott wrote:
Sun Aug 05, 2018 7:04 am
Bacchus01 wrote:
Sun Aug 05, 2018 6:24 am
Why not look at the rest of the line?
You might want to do that yourself and notice that it levels off for about 4 years immediately AFTER the dashed red vertical line.

Sure does. What does that tell you? Despite a major market correction which usually creates a rebound, SOX killed any rebound. It’s just too expensive, especially for small firms.

I’m not arguing for or against SOX, but anyone with practical knowledge of working in the types of companies that formally would have gone public, or working in firms impacted by SOX, has found it is extremely expensive. As a result, many companies have decided it isn’t worth it and have sought capital through other means.

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Re: The stock market is shrinking.

Post by CaliJim » Sun Aug 05, 2018 5:10 pm

A bit of a change in topic.... but.... regarding SOX is expensive and therefore bad for investors.... I think this is bit of a red herring distraction.

My thoughts on SOX:

As a passive investor with former SOX and internal controls experience... in the long run... SOX is good for investors.
SOX is about having reliable internal controls..... Risk Analysis and Risk Control.
Do freewheeling, risk taking, entrepreneurs hate it? Likely most do. The one's I knew did.
However, I would be very reluctant to make a passive investment in a company with poor internal controls.
Internal controls can be expensive, but they help protect our retirement investments.
Are they necessary in companies that are 100% staffed by competent, honest, trustworthy, non-corruptible people? No.
Are there any companies (with more than ... let's say... 20 employees) that are 100% staffed by competent, honest, trustworthy, non-corruptible people? Maybe.... but not likely.
Nothing about SOX requires that internal controls be implemented without a cost benefit analysis.
What is the value at risk? What is the probability? What are the costs of controlling the risk to reduced levels of probability? If no control puts $1000 at risk, and that risk has a low probability of happening, and that risk costs $10 a day to reduce the risk to zero, then a company can choose to not control that risk. (IE... a risk like .... having two people make the daily bank run instead of just one person.)
SOX does not require that companies make dumb choices. A company can be entirely SOX compliant and still have large unmitigated risks that the company chooses are too expensive control. Their biggest uncontrolled risks are generally clearly spelled out in the company's prospectus.
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Re: The stock market is shrinking.

Post by nisiprius » Sun Aug 05, 2018 6:01 pm

AlohaJoe wrote:
Sun Aug 05, 2018 10:26 am
...If you want to do some extra legwork you could download the Cambridge Associates Private Equity Index and see how that has fared -- https://www.cambridgeassociates.com/pri ... enchmarks/ ...
How do you invest in this index? What is the name of the mutual fund or ETF that tracks it?

And what is wrong with the Red Rocks Global Listed Private Equity Index tracked by PSP, or the LPX Direct Listed Private Equity Index tracked by PEF?

It's not entirely a question of legwork. To me, implementation by a mutual fund or ETF is an important touchstone. The theory or the asset class is being tracked in the real world, running real money, incurring real costs... and the results are transparent to the whole world and can't be hidden. And once the fund or ETF is launched, the stake is in the ground. It's no longer possible to backtest several things and only write about the one that turned out well. You can no longer hide the out-of-sample performance going forward.
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Re: The stock market is shrinking.

Post by nisiprius » Sun Aug 05, 2018 6:25 pm

HEDGEFUNDIE wrote:
Sun Aug 05, 2018 10:44 am
nisiprius wrote:
Sun Aug 05, 2018 9:13 am
Why aren't the actual results, shown above, of four private equity mutual funds and ETFs--LPEIX, PSP, PEX, and LPEAX--germane?...
The results are not germane. Investing in a private equity ETF (or an underlying private equity stock) is not at all the same as being an LP in an private equity fund. This is because the GPs and LPs of the private equity fund get distributed the vast majority of the carry (the 20% of profits) first. The publicly traded vehicle is a separate entity that is then left with only the management fee (table scraps in comparison to the carry).

