Baruch is more pleased than he can say to see his pal Felix get a spot on the NYT’s op ed page. But I wish he had written about bonds, or art or something else. He knows I don’t like it when he is rude about stocks.
Felix uses the occasion of the takeover of the NYSE by Deutsche Börse to claim the US stockmarket has become somehow “irrelevant”. Far from being the “bedrock” of American capitalism, he writes, instead
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. . . a noisy sideshow that churns out increasingly meager returns.
Excuse me, but when any stockmarket not been full of speculators trying to outdo each other? Algobots are new, to be sure, but they don’t change the market’s essential nature, other than giving bad or unlucky traders another mealy mouthed excuse as to why they lost money. I think the great traders of stockmarket history, Jesse Livermore, Bernard Baruch and our own George Soros would be amused to be thought of as something other than speculators.
Yes, sometimes stocks can go up when economic growth is only so-so; the link between the two is indirect. Eventually they correlate, but the period when they don’t mesh can be pretty long. Increasingly though, as companies globalise, they reflect global economic growth. And you all have to get used to the fact that the US economy isn’t as relevant as it once was.
Sure, it might be that the number of listed companies has fallen. Baruch hasn’t counted. But so what if there are fewer? Is that bad? I would imagine that after a period of prolonged weakness, such as we have come through, when IPOs were hard and bankruptcies and mergers common, the number of listed entities would fall. It’s a bit like speciation in biology; every now and then we get Cambrian-like explosions, and periods of higher extinction levels. Let’s not draw conclusions from low samples. And anecdotally it is simply not true that there are no IPOs out there, and no small IPOs. Baruch has been positively plagued with them in the past 12 months, from second rate brokers pushing illiquid crap I wouldn’t go near with my worst enemy’s money, to once in a lifetime opportunities the Goldmans and Morgans have to beat the investors off with sticks. There was a great one the other day, and Baruch would love to tell you about it. But he won’t.
Where Felix is right is when he says that there are lots of interesting companies out there who don’t want to go public; its a complete pain, having to explain yourself to people like me. There are certain things about how investors think, their collective expectations, the behaviours they force companies into, that make Baruch’s toes curl. But there is one very important reason for going public which still proves, ultimately, irresistible to entrepreneurs, and it is this: it’s the only way to pay yourself and your people stock options. It is still the easiest way of making a lot of people very rich, and keeping them rich.
And ultimately whether Facebook goes public or not won’t change the central importance of stockmarkets. They are still the cockpit where it all happens, where the key society-shaping corporate entities of our time, such as Apple and Google, keep score against each other and their competitors. The power of a massive market cap doesn’t necessarily get used in all-stock M&A or when it raises money; it is a latent power, it is potential financial energy, which you don’t want to waste. You typically don’t want to use your equity to raise money as it dilutes you. But your stockmarket valuation sure as hell counts when and if someone wants to buy you.
Does the stockmarket allocate capital as efficiently as it used to? I have no idea, but frankly if you think you know better than the stockmarket how to allocate capital in a complex economy, I suggest you get back in your time machine and return to the 1970s to see how well that worked out last time.
I think far from being irrelevant, stocks are the asset class of the future; we had the years where bonds ruled in the noughties, and it ended badly. The Asian countries which are leading global growth now are debt averse, and their main focus is on their own equity markets which are getting almost as important, and just as liquid and vibrant, as the NYSE, with world leading companies like TSMC, Samsung, and Infosys trading billions of dollars on their local exchanges every day. Meantime, this is Baruch’s advice: stop worrying, and go buy an actively-managed mutual fund or go research a selection of stocks in spaces you know about, with the aim of holding them for a few years. Make sure that at least some of them are listed in a different country (but you can still buy the ADRs). Try not to listen to brokers. Keep reading Felix’s blog, though.