Shrinking stock market

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Schooly D
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Shrinking stock market

Post by Schooly D »

Has there been any discussion on this board about the investing implications, if any, of the marked decline in the number of companies listed on US stock exchanges?
The total number of publicly traded firms in the United States has fallen by half since the late 1990s. As a result, the size of the market is roughly the same as it was in 1991 despite the overall economy tripling in size since that time. This study examines this trend showing the long-term shrinking stock market trend is associated with higher levels of cash dividend payouts by firms, slower rates of profit and revenue growth, and less firm-level risk, all of which point to an average firm that is later in its lifecycle. The loss of firms has a more substantial impact on revenue and profit growth rates for the marginal firm in the market than the addition of new firms does. These results have important implications for the broader economy and support studies which find that smaller firms are being purchased by larger firms rather than going public.
https://www.sciencedirect.com/science/a ... 8121000458
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Re: Shrinking stock market

Post by Logan Roy »

Quite a bit. I'm sure someone will have links.

For one, the way innovative businesses grow in the 21st century (as described in Zero to One) is probably better suited to private markets .. Private markets don't demand constant quarterly earnings growth – businesses can grow and scale and build huge information edges, and IPO when they're already monopolistic and ready to focus on margins .. So at some point it probably would affect public market growth.

And if you strip out big tech, public market returns have been quite muted, even with all this stimulus. But big tech is also acquiring lots of innovative businesses, and isn't being regulated properly, and you break down a business like Amazon, and their acquisitions look like a private equity/VC fund. So I think some of that private market growth is bleeding heavily into the largest public companies .. And so I think the real issue is what happens to free markets with a handful of under-regulated tech monopolies? Do they just keep getting bigger until they swallow up everything?
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Re: Shrinking stock market

Post by TimeIsYourFriend »

Compared to the late 1990's when businesses were IPOing with empty office buildings and barely a name on the door?!?
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Re: Shrinking stock market

Post by mbouck »

This is why I believe it's a fool's errand to chase the value premium - with PE vacuuming-up a significant percentage of the public markets what premium there was is only being realized in PE land IMHO.
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Re: Shrinking stock market

Post by afan »

I do not see the number of companies as being of any consequence whatsoever. That figure, by itself, tells us nothing about the size of the economy or the proportion of market value in publicly,-traded stock.

There were no stocks with market caps of greater than a trillion dollars in the late 1990's, now there are several. So what?


Would the market somehow be better if those companies were to spin off 9 new issues each, with market caps of $100B? If every public stock were to spin off 9 companies, then the total number of stocks would increase by a factor or 10. And nothing else would change.

Meaningless statistic.
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Re: Shrinking stock market

Post by nisiprius »

Many.

Like so many other things, the number of stocks in the stock market has fluctuated.

I don't know where to find a history of the number of stocks in the Total Stock Market Index Fund but I am virtually certain that it was less than--yes, a 2013 posting mentions 3,317 stocks. So there are more stocks in the total market than there were a decade ago. Shouldn't we be talking about the expanding stock market?

Facts are whatever they are, interpretations vary, and I don't think anyone knows what these variations mean. There's an explosion of hype about private equity (see right here upthread), and obviously a narrative that public equity is dying is useful to support that hype, so I think anything consistent with that narrative is getting highlighted.

I'll certainly accept the idea of consolidation and oligopolization.

A chart of the number of stocks in Total Stock over time would be great to see, anybody have one or know where to find one? I can't get that article even through JSTOR, does the ScienceDirect article have one?
Last edited by nisiprius on Mon May 13, 2024 12:39 pm, edited 1 time in total.
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Re: Shrinking stock market

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"I was in the pool!, I was in the pool!"

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Re: Shrinking stock market

Post by GP813 »

There are less companies but also less shares as buybacks have increased.
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Re: Shrinking stock market

Post by ScubaHogg »

Random Musings wrote: Mon May 13, 2024 12:37 pm "I was in the pool!, I was in the pool!"

