Reuters blogger Felix Salmon wrote a very interesting op-ed in The New York Times last week about our increasingly irrelevant stock market:
... the glory days of publicly traded companies dominating the American business landscape may be over. The number of companies listed on the major domestic exchanges peaked in 1997 at more than 7,000, and it has been falling ever since. It's now down to about 4,000 companies, and given its steep downward trend will surely continue to shrink.
Nor are the remaining stocks an obvious proxy for the health of the American economy. Innovative American companies like Apple and Google may be worth hundreds of billions of dollars, but most of them don't pay dividends or employ many Americans, and their shares are essentially speculative investments for people making a bet on how we're going to live in the future.
Put another way, as the number of initial public offerings steadily declines, the stock market is becoming little more than a place for speculators and algorithms to compete over who can trade his way to the most money. ...
Meanwhile, the companies in which people most want to invest, technology stars like Facebook and Twitter, are managing to avoid the public markets entirely by raising hundreds of millions or even billions of dollars privately. You and I can't buy into these companies; only very select institutions and well-connected individuals can. And companies prefer it that way.
Sadly, he's all sorts of right. The only reason a company should go public is to gain access to capital markets. If they can privately obtain all the capital they need and bypass the public circus of high-frequency traders, quarterly earnings roasts, and regulatory flame-throwing, then by all means they should do so.
But to play devil's advocate, the decline of public markets might not be as bad as it looks.
The number of listed companies shouldn't be of upmost importance in judging markets' relevancy. The quality of those companies should get some weight, too. The number of listed companies may have peaked in 1997, but what kind of companies were these? Data from the World Federation of Exchanges shows the Nasdaq is responsible for essentially the entire decline since then -- fully 35% of Nasdaq listings vanished between 1998 and 2003. Maybe these were good companies looking to escape the rigors of public life. Or maybe they never should have been public to being with -- because they weren't real companies, just dot-com dreams someone managed to take public. More than 65% of Nasdaq companies were profitable last year. My humble data source doesn't go back far enough, but one can only imagine it was a fraction of that in 1997.
And Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) may not pay dividends or employ many people, as Salmon notes, but neither, presumably, do Facebook or Twitter, the privately held stars he mentions. Twitter, in fact, recently employed just 300 people -- the equivalent of 0.002% of the population of Billings, Mont. And 72% of S&P 500 companies do actually pay a dividend. For every dividend-free Apple or Google, one can point out an Intel (Nasdaq: INTC) or MSFT (Nasdaq: MSFT), which are innovating, employing, and paying good dividends to shareholders. Good companies worthy of your money are still public. Many of them. Probably more than there ever have before. Even with 4,000 listed companies, the average investor is still completely overwhelmed with opportunity. Most would be better off with fewer listed companies tempting them to invest in areas they have no hope of understanding.
In the end though, I don't think Salmon's larger point can be argued. Companies don't have the incentive to be public today that they did in years past. Other options are available, and the annoyances of public life are multiplying in force.
Will this trend continue? Is it something investors should worry about?
You tell me.
Fool contributor Morgan Housel owns shares of Microsoft. Google, Intel, and Microsoft are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor choice. The Fool has written puts on Apple. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended a diagonal call position on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
