I'm not sure Scott has the causation/correlation right on this, but the trend away from taking companies public is troubling. I don't think the regulation in this area is helping: Sarbanes Oxley is pretty draconian in its regulatory burden, and I view things like "sophisticated investor" requirements with deep distrust. I think they're an overly paternalistic solution to a non-existant problem, or one that should be non-existant if Social Security was maintained as the proper safety net retirement system it was intended to be. Enron wouldn't have been such a disaster if all of those people had a solid retirement from Social Security.
But I think there is something deeper and more structural than merely regulatory burden. Public companies suffer from the agency problem. When ownership is diffuse, that problem is more acute, and managers' interests more easily diverge from shareholders' interests. This is true regardless of the regulatory structure. That is to say, it's a fundamental economic problem rather than an artifact of whatever regulatory system is in place. One of the benefits of taking companies public later, if at all, is that ownership stays concentrated during a longer period and owners have much more concentrated influence on management.
There is another economic phenomenon in place, which is this: the economy is awash in capital and companies don't need public capital. When there are hedge funds with billions to throw around, and private equity companies who can engage in billion dollar transactions, why do companies need to turn to the public markets? If there is some profit to be made investing in the next Microsoft, and a private fund can swing the necessary size of investment, what purpose is there to resort to the public markets? Is it ever more efficient or more effective to supply a given amount of capital via the public markets instead of via some private investment Overregulation doesn't help this problem, but it's also ultimately an economic phenomenon. Concentration of wealth (there are a lot of new foreign oil/resources billionaires these days) means more private entities that can raise the kind of money that previously one could only raise in the public markets. Moreover, fewer opportunities for investment means that private funds can meet the underlying economy's need for capital, making public funding less relevant. Changing the regulatory structure isn't going to change that dynamic.
> one that should be non-existant if Social Security was maintained as the proper safety net retirement system it was intended to be. Enron wouldn't have been such a disaster if all of those people had a solid retirement from Social Security.
Hmm, don't know what you mean by this. As it stands, the safety net is working -- nobody who worked a significant portion of their lives is living on the street for lack of funds.
What SS does not give is a retirement of the same quality as a rich person's retirement, which should make sense on the face of it. Those Enron folks did have a Social Security retirement, what they lost was the more lavish retirement they had planned for themselves (nb: I'm not using "lavish" in any derogatory sense).
SS was intended to be a safety net, not a golden parachute, so elderly people didn't die freezing and starving in the streets. By and large, it has accomplished -- and continues to accomplish -- this mission.
> SS was intended to be a safety net, not a golden parachute, so elderly people didn't die freezing and starving in the streets. By and large, it has accomplished -- and continues to accomplish -- this mission.
Now if we can just broaden the population pyramid widely enough (and lucratively enough) to support the great height of the future retirees, we can kick that can so far down the road even we 40-somethings won't have to worry about the scheme's stability.
This is something that has been worrying me for some time. More and more, the IPO is being used as a method for cashing out, rather than as a source of funding. I am an advocate for low cost index funds, as historically, it is one of the best returns an ordinary investor can expect to achieve. But this recent trend in private/public markets has me second guessing that position.
What I think is more interesting is the idea that private markets are less rational. If you look at venture capital over the last 30 years it's underperformed the stockmarket. There are a few big winners but if you look at the total returns of the funds which invested in them it's a lot less amazing. Which arguably comes back to the lack of hard data plus the effort involved in managing these small investments.
PS: Also of note he ignored dividends and inflation when looking at microsofts returns which is a sign of basic incompetence.
Also, I would point out that middle classes typically (and by definition, according to some definitions) make money from skilled labour, not investment. Stock profits is just not that big a percentage of a middle class person's lifetime earning.
It should be noted that half the US has no 401K. 80% of stock is owned by 10% of the population. So "middle class" really means "above the median" if we're talking about people with any substantial stock investments.
But I think there is something deeper and more structural than merely regulatory burden. Public companies suffer from the agency problem. When ownership is diffuse, that problem is more acute, and managers' interests more easily diverge from shareholders' interests. This is true regardless of the regulatory structure. That is to say, it's a fundamental economic problem rather than an artifact of whatever regulatory system is in place. One of the benefits of taking companies public later, if at all, is that ownership stays concentrated during a longer period and owners have much more concentrated influence on management.
There is another economic phenomenon in place, which is this: the economy is awash in capital and companies don't need public capital. When there are hedge funds with billions to throw around, and private equity companies who can engage in billion dollar transactions, why do companies need to turn to the public markets? If there is some profit to be made investing in the next Microsoft, and a private fund can swing the necessary size of investment, what purpose is there to resort to the public markets? Is it ever more efficient or more effective to supply a given amount of capital via the public markets instead of via some private investment Overregulation doesn't help this problem, but it's also ultimately an economic phenomenon. Concentration of wealth (there are a lot of new foreign oil/resources billionaires these days) means more private entities that can raise the kind of money that previously one could only raise in the public markets. Moreover, fewer opportunities for investment means that private funds can meet the underlying economy's need for capital, making public funding less relevant. Changing the regulatory structure isn't going to change that dynamic.