RM
Nice
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Re: Shrinking stock market

Post by Beensabu »

We're not at "Obey the One and Only Omnicorp" yet, but... you know... on the way.
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Re: Shrinking stock market

Post by billaster »

Private equity has been boosted by more than a decade of extremely low interest rates. With nearly free money available in the debt markets, companies have had less reason to resort to the public equity markets for funds.
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Re: Shrinking stock market

Post by Rocinante Rider »

ScubaHogg wrote: Mon May 13, 2024 12:59 pm
Random Musings wrote: Mon May 13, 2024 12:37 pm "I was in the pool!, I was in the pool!"

RM
Nice
At this point, "isn't it common knowledge"?
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Re: Shrinking stock market

Post by Schooly D »

From the article:
The decline in firms is not solely a by-product of the 2000 dotcom bubble collapse or the 2008 recession, as shown in Fig. 1. Instead the decline has been measured and persistent for more than a decade. This decline is largely unique to the U.S. markets—European markets have continued to increase in size as shown by Doidge et al. (2013). The implication of the shrinking number of firms, but rising total equity value is that the average firm's size has increased dramatically. And this in turn has real consequences for the average firm's economic performance.

Overall these findings suggest that the corporate structure of the component companies in U.S. equity markets changed considerably during the 1990–2013 period. The 1990s saw substantial equity growth built around a swelling number of high-growth low-profitability companies, while the period since the dot-com bubble has seen a shrinking stock market characterized by more mature companies with weaker growth profiles.
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Re: Shrinking stock market

Post by arcticpineapplecorp. »

nisiprius wrote: Mon May 13, 2024 12:29 pm A chart of the number of stocks in Total Stock over time would be great to see, anybody have one or know where to find one? I can't get that article even through JSTOR, does the ScienceDirect article have one?
only back to 1980:

Image

source: https://www.ceicdata.com/en/united-stat ... nies-total

i'm still looking beyond that

here's a good article from McKinsey (Reports of corporates’ demise have been greatly exaggerated) that analyzes the data slightly differently than the original linked paper:

https://www.mckinsey.com/capabilities/s ... xaggerated

the total number of the World's publicly traded companies (since 1975) is here:

Image

source: https://data.worldbank.org/indicator/CM ... view=chart

here's the US since 1975:

Image

source: https://www.theglobaleconomy.com/USA/Listed_companies/

Data availability 1975 - 2022
Average 5,331
Min - Max 2,401 - 8,090
Source The World Bank

finally US vs. Non US:

Image

source: https://www.nber.org/digest/sep15/why-a ... mpanies-us

The total number of listed companies fell from 8,000 to 4,100 from 1996 to 2012, while the rest of the world saw an increase from 30,700 to 39,400.
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WillRetire
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Re: Shrinking stock market

Post by WillRetire »

Yes, this has been discussed before. One such thread I started back in 2017 prompted by an article in the WSJ.
viewtopic.php?t=232566

I still find the situation concerning.
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Re: Shrinking stock market

Post by billaster »

WillRetire wrote: Mon May 13, 2024 8:20 pm I still find the situation concerning.
Why? I would be fine with the S&P 500. Heck, I would be fine with the DOW 30.
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Re: Shrinking stock market

Post by WillRetire »

billaster wrote: Mon May 13, 2024 8:29 pm
WillRetire wrote: Mon May 13, 2024 8:20 pm I still find the situation concerning.
Why? I would be fine with the S&P 500. Heck, I would be fine with the DOW 30.
For the reasons I stated in the 2017 thread.

Also, as a U.S. investor, I'd prefer to see growth and innovation across the spectrum of companies. Companies going public is a bet on the economy and the business climate. Companies folding or going private suggests a contracting private sector.
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Re: Shrinking stock market

Post by Lawrence of Suburbia »

Another good reason to have international stocks in one's portfolio, probably.
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Re: Shrinking stock market

Post by WillRetire »

Lawrence of Suburbia wrote: Tue May 14, 2024 5:03 pm Another good reason to have international stocks in one's portfolio, probably.
Yes, indeed.
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Re: Shrinking stock market

Post by Call_Me_Op »