Earlier this year WSJ did a comprehensive study of private equity fund returns (using data from Preqin). PE funds of a common “vintage” (year of launch) beat a S&P 500 investment also made in that year 21 out of 26 years (between 1990-2015).

https://www.wsj.com/articles/does-priva ... 1518520639
It's paywalled, but the article title doesn't quite say what you imply. The title is:
Does Private Equity Really Beat the Stock Market? Most likely, yes, but it is really hard to measure and comes with big caveats.
Also, was that risk-adjusted performance?

Because another article, in Forbes, reporting on a paper in the Financial Analyst's Journal, said: Study Demolishes Private Equity's Claim of Beating the Market
Private equity funds fail in their most important mission of earning more than investors can make in the public markets, a new study of more than 900 funds raised since 1986 finds. After adjusting for the heavier leverage PE managers place on portfolio companies and the tiny average size of the companies they buy, researchers including advisors to Abu Dhabi and Canadian national investment funds found no significant return difference between private equity and an equivalent portfolio of publicly traded stocks.
The article cited in Forbes is A Bottom-Up Approach to the Risk-Adjusted Performance of the Buyout Fund Market, Financial Analysts' Journal, 2016, Jean-François L’Her, CFA, Rossitsa Stoyanova, Kathryn Shaw, William Scott, CFA, and Charissa Lai, CFA. They concluded that
After making these risk adjustments, we find no significant outperformance of buyout fund investments versus the public market equivalent on a dollar-weighted basis. We contend that even without significant risk-adjusted outperformance, buyout funds can play a valuable role in institutional investors’ portfolios.
Which is fine--for institutional investors.
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Re: The stock market is shrinking.

Post by golfCaddy » Sun Aug 05, 2018 6:42 pm

nisiprius wrote:
Sun Aug 05, 2018 6:01 pm
AlohaJoe wrote:
Sun Aug 05, 2018 10:26 am
...If you want to do some extra legwork you could download the Cambridge Associates Private Equity Index and see how that has fared -- https://www.cambridgeassociates.com/pri ... enchmarks/ ...
How do you invest in this index? What is the name of the mutual fund or ETF that tracks it?

And what is wrong with the Red Rocks Global Listed Private Equity Index tracked by PSP, or the LPX Direct Listed Private Equity Index tracked by PEF?

It's not entirely a question of legwork. To me, implementation by a mutual fund or ETF is an important touchstone. The theory or the asset class is being tracked in the real world, running real money, incurring real costs... and the results are transparent to the whole world and can't be hidden. And once the fund or ETF is launched, the stake is in the ground. It's no longer possible to backtest several things and only write about the one that turned out well. You can no longer hide the out-of-sample performance going forward.
We can assume there is no US mutual fund or ETF that can directly access US private equity funds. The SEC won't allow it. Private equity is sold to US accredited investors, in practice qualified purchasers. Normal investors can buy shares of private equity management firms but not invest directly in funds. So a normal investor could buy shares of Blackstone, but not invest in Blackstone private equity funds. Overseas, there are listed private equity funds, like SVG Capital, but they can't be purchased directly by US investors. At least it used to be some of the US ETFs did own some of the overseas listed private equity funds, which must have been some weird SEC loophole.

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Re: The stock market is shrinking.

Post by HEDGEFUNDIE » Sun Aug 05, 2018 6:52 pm

golfCaddy wrote:
Sun Aug 05, 2018 6:42 pm
nisiprius wrote:
Sun Aug 05, 2018 6:01 pm
AlohaJoe wrote:
Sun Aug 05, 2018 10:26 am
...If you want to do some extra legwork you could download the Cambridge Associates Private Equity Index and see how that has fared -- https://www.cambridgeassociates.com/pri ... enchmarks/ ...
How do you invest in this index? What is the name of the mutual fund or ETF that tracks it?

And what is wrong with the Red Rocks Global Listed Private Equity Index tracked by PSP, or the LPX Direct Listed Private Equity Index tracked by PEF?

