The Dangers of Inward Thinking

There are a number of changes taking place in the investment environment and they are likely to have an influence on the returns on financial assets for some time to come. When the world’s leading economy, with more than a fifth of global GDP, does not participate in major alliances dealing with matters of security and the environment, this has longer-term investment implications. When multilateral trade agreements are in jeopardy, earnings for companies in participating countries are likely to be affected negatively. When the number of public companies materially shrinks, investment opportunities become more limited even if the overall market value for public securities increases. When companies choose to remain private because they can raise money without a public offering, investors are deprived of sharing in the growth of some of America’s most exciting innovations. All of these examples contribute to the theme that the world is becoming a place where inward thinking is on the rise. I worry that countries and companies are thinking short-term and making decisions accordingly. While this may result in favorable quarterly earnings comparisons and temporary solutions to geopolitical problems, the long-term implications of inward thinking may be more problematic.

Let’s start with the shrinkage in the number of public companies. Today there are fewer public companies in the U.S. than at any time over the last 40 years. The peak year for public markets was 1996, when over 8,000 companies were listed on U.S. exchanges. Today that number is down nearly 50% to 4,336, according to the World Federation of Exchanges. This troubling trend isn’t just limited to the United States. The number of companies in developed markets around the world is shrinking: Canada, Switzerland, Germany, France, the U.K. and others have seen the number of listed companies fall 20%–60% from their peak. Mergers and acquisitions played a major role, but so did leveraged buy-outs. As globalization became a more important factor, competition increased and companies became vulnerable to predators. Many sought refuge by consolidating with businesses in similar or related industries. Let’s face it: being a public company has never been fun. A company is judged by its quarterly earnings performance, which often causes it to make decisions that might not be in its best long-term interest. Executives of public companies have to spend time talking to security analysts and holding conference calls when they could be working on matters that would improve growth prospects. Legal and investor relations expenses are also a factor. As more companies have deferred or avoided going public, the number of companies investors can choose from has become more limited.

Two basic incentives encourage companies to go public: raising capital and monetizing the value of the company for employees. Now both of these objectives can be satisfied in the private market by venture capitalists and other investors. As a result, major innovative companies like Uber and Airbnb have chosen to remain private for much longer than would have been the case several decades ago. Although the small investor has been deprived of the opportunity of participating in their growth, the companies themselves have enjoyed more flexibility in the early stages of development when their earnings are likely to be volatile; therefore, staying private is not necessarily an example of inward thinking or short-termism. It may be a sound business decision.