Why does the number of companies matter? That means nothing.
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Re: Shrinking stock market

Post by Silverado »

Call_Me_Op wrote: Wed May 15, 2024 7:31 am Why does the number of companies matter? That means nothing.
My megacorp has gobbled up a few public companies over the years, and I am not 100% convinced that the overall amount of innovation and growth has been maximized. Something like maybe 100+5=104 and not 105. There are often a lot of inefficiencies and this can stifle things. Of course, there are some instances where it really was a force multiplier.
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Re: Shrinking stock market

Post by nisiprius »

arcticpineapplecorp. wrote: Mon May 13, 2024 7:43 pm
nisiprius wrote: Mon May 13, 2024 12:29 pm A chart of the number of stocks in Total Stock over time would be great to see, anybody have one or know where to find one? I can't get that article even through JSTOR, does the ScienceDirect article have one?
only back to 1980:
Thank you very much! Particularly for the McKinsey study, which concluded
The concerns about the decline in the number of listed companies appear to be unfounded.
And here's an impressionistic idea of how that first chart might look without a suppressed zero on the Y axis.

Image
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Re: Shrinking stock market

Post by Rocinante Rider »

nisiprius wrote: Wed May 15, 2024 8:21 am
And here's an impressionistic idea of how that first chart might look without a suppressed zero on the Y axis.

Image
Thank you nisiprius. Great observation regarding the scaffolding of the chart. How Charts Lie: Getting Smarter about Visual Information, by Alberto Cairo has many helpful and amusing insights, including the general preference to use zero as a baseline when the method of encoding involves height.
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Re: Shrinking stock market

Post by nisiprius »

And meanwhile: America is in the midst of an extraordinary startup boom, says The Economist. Readable with no-cost registration.
An array of data indicate that Americans are rediscovering their go-getting spirit. The most striking evidence comes from applications to form businesses, a proxy for startup activity. These soared in mid-2020, when America was still in the grip of covid-19. The initial surge was easy to dismiss: some of the new firms were scams, trying to profit from the government’s financial assistance for small businesses; others reflected the strangeness of the moment, with companies set up to import face masks or flog hand sanitiser.

Image

But now, well after the pandemic has faded away, the surge continues (see chart 1). Last year applications to form businesses reached 5.5m, a record. Although they have slowed a touch this year, the monthly average is still about 80% higher than during the decade prior to covid, compared with just a 20% rise in Europe.
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Re: Shrinking stock market

Post by stan1 »

If one was concerned they could invest in companies based outside the US ... but that's a different thread with thousands of posts.
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Re: Shrinking stock market

Post by Makefile »

Schooly D wrote: Mon May 13, 2024 7:22 pm From the article:
The decline in firms is not solely a by-product of the 2000 dotcom bubble collapse or the 2008 recession, as shown in Fig. 1. Instead the decline has been measured and persistent for more than a decade. This decline is largely unique to the U.S. markets—European markets have continued to increase in size as shown by Doidge et al. (2013). The implication of the shrinking number of firms, but rising total equity value is that the average firm's size has increased dramatically. And this in turn has real consequences for the average firm's economic performance.

Overall these findings suggest that the corporate structure of the component companies in U.S. equity markets changed considerably during the 1990–2013 period. The 1990s saw substantial equity growth built around a swelling number of high-growth low-profitability companies, while the period since the dot-com bubble has seen a shrinking stock market characterized by more mature companies with weaker growth profiles.
I don't know how realistic it is, but I have seen the compliance costs of Sarbanes-Oxley also cited as raising the minimum threshold where it makes sense to go public.
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Re: Shrinking stock market

Post by WestCoastPhan »

The number of foreign firms listing on U.S. exchanges has risen https://www.euronews.com/business/2024/ ... as%20well.
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Re: Shrinking stock market

Post by KyleAAA »

There's been a lot of conversation about it over the years. I think at some point someone will come along and do for private equity what Vanguard did for mutual funds. It might even be Vanguard. They do offer a private equity fund to qualified individual investors these days https://investor.vanguard.com/wealth-ma ... ate-equity. I might be inclined to invest 10% of my portfolio in private equity if/when that happens.

