Don’t worry…the stock is not finished at all

2023-11-26 22:04:41

During a speech last week in Zurich, I laughed at the irony that people like me, who are supposedly being ignored, are not, but are being called on everywhere to complain loudly about our silence.

Another disconnect from reality applies to the common fear that stocks will die, as companies and investors turn away from public markets, to the point of ignoring the continued rise of stock indices.

As an example, the FTSE 100 jumped by about 70% in nominal terms during the two decades that witnessed the so-called “stock deflation,” while the market value of US stocks quadrupled. Even the smaller stocks, which were deemed to have lost the most vitality, grew more.

Therefore, the Minister of Finance was right to resist demands to provide a savings product that gives preference to local stocks, otherwise it would be an incorrect solution to a problem that does not exist in the first place. In fact, I have a hard time thinking of anything less important that investors and policymakers would care. The extinction view confuses volume and value, primary and secondary markets, and overstates the importance of equity capital.

The absolute number of shares trading doesn’t tell us much about the health of a market or company. We have Apple, for example, which decided to split its shares five times since going public 43 years ago. In three cases, investors received two shares for every share they owned, one time they received seven shares for each share, and another time they received four shares for each share. No one cheered these decisions as an increase in equity in the company’s capital, and they were right in that, as Apple’s shares were subject to a downward adjustment each time.

Likewise, should we punish Warren Buffett, who has encouraged more people to invest than anyone, for not splitting his Class A shares in Berkshire Hathaway? Or why don’t we force all public companies to separate a subsidiary from the parent company and put it on the market on the basis that this will create new shares? This would increase the number of public companies, something that bothers those who believe stocks shrink for a reason.

The real salient proof of success is shareholder returns, not the number of shares or companies. Japan has twice the number of listed stocks as the UK, but its annual returns to shareholders are not twice the UK’s, nor is its economic growth. Yields also explain why markets have not grown more in the past decade, a complaint from deflationists, as most companies pay out some of their excess dividends, reducing any increase in their market capitalization.

For example, while the latter increased by a tenth on the FTSE 100 index in the past decade, total shareholder returns, which include dividends, reached 60%. Moreover, returns for poorly capitalized UK companies are more than twice as high as their market capitalization. Even if the number of shares is important, encouraging investors to buy local shares, by selling foreign ones, does not help much, and this is the second fallacy of those who say that stocks shrink, and it is the result of confusion between the primary and secondary markets.

Whatever the case may be, you must encourage, by all means and with all your might, local investors to participate in initial public offerings, as they help companies and enhance growth, but buying shares that are already offered does not help with any of this, because the cash coming in must equal that. the outside.

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Likewise, stock markets do not become cheap in the long run simply because insurance companies, for example, shift toward buying bonds for accounting purposes. When someone buys shares, the price at which they trade, and therefore the attractiveness of the market, is ultimately tied to cash flow and a number of other fundamentals.

But brokers like Bill Hunt are screaming that the number of IPOs is falling. As this continues, it leads to a cycle of declining interest, lower valuations and fewer stock exchange listings. Newer companies tend to be more dynamic, but markets are ossifying, and so are economies.

Again, there is no need to worry, what matters is the establishment of new companies, not whether these companies are public or private. New business establishments in the UK rose by 13% in the third quarter compared to the same period last year. If the proportions are compared to the past decade, more than 90,000 additional companies were founded between July and September, meaning the average annual growth rate is about 6%.

Moreover, there are other ways companies can finance themselves, such as old-fashioned loans, something industrial Germany knows well. What’s more, why make such a fuss over the amount of equity out there while ignoring the amount of credit?

Non-financial corporate debt is 50% larger than it was a decade ago, and has grown this year amid rising global borrowing costs, but mothers and fathers have rushed to credit funds and made fortunes, which is something to celebrate.

Of course, investors’ preference for bonds versus stocks will change over time, as will companies. This is due to several factors, including interest rates, dividend yields, and regulatory rules, in addition to instincts, inclinations, and emotions.

Low interest rates favored debt financing for a long time, but stock markets nonetheless rebounded. Ultimately, as academics Franco Modigliani and Merton H. Miller demonstrated in the 1950s, how companies raise capital is not important from a valuation perspective; what we constantly need is more blue-chip businesses.

Shares can be issued, cancelled, and divided, just as companies can do, but don’t worry or worry about canceling them.

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