Why Equities Just Might not be the Same Anymore

While for decades, the historically high returns of the stock market have been used to justify putting more money into the stock market, some underlying factors have changed that make this constant growth story no longer as sure of a narrative. While total returns have been buoyed by several massive companies that manage to keep growing, there are not as many avenues to growth as there once were for retail investors. Investing in stocks may still have high returns over the next few decades, but the repeated rhetoric that it will always be so is based on assumptions that may no longer hold true. Retail investors are contending with more and more high growth opportunities that are closed off to them. The returns of those with a large amount of assets and those with less assets are diverging at a rapid pace as a result of the ability of the wealthy to access and create exclusive markets which avoid the high burden of regulatory requirements in private markets. Until uniform reporting requirements are established or the barrier to entry is reduced to the public market, everyday investors will lose out on much potential growth they would have had access to in the past. 

Less companies are listed in public markets than were in the past. In a world where investors seek diversification, fewer companies in the pool is almost always a bad thing. A smaller selection of equities means that a smaller range of risk appetites can be met. Of course, many retail investors got burned through access to volatile companies in the past, but that was a risk they bore willingly in the name of high returns. The fact that less companies are listed means that the stock market is a less accurate representation of America’s economy. Higher percentages of sectors are only privately available than before, meaning any investor seeking diversification in industry will be a victim of whatever subset of those companies choose to participate in the public market. However, the reality is far more damaging to normal investorsg, as the companies with the highest probability of high growth disproportionately seek funding from the private sector.

The high barrier to entry of regulation coupled with the capacity of the wealthy for illiquid high growth assets has led to a situation where any company with potential for explosive growth is incentivized to first sell in the private markets. They are subject to far less regulatory restrictions than in public markets, and they are able to sell to rich people who can agree to more long-term arrangements to not withdraw their funds quickly. The median age of first listing is now 13 years from founding rather than 6 as it once was in the 1980s. Companies who can sell an effective growth story are incentivized to cash in on that before becoming subject to more rigorous regulations. If high growth is a luxury, then only the rich can afford it. Relationships and other exclusive connections are needed to gain access to the most exponentially growing companies that were once accessible to all. Going public brings risks, and it is understandable that so many of these companies are choosing to avoid it. Shareholders who do not understand the vision of a company could very easily damage long-term growth. The short term focus of the markets has held us back from many innovations that could have been world changing. The SEC quarterly reporting requirements feed into this short term mindset when real progress should be measured in years and decades. The desire of the wealthy to seek out high growth companies, even with little information accessible about them means that the man should not be ridiculed for wanting to do the same thing. Of course they may get burned, but limiting the best returns of the stock market to the wealthy is one of the worst innovations of the federal government that has created seeking to protect people.

This situation is just a reminder that the markets are not dehumanized aggregates far from individuals, but rather they are an output determined by uniquely human inputs. The success of a company is entirely determined by how well it navigates the web of government and societal structures and fundamentally fulfills some sort of need. The fact that the returns of the aggregate economy over the years have been so high in America is not some sort of mathematical rule or principle that should be generalized. Rather, it is a creation of a unique and very positive set of circumstances that can be taken away if we ever let them. The freedom of businesses to create and people to choose products has allowed a movement from a world with less needs to served, to one with more needs served. If regulation or human dullness continues to limit this, it can end far more quickly than it began. 

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