Mutual funds are allowed to invest a small portion of their assets in private equity, and a number have done so for a while now. The result, at least according to this Morningstar article from 2022, were mixed: https://www.morningstar.com/funds/how-h ... tual-funds

There are also the real estate crowdfunding investments like Fundrise, which some on this forum have used and recommend. I don't know if they are preferable to something like VNQ, but they are legitimate investment vehicles and aren't outright scams. I would feel comfortable investing a small % of my assets on a few of these platforms, although I don't currently.

Then there are closed-end funds like this which...I'd probably avoid for now
https://www.morningstar.com/funds/dxyz- ... inys-child
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Re: Shrinking stock market

Post by nyejos11 »

A recent Economist article- “ America is in the midst of an extraordinary startup boom“ . Is it possible that the future will include more US companies in the IPO lineup?
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Re: Shrinking stock market

Post by alex_686 »

nyejos11 wrote: Wed May 15, 2024 8:15 pm A recent Economist article- “ America is in the midst of an extraordinary startup boom“ . Is it possible that the future will include more US companies in the IPO lineup?
I don’t think so - or at least in this context.

Most of these businesses are asset light. As they ramp up they just don’t need to raise vast sums from the capital market.

So yeah, lots of companies may be going IPO but will only be selling a thin slice of themselves. Or staying private. Or selling themselves to one of the big guys.

But this isn’t going to dramatically increase the size of the pool.
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Re: Shrinking stock market

Post by billaster »

alex_686 wrote: Wed May 15, 2024 8:21 pm So yeah, lots of companies may be going IPO but will only be selling a thin slice of themselves. Or staying private. Or selling themselves to one of the big guys.
Nope. An IPO is almost always the exit strategy of a startup or venture capital investment. It's the only way you can transform hypothetical paper money into real money. Startup founders call it "getting liquid." That's how they cash in. The same for private equity.

For more than a decade debt financed money has been almost free so IPOs have been delayed because they weren't necessary. But the end goal is almost always an IPO to "get liquid" and cash in.

With higher interest rates, VC money has been drying up. I expect earlier IPOs because startups still need money. If they can't get it with cheap debt, they will do it through equity.
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Re: Shrinking stock market

Post by protagonist »

Whether growing or shrinking....would that change the way you invest? Or is it just a curiosity?
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Re: Shrinking stock market

Post by alex_686 »

billaster wrote: Wed May 15, 2024 8:41 pm
alex_686 wrote: Wed May 15, 2024 8:21 pm So yeah, lots of companies may be going IPO but will only be selling a thin slice of themselves. Or staying private. Or selling themselves to one of the big guys.
Nope. An IPO is almost always the exit strategy of a startup or venture capital investment. It's the only way you can transform hypothetical paper money into real money. Startup founders call it "getting liquid." That's how they cash in. The same for private equity.

For more than a decade debt financed money has been almost free so IPOs have been delayed because they weren't necessary. But the end goal is almost always an IPO to "get liquid" and cash in.

With higher interest rates, VC money has been drying up. I expect earlier IPOs because startups still need money. If they can't get it with cheap debt, they will do it through equity.
As a contra example look at the pharmacology and biotechnology sector. The strategy here is to do R&D. Once you have a product ready for human studies you sell yourself to a major. No IPO. This is almost a universal rule in this segment but it happens in many others.

To your point specifically. Founders now have a larger slug of equity and seem reluctant to sell. VC firms are holding onto their positions longer. And PE has picked up the pace of buying VCs stakes.

I just don’t see large net slugs of liquid equity hitting the markets.
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Re: Shrinking stock market

Post by alex_686 »

protagonist wrote: Wed May 15, 2024 9:07 pm Whether growing or shrinking....would that change the way you invest? Or is it just a curiosity?
Yes.

For a variety of reasons I think the relative amount of liquid equity against total economic activity will fall.

Price is determined by supply and demand. Low supply means high prices. i.e. high P/E ratios. So low expected returns.

