I'm betraying my age but remember the classic 1980s Wendy's hamburger commercial, featuring three old ladies standing at a burger counter? While two of the ladies were admiring the outsized hamburger bun, the third lady, a short grumpy octogenarian, focused on the tiny patty and groused, "Where's the Beef? It is considered one of the top ad slogans in television history.
Where's The Beef?
The commercials vaulted Wendy's profile in the fast food industry and "WTB" became a national catchphrase. Walter Mondale used the phrase during a presidential debate with Ronald Reagan in 1984, but it fell flat. Someone quipped "if the Wendy's lady had delivered the line, Mondale would have won."
The diminutive "Wendy's lady" was Clara Peller, a Chicago native coaxed into commercial acting at the ripe age of 80 after retirement as a manicurist. She became a national sensation from the Wendy's ads, landing several other commercial and bit movie roles, including a Prego pasta sauce commercial in 1985 in which she exclaimed "I found the beef – it's in the sauce" and promptly got fired by Wendy's.
Wendy's claimed it took five years to overcome their sales slump caused by Peller's termination. She died in 1987 at the age of 85 and did not get rich from her acting career.
Where Clara worried about undersized hamburgers, investment analysts are concerned about the ever-shrinking number of publicly traded stocks listed on US stock market exchanges. It has had and will have future implications for investors.
At the end of 2016, there were 3,671 publicly traded stocks in the US (per Credit Suisse), compared to more than 7,300 publicly traded stocks listed on US stock exchanges in 1996 – a one-half reduction.
The Wilshire 5000 Index is a venerable total stock market index consisting of the top five-thousand US stocks based on market size. Well, as of June 30th, 2018, there were only 3,486 stocks in the Wilshire 5000 index and there's hasn't been five-thousand stocks in the index since 2005 – there aren't enough to fill the index bucket! At least the S&P500 stock market index does indeed contain five-hundred stocks.
The pool of publicly traded stocks has been declining since the mid-1990s due to several causative factors.
A key one was the dual bear markets of 2000 and 2008. The 2000 tech crash wiped out a large swath of tech stocks after the internet bubble popped. The 2008 severe bear market led to a number of liquidation bankruptcies and mergers of distressed companies, like Merrill Lynch, Wachovia and many more, which outpaced the flow of initial public offerings ("IPOs") at the time and ever since.
In fact, the volume of new IPO listings has dropped materially since 1996, due in part to onerous and expensive government regulations to list.
Adding to the complications of running a public company are activist shareholders, short-sellers, litigation risk and, worst of all, the forced short-term management focus to keep Wall Street content every quarter.
Aside from these externalities, other important reasons for the decline in listed US stocks has been the evolving US economy away from manufacturing to technology and services, plus the rise of private equity as an alternative source of capital for small fast-growing companies.
Let's back up and consider why a private fast-growing company would choose to list as a public stock? There are legitimate reasons: To create a public market for the stock to allow owners, investors and employees to harvest a return on their investment and to tap into equity capital to support the company's growth, reinvestment and even acquisitions.
Also, back when the US was a manufacturing economy, corporations needed large amounts of capital to run and reinvest in their businesses, so tapping the stock market for new equity capital was an important funding source. In the new digital economy, it doesn't take as much capital to scale up a business and make it sustainably profitable.
So, the upshot is that many private companies – large and small - need much less capital to run their business now than in the past. They also have abundant access to private capital - both venture and private equity – so young companies no longer must follow the IPO route to source capital or to sell out and that's been a game changer for investors.
Lastly, staying private allows a smaller company to the focus on long-term return on invested capital, not on next quarterly earnings report and reduce regulatory oversight.
The shrinking pool of publicly traded US stocks is a challenge for investors when crafting a diversified portfolio. Per Wall Street Journal, over the past twenty years the average size of publicly listed stocks has risen four-fold, with micro, small and mid-cap stocks much less represented.
In fact, it's now hard to invest in a fully diversified portfolio of small publicly traded companies, especially upstart growth companies, like in the past. This is not unimportant, insofar as small stocks have historically outperformed larger company stocks over time.
The risk is that the US stock market may struggle to deliver future satisfactory returns if it remains dominated by mature, lower-growth businesses, while the exciting, fast-growing new companies remain privately owned.
Right now, a small set of mega-cap technology companies like the FAANG stocks are driving the US stock market, but this sector cannot do so forever.
So how should investors adapt to the new US stock market landscape? Adding private equity could help. Even retail investors can invest in private equity today, as some of the largest private equity firms are now publicly traded stocks.
Another tactic would incorporate actively-managed small and mid-cap stock funds to your portfolio, hiring skilled managers who scour for smaller growth companies in the haystack.
Finally, adding a dash of international stocks, including small and mid-cap and emerging markets could dilute some of the large stock bias in your portfolio.
To co-opt a current ad catchphrase, we know a thing or two about portfolio diversification because we've seen a thing or two.
Until next time, be well….Tim
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**Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.