The numbers say that it is so

For the last few months there has been lots of talk about the size of equity markets – specifically the dramatic drop in the number of publicly traded companies. The always interesting Jason Zweig wrote a series of articles on this topic appearing in the Wall Street Journal during spring. One of my favorite resources, Bespoke Investment Group (, highly recommended) has done analysis confirming the reality of the dwindling number of companies available to us individual investors for purchase. Another way to look at these factoids is how they support the case for using indexed funds, specifically exchange traded funds (ETF).

As Alice mentioned in wonderland – a fair comparison for equity markets we’ll argue – the beginning is a good place to start, so it is worth noting that from 1926 to 2015 there have been a total of 25,782 companies available for purchase through a brokerage account. Yet the truly astounding fact is that over this 90-year period, only 30 stocks have been responsible for almost a third of the total returns accrued to stock investors. Since it is pretty much impossible to determine in advance what stocks will outperform over time, best bet is to hold a broad basket of equities and to do so at the lowest possible cost.

Jumping forward and looking at just the last 20-years, in 1996 there were 7322 publicly traded companies, a number that dropped to 3,671 at the beginning of 2017. Putting this in a slightly different context, in the lifetime of the Internet (Netscape went public in 1995!) the number of choices available for stock market investors has dropped by almost half. Of those companies now gone from the equity markets, one third went out of business (perhaps the recent obsession with retailer’s current bout of “Death by Amazon” is just part of a longer running trend). An argument can be made that a smaller pool of investable equities offers more opportunity for holders of ETFs.

Okay, now let’s look at our favorite proxy here at Invest-Notes for equity markets, the S&P 500. As a quick reminder, the S&P 500 is an index of 500 (mostly) large cap stocks that are used to measure the overall health of the stock markets.  By contrast, the Dow Jones Index has only 30 stocks attempting to do the same thing. Only as companies are bought or go out of business, the S&P replaces them with existing equities to ensure a constant count of five hundred. Again, by contrast, the Dow makes changes to their index on an annual basis making it less valuable when looking at long-term trends in its portfolio.

Over the last ten years, the S&P has seen 129 companies go out of business and currently has 72 stocks that are trading at prices lower than they were in 2007. While big technology stocks have been responsible for a significant percentage of the gains this year, most stocks in the index are having a good year. The strength of market breadth (the number of stocks hitting new 12-month highs versus the number hitting new 12-month lows), confirms this is not a rally dependent on just a few big winners, an idea that seems to be making the rounds. Owning an S&P ETF (like VOO or RSP) has been the best bet for most investors for the bull market that began in 2009.

Perhaps the most startling number is how many private asset management firms have at least $100,000,000 in assets under management – around 3,900. This means that today there are more companies telling people how to invest their money than there are public companies to invest in. There were just 750 advisory firms of this size fifteen years ago.

Finally, there was a recent article in the Financial Times using information from the U.S. Federal Reserve to demonstrate that since 1960s the single largest purchasers of common stock – the stuff we buy in our brokerage accounts – are the publicly traded companies themselves. This helps explain why the huge shift of funds belonging to individual investors moving into exchange traded funds at places like Blackrock and Vanguard have not had an outsized impact on market prices – and are unlikely to for the foreseeable future.

Markets go up more often than they go down and the various asset classes tend to rotate over time as market leaders. So it appears reasonable to assume for the foreseeable future that individual investors are best served by maintaining portfolios anchored by a few broad ETFs that can capture gains while limiting losses. For the more adventurous investor, adding a few individual stocks with strong fundamentals and a healthy dividend is also an option, but should remain a small percentage of assets.

This entry was posted in Investment. Bookmark the permalink.

3 Responses to The numbers say that it is so

  1. Karcher's college roommate says:

    In your second paragraph – Do you know what 30 stocks were responsible for a third of the total returns over a 9o year period? Just curious…

  2. Matt Mohr says:

    Chris, Another good one. Morningstar has Disney (DIS) slightly undervalued. I might pick some up today. Thanks

Leave a Reply

Your email address will not be published. Required fields are marked *