Tuesday, April 19, 2016

In the Last 20 Years The Number of Publicly Traded Firms Has Halved

That's a problem for the country and for anyone running portfolio investments.*

From Marginal Revolution:
In the past twenty years [the] U.S. has lost almost 50% of its publicly traded firms [from 6,797 in 1997 to 3,485 in 2013, AT]. This decline has been so dramatic, that the number of firms these days is lower than it has been in the early 1970s, when the real gross domestic product in the U.S. was one third of what it is today. This phenomenon has been a general pattern that has affected over 90% of U.S. industries.
A rather stunning finding from Grullon, Larkin and Michaely. 
The total number of firms has dropped far less than the number of publicly traded firms, so in part this is probably due to laws affecting publicly traded firms in particular such as Sarbanes-Oxley. But there has also been a small drop in the total number of firms (depending on year measured) and concentration ratios have increased which suggests that competition might have fallen. (I wish the authors had looked more closely at the entire size distribution). Have international firms risen to offset the decline of publicly-trade firms? The authors discuss but discount the role of globalization. I don’t see, however, how their findings of small effects on output competition are consistent with big labor market effects. Nevertheless the bottom line is that as concentration rates have increased so have profits, as a recent CEA report also argues....MORE
*I've harped on a variation of this a few times. To capture even just the growth in GDP you have to have exposure to younger companies which means the $100 mil to $2-3 bil. market caps and there just aren't enough of them in the free trading markets to allow a manager to spread enough bets around to deploy any serious money in a publicly traded portfolio approach so you end up almost driven into venture capital and private equity.
Here's a 2015 intro to a recapitulation of a 2011 post:

Mutual Funds In the Venture Capital Business: “Eye-Popping Valuations”
Maximizing expected future returns.
One of our favorite topics, along with agricultural commodities and production, materials science, really, really fast computers, advanced manufacturing technology, energy and Dogbert's schemes for world domination.

One of the most profound facts of investing is that the growth is in the new companies.*
Not small companies, new ones.
So the question is: How to capture that growth?
And while you're at it, maybe mitigate some of the risk inherent in new ventures?