So more like 19th century England than 20th century America.
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Re: Shrinking stock market

Post by Northern Flicker »

There many be some exceptions to this, but generally, the US has a much larger fraction if its GDP taking place in publicly traded companies than other countries have.

Some historical data for the US, 1975-2022:

https://www.theglobaleconomy.com/USA/Listed_companies/
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Re: Shrinking stock market

Post by protagonist »

alex_686 wrote: Wed May 15, 2024 9:14 pm
protagonist wrote: Wed May 15, 2024 9:07 pm Whether growing or shrinking....would that change the way you invest? Or is it just a curiosity?
Yes.

For a variety of reasons I think the relative amount of liquid equity against total economic activity will fall.

Price is determined by supply and demand. Low supply means high prices. i.e. high P/E ratios. So low expected returns.

So more like 19th century England than 20th century America.
So would your current action be to put less money in the stock market and more in fixed income?
What would you do differently?
(I'm not trying to be difficult. I'm actually curious to understand your thinking about this.)
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Re: Shrinking stock market

Post by alex_686 »

Northern Flicker wrote: Wed May 15, 2024 9:37 pm There many be some exceptions to this, but generally, the US has a much larger fraction if its GDP taking place in publicly traded companies than other countries have.

Some historical data for the US, 1975-2022:

https://www.theglobaleconomy.com/USA/Listed_companies/

Measuring the portion of national income assigned to public companies by counting the number of companies is a nonsensical metric, You are ignoring the relative size of the economy and the relative size of the company. Could be lots of small companies versus a few big ones.

National Income Accounting is the better option.

But you have a point. The share of national income assigned to capital over labor and management/entrepreneurs has increased since the 80s. The share of equity within the capital pool has increased.

I personally think that the capital and equity slices will shrink and the management/entrepreneurs share will increase.
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Re: Shrinking stock market

Post by Northern Flicker »

alex_686 wrote: Wed May 15, 2024 9:49 pm
Northern Flicker wrote: Wed May 15, 2024 9:37 pm There many be some exceptions to this, but generally, the US has a much larger fraction if its GDP taking place in publicly traded companies than other countries have.

Some historical data for the US, 1975-2022:

https://www.theglobaleconomy.com/USA/Listed_companies/

Measuring the portion of national income assigned to public companies by counting the number of companies is a nonsensical metric,
I was not trying to do that. I presented two independent points.
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Re: Shrinking stock market

Post by asset_chaos »

It may be fatalistic, but I put this question of the number of public companies into the catagory of investing things not worth thinking much about because I have no control or ability to influence the metric. For all practical purposes publicly listed companies are all I can invest in. If that means I miss out on owning part of the world's economic activity, I'll just have to miss out because I don't have a viable way to own a globally diversified and economically meaningfull list of private businesses. Sure, if one day, someone comes up with a low-cost way to include private companies at their market weight into index funds, I'd be all for the expanded coverage. Until then, I'll have to stick with the broad diversification of total world index fund; and hope to muddle through somehow.
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Re: Shrinking stock market

Post by alex_686 »

protagonist wrote: Wed May 15, 2024 9:45 pm So would your current action be to put less money in the stock market and more in fixed income?
What would you do differently?
(I'm not trying to be difficult. I'm actually curious to understand your thinking about this.)
I just done reading the excellent, if technical, book Investing Amid Low Expected Returns by Antti Ilmanen. Lots of good lessons here - kind of. The book is kind of aimed at the institutional inventor. Greater awareness is always good and there are some actions one can take.

On that,
asset_chaos wrote: Thu May 16, 2024 3:19 am It may be fatalistic, but I put this question of the number of public companies into the catagory of investing things not worth thinking much about because I have no control or ability to influence the metric. For all practical purposes publicly listed companies are all I can invest in.
I am not as pessimistic as Asset Chaos. Many specific recommendations won't apply but some do. Basically, be aware, be flexible, be nimble. So it is not going to be a set and forget answer.

On that point, the answer is probably not bonds. The yield curve is inverted. We have had a 30 year bull run in bonds and we have hit the end of that road. Either yields will move sideways and we will have low yields. Or yields will increase and bond prices will fall. So - Ugly.