It's not entirely a question of legwork. To me, implementation by a mutual fund or ETF is an important touchstone. The theory or the asset class is being tracked in the real world, running real money, incurring real costs... and the results are transparent to the whole world and can't be hidden. And once the fund or ETF is launched, the stake is in the ground. It's no longer possible to backtest several things and only write about the one that turned out well. You can no longer hide the out-of-sample performance going forward.
We can assume there is no US mutual fund or ETF that can directly access US private equity funds. The SEC won't allow it. Private equity is sold to US accredited investors, in practice qualified investors. Normal investors can buy shares of private equity management firms but not invest directly in funds. So a normal investor could buy shares of Blackstone, but not invest in Blackstone private equity funds. Overseas, there are listed private equity funds, like SVG Capital, but they can't be purchased directly by US investors. At least it used to be some of the US ETFs did own some of the overseas listed private equity funds, which must have been some some weird SEC loophole.
+1.

Here is a diagram from Blackstone’s S-1 showing how shareholders get paid. The common shareholders are the third circle, and get paid last. If you want to read the actual cash distribution policy it’s on page 68.

https://www.sec.gov/Archives/edgar/data ... 32zs-1.htm

Image

To Nisiprius’s other point of “if you can’t invest in it, you should just ignore it,” I would agree that for most household investors that is the best approach. But for those BHs who do have the assets to become an LP (or through a wealth manager like Morgan Stanley as mentioned above), private equity should not be dismissed out of hand.

I would be content, for example, if the windfall wiki were updated to explain how one could invest in Alternative asset classes cost-efficiently and what to look out for.

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Re: The stock market is shrinking.

Post by nisiprius » Sun Aug 05, 2018 6:54 pm

golfCaddy wrote:
Sun Aug 05, 2018 6:42 pm
...We can assume there is no US mutual fund or ETF that can directly access US private equity funds. The SEC won't allow it. Private equity is sold to US accredited investors, in practice qualified purchasers. Normal investors can buy shares of private equity management firms but not invest directly in funds. So a normal investor could buy shares of Blackstone, but not invest in Blackstone private equity funds. Overseas, there are listed private equity funds, like SVG Capital, but they can't be purchased directly by US investors. At least it used to be some of the US ETFs did own some of the overseas listed private equity funds, which must have been some weird SEC loophole...
So, with regard to this exchange:
letsgobobby wrote:
Sat Aug 04, 2018 11:02 pm
knpstr wrote:
Sat Aug 04, 2018 7:22 pm
I don't think there is anything I can do about this phenomena so I don't worry too much about it.
You could invest in private equity.
So if I ask "how could I invest in a private equity index with >25 constituents," I take it that the answer is "to have about >$25 million or so, so that you can be a qualified limited partner in each of the funds constituting the index." And if I only wanted to risk that with 10% of my portfolio, I would need to have a $250 million portfolio. In short, as the Financial Analysts' Journal paper said (though for different reasons) it is potentially useful for institutional investors.
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Re: The stock market is shrinking.

Post by golfCaddy » Sun Aug 05, 2018 7:04 pm

nisiprius wrote:
Sun Aug 05, 2018 6:54 pm
So if I ask "how could I invest a private equity index with 25 constituents," I take it that the answer is "to have about $25 million or so, so that you can be a qualified limited partner in each of the funds constituting the index." And if I only wanted risk that with 10% of my portfolio, I would need to have a $250 million portfolio. In short, as the Financial Analysts' Journal paper said (though for different reasons) it is useful for institutional investors.
Wall Street has already solved this problem. Assuming you have $5M+ in liquid investments, for the low entry of $250k can buy into a fund of funds. Now, you have to pay the fund of funds 1 and 10 in addition to the 2 and 20 charged by the underlying funds and your Morgan Stanley FA might charge you another 1-2% to place you into these terrific investments. Nonetheless, 5 and 30 is a small price to pay to avoid investing in mutual funds alongside the unwashed masses.

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