Weekly

This Is Not the End of the World

You’ve heard a lot of bad news about stocks lately.

On Monday, the S&P 500 plunged more than 7%. It was the worst day for US stocks in over a decade. But stocks have another problem… one that no one else is going to tell you about.

They’re going extinct!

About 20 years ago, there were roughly 7,500 US publicly traded companies. Now there are about 3,500. Is this a problem for you? Yes, I think it is. But it’s a very manageable problem, as you’ll see in a moment.

The Most Successful Piece of Legislation Ever

One of the reasons behind the great stock extinction is an increase in mergers and acquisitions, where one company buys another company. Plus, other companies have gone bankrupt, which is bound to happen.

There used to be enough new public companies to make up for this. That's the part that isn’t happening now.

Today, federal regulations keep a lot of companies from going public…

In 2002, Congress passed a very important law called the Sarbanes-Oxley Act, which is still on the books today. The purpose of Sarbanes-Oxley was to weed out accounting fraud by making it tougher for companies to falsify numbers.

The law has had a remarkable deterrent effect on fraud. To my knowledge, there haven’t been any major corporate accounting frauds since the law went into effect.

I think Sarbanes-Oxley was the most successful piece of legislation of all time. It actually did what it was supposed to do.

At the same time, it has also made it really expensive for companies to go public. So there haven’t been many IPOs over the last 17 years. And now we have about half as many stocks, which is nuts!

Why You Have No Edge

Running a public company is a huge hassle. That’s why nobody wants to do it anymore.

You have to publish all these quarterly and annual numbers. Then Wall Street analysts dissect them and tell you how to do your job. Plus there are the journalists and everybody on Twitter hounding you. Who needs that?

The only reason to go public these days is so insiders can sell their stock. It's certainly not to access to capital, which you can get in the private market.

The great stock extinction will continue as more and more companies realize this. The problem for you is, this shuts out a lot of investors.

See, you won’t be able to invest in most of these private companies unless venture capital and private equity funds open to individual investors. They might do that someday. But even then, these funds wouldn’t be the best vehicles for you. They have huge fees, and the math behind their returns is a little fuzzy.

Meanwhile, the leftover stocks are overanalyzed. That’s the other consequence of the great stock extinction. The whole world is looking at 3,500 stocks—so you have no edge whatsoever. And the market has become very efficient, making it almost impossible to outperform the market.

This is one reason people who can invest in private companies do just that. Anybody can buy the stock of a public company. But you have to be an accredited investor to invest in venture capital or private equity funds. That means you need to consistently make $200,000 a year and/or have a net worth of one million dollars. That rules out a lot of people.

Buy and Hold Forever

Things were better in 2002. I'm not just being nostalgic here. There were 7,000 stocks and a lot less nonsense.

Also, if you had any idea of the kind of mathematical and computer analysis the smart money puts into trading stocks, you'd probably never invest in the stock market again.

There's a hedge fund on Long Island called Renaissance Technologies. It makes somewhere in the neighborhood of 70% a year.

How is that even possible?

Well, it has scores of math and computer science whizzes using quantitative models to suck money out of the market. There’s a bunch of other funds like Renaissance, and they're all good.

They’re all sucking money out of the market, and there's none left for you. But don’t let that depress you.

There’s an antidote to all this…

Buy and hold forever—that's it. Please keep that in mind when fear takes over and you’re tempted to panic sell.

Jared Dillian
Jared Dillian