Equities isn't much better. Just piling on more risk is rarely the correct answer. You can extend the same bond analysis to the rich equity valuations. Not as straight forward but still ugly.

I think the primary answer will be to save more and expect less. I think a partial answer is in the Low Beta and Quality factors.
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Re: Shrinking stock market

Post by Thesaints »

billaster wrote: Wed May 15, 2024 8:41 pm Nope. An IPO is almost always the exit strategy of a startup or venture capital investment. It's the only way you can transform hypothetical paper money into real money. Startup founders call it "getting liquid." That's how they cash in. The same for private equity.
Not anymore. In the recent past, founders are trying more and more to remain private and there are other cash-out mechanisms for insiders.
As an anecdotal example, only one of Musk's companies is public.
Google "public markets are the new private markets" and you'll find some enjoyable readings.
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Re: Shrinking stock market

Post by the_wiki »

How many companies do we need?

I'm more concerned with how few companies are concentrated at the top vs how many are fighting for that last .0005% of VTI investment.
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Re: Shrinking stock market

Post by billaster »

Thesaints wrote: Thu May 16, 2024 10:05 am
billaster wrote: Wed May 15, 2024 8:41 pm Nope. An IPO is almost always the exit strategy of a startup or venture capital investment. It's the only way you can transform hypothetical paper money into real money. Startup founders call it "getting liquid." That's how they cash in. The same for private equity.
Not anymore. In the recent past, founders are trying more and more to remain private and there are other cash-out mechanisms for insiders.
As an anecdotal example, only one of Musk's companies is public.
Google "public markets are the new private markets" and you'll find some enjoyable readings.
You have as your example Musk who is the richest person in the world because of one of the richest public companies? He took his solar company public. So SpaceX is the one major that isn't public and that is because Musk is already rich. But SpaceX is going to eventually be pressured to go public because their not rich stock owning employees are going to demand it.

As I said founders have recently been able to delay their public ownership because cheap debt has been available for start-ups that is cheaper than equity. But eventually they need to cash in. Their stock owning employees need to cash in. Private stock isn't money that can make you billionaire rich. They either have to be acquired by a public corporation or they have to do their own IPO. Most successful private companies don't stay private forever.
alex_686
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Re: Shrinking stock market

Post by alex_686 »

billaster wrote: Thu May 16, 2024 10:45 am You have as your example Musk who is the richest person in the world because of one of the richest public companies? He took his solar company public. So SpaceX is the one major that isn't public and that is because Musk is already rich. But SpaceX is going to eventually be pressured to go public because their not rich stock owning employees are going to demand it.

As I said founders have recently been able to delay their public ownership because cheap debt has been available for start-ups that is cheaper than equity. But eventually they need to cash in. Their stock owning employees need to cash in. Private stock isn't money that can make you billionaire rich. They either have to be acquired by a public corporation or they have to do their own IPO. Most successful private companies don't stay private forever.
I was thinking more along the lines of the founders of Facebook and Google which kept a larger portion of equity than Apple and Microsoft.

I am also thinking along the lines of Facebook, Alphabet, Apple, and Micrsoft who are buying start-ups prior to them going public using their free cash flow. No new equity is required.

I am also looking at the actual numbers of the actual amount of public equity out there. Yes, the data is a bit murky but this is how I read the tea leaves.

On that, the AI explosion is modifying my beliefs a bit. On one hand you have NVidia who has been able to drastically expand earnings without expanding capital. In the good old days if a auto manufacture wanted to double earnings they would kind of have to double the number of factories.

On the other hand I am agog and the start-up capital these new AI start-ups need. I suspect that the capital is going to come from the earnings of the big tech giants. I am humble enough to know the limits of my knowledge.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
billaster
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Re: Shrinking stock market

Post by billaster »

alex_686 wrote: Thu May 16, 2024 11:45 am I was thinking more along the lines of the founders of Facebook and Google which kept a larger portion of equity than Apple and Microsoft.
Now, that is a problem, but it is a problem regarding the laws of corporate governance and Jack Bogle also sounded the alarm. For example Facebook (Meta) has two share classes A and B. At their IPO Zuckerberg and other insiders sold off most of their shares to the public to get the big bucks but retained a small minority of shares for themselves. But their shares count as 10 votes for every share that the public holds. This allows Zuckerberg to maintain total control of the company even though he owns only a small minority of shares.

This should be flat out illegal. One share, one vote. You shouldn't be able to have it both ways -- sell your shares to the public for billions of dollars and still maintain control as if it were a private company. If you want private control, keep your company private. If you want to sell your shares for billions of dollars, then you need to cede control to the majority of shareholders who own the company.

So these are poor examples of founders staying private because they aren't. They are going public but operating as a private company through anti-democratic corporate governance gimmicks -- trying to have it both ways.

alex_686 wrote: Thu May 16, 2024 11:45 am I am also thinking along the lines of Facebook, Alphabet, Apple, and Micrsoft who are buying start-ups prior to them going public using their free cash flow. No new equity is required.
Those start-ups aren't examples of companies staying private. It's just the opposite. They are being acquired by public companies. They are becoming publicly owned. And there is new equity. The equity of the acquiring company presumably increases due to the acquisition. There is no increase in number of shares but the value of the shares increases. Financially there is no difference. Investors have the same total value whether it is by increasing the number of shares of two companies or of increasing the value of existing shares of one combined company. But this is in no way a story of companies remaining private. They are publicly owned.

Maybe you are making an argument about market consolidation but then you are getting into anti-trust laws, which is another complicated subject.
protagonist
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Re: Shrinking stock market

Post by protagonist »

alex_686 wrote: Thu May 16, 2024 9:10 am
protagonist wrote: Wed May 15, 2024 9:45 pm So would your current action be to put less money in the stock market and more in fixed income?
What would you do differently?
(I'm not trying to be difficult. I'm actually curious to understand your thinking about this.)
I just done reading the excellent, if technical, book Investing Amid Low Expected Returns by Antti Ilmanen. Lots of good lessons here - kind of. The book is kind of aimed at the institutional inventor. Greater awareness is always good and there are some actions one can take.

On that,
asset_chaos wrote: Thu May 16, 2024 3:19 am It may be fatalistic, but I put this question of the number of public companies into the catagory of investing things not worth thinking much about because I have no control or ability to influence the metric. For all practical purposes publicly listed companies are all I can invest in.
I am not as pessimistic as Asset Chaos. Many specific recommendations won't apply but some do. Basically, be aware, be flexible, be nimble. So it is not going to be a set and forget answer.

On that point, the answer is probably not bonds. The yield curve is inverted. We have had a 30 year bull run in bonds and we have hit the end of that road. Either yields will move sideways and we will have low yields. Or yields will increase and bond prices will fall. So - Ugly.

Equities isn't much better. Just piling on more risk is rarely the correct answer. You can extend the same bond analysis to the rich equity valuations. Not as straight forward but still ugly.

I think the primary answer will be to save more and expect less. I think a partial answer is in the Low Beta and Quality factors.
Personally, I try to tune out the noise, and from my perspective, just about everything I read about future financial predictions is noise.

Which makes sense, since the economy is a complex, nonlinear system....exquisitely sensitive to initial conditions...and there are far too many variables, many completely unpredictable and unknowable, to make any reliable guesses about the future. I have no expectations, positive or negative, for the market.

My recollection is that after the 2008-9 financial crisis, most pundits were predicting very low returns throughout the 2010s, yet the stock market went gang-busters. At any given time, there seem to be doomsayers as well as gung-ho bulls predicting nirvana, and every forecaster can find some logically consistent and credible rationale for their call.

The money I need to keep safe is all in TIPS. I consider my stock investments my gambling money. I invest in the stock market because it seems as good a bet as anything else, and I have to do something with my money. Maybe I will win in the long run. Maybe I will lose. So far I, like most baby boomers lucky enough to have lived through what might be the greatest period of economic growth since the dawn of agriculture, have done quite well.

I see the "shrinking stock market" argument as just one of a dizzying array of potential variables that could have some effect on future returns. Or maybe not. Given all the other stuff out there, not the least of which is the heightened degree of geopolitical uncertainty this year with all the weird stuff going on at home and abroad, my inclination is to block it out.

Hopefully my inclination is correct.

You said:
Basically, be aware, be flexible, be nimble.
I think that is the best any of us can do.
Last edited by protagonist on Thu May 16, 2024 2:25 pm, edited 3 times in total.
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BrooklynInvest
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Re: Shrinking stock market

Post by BrooklynInvest »

It would be a minor concern at most.

While the number of stocks has, it seems, gone down, what's the dollar impact? If there's a lot fewer very tiny companies at the very bottom of the market cap spectrum it impacts me not one whit. Even if I were in a total market index the very smallest companies are a rounding error, no?
alex_686
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Re: Shrinking stock market

Post by alex_686 »

billaster wrote: Thu May 16, 2024 1:59 pm Those start-ups aren't examples of companies staying private. It's just the opposite. They are being acquired by public companies. They are becoming publicly owned. And there is new equity. The equity of the acquiring company presumably increases due to the acquisition. There is no increase in number of shares but the value of the shares increases. Financially there is no difference. Investors have the same total value whether it is by increasing the number of shares of two companies or of increasing the value of existing shares of one combined company. But this is in no way a story of companies remaining private. They are publicly owned.

Maybe you are making an argument about market consolidation but then you are getting into anti-trust laws, which is another complicated subject.
There isn't new equity. If companies were paying the start-ups in newly issued shares then you would be right. And this has been done, but not now. Now they are paying with cash. So we are seeing a exchange of assets on the books, cash for equity. The value remains constant. Actually, what is really happening is that the companies are offering new shares to the start-ups and then using their free cash to buy back shares on the open market, thus shrinking the pool.

The real answer is to link national income to the percentage generated by free float public equity. This isn't easy or straightforward. However, it looks like the percentage that we can assign to free float has been falling over the past 10 years. So while growing it is now a smaller piece of the pie.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
alex_686
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Re: Shrinking stock market

Post by alex_686 »

protagonist wrote: Thu May 16, 2024 2:13 pm My recollection is that after the 2008-9 financial crisis, most pundits were predicting very low returns throughout the 2010s, yet the stock market went gang-busters.
The primary drive of increased returns after the 2008 GFC was a fall in interest rates and the equity risk premium. It went from a rich valuation which few though was rational (and I was one of them) into even richer valuation. Interest rate can't forever drop, the P/E ratios can't always increase.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Hoosier CPA
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Re: Shrinking stock market

Post by Hoosier CPA »

Makefile wrote: Wed May 15, 2024 3:07 pm
Schooly D wrote: Mon May 13, 2024 7:22 pm From the article:
The decline in firms is not solely a by-product of the 2000 dotcom bubble collapse or the 2008 recession, as shown in Fig. 1. Instead the decline has been measured and persistent for more than a decade. This decline is largely unique to the U.S. markets—European markets have continued to increase in size as shown by Doidge et al. (2013). The implication of the shrinking number of firms, but rising total equity value is that the average firm's size has increased dramatically. And this in turn has real consequences for the average firm's economic performance.

Overall these findings suggest that the corporate structure of the component companies in U.S. equity markets changed considerably during the 1990–2013 period. The 1990s saw substantial equity growth built around a swelling number of high-growth low-profitability companies, while the period since the dot-com bubble has seen a shrinking stock market characterized by more mature companies with weaker growth profiles.
I don't know how realistic it is, but I have seen the compliance costs of Sarbanes-Oxley also cited as raising the minimum threshold where it makes sense to go public.
I was going to mention this. Not just Sarbanes Oxley, but the compliance cost of being a public company has skyrocketed, not to mention all the management headaches that go along with it. You have a be a significantly large sized company for the benefit to exceed the cost. Plus as others have mentioned it's likely you're swallowed up by an acquirer or a PE company along with way to getting to that size.
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