The Total Economy Portfolio - Rick Ferri

[Midpack]

An interesting article on the significance of privately held companies (I worked for one for almost 20 years) vs publicly held. In the end, the author suggests a small value & REIT tilt mimics the broader (public & private) economy. I've always had this tilt, but here's a new (to me) supporting reason to do so.

I'm not making any recommendations, just another POV.

The profits of publicly-held companies comprise less than half of all business profits earned in the U.S., according to Bureau of Economic Analysis’ (BEA) corporate profit measures. The other half of the economy is represented through private businesses. This means the stock market in its entirety is an incomplete reflection of economic activity. By making a couple of minor adjustments, your stock portfolio can become more aligned with the U.S. economy than with the stock market.
We have no say in which companies choose to raise capital through the stock market. The number of listed stocks has declined dramatically over the years. Public companies have dropped from 7,450 in 1997 to 3,750 today, and this number continues to shrink each year.

The Total Economy Portfolio

 

[ziggy29]

It may be that the number of public companies is dropping sharply, but I don't think that's as much due to a desire to remain private as it is because the big public companies are all buying the smaller ones. Corporate R&D departments are on the endangered species list and are mostly M&A departments these days. There's less organic growth today in companies than there has been in a long time. The strategy is now to buy complementary product lines, not develop them. "Investment" has become hoarding cash for the next big acquisition.

Plus it's noteworthy that a steadily growing percentage of the "best places to work" are privately held. Apparently when you aren't beholden to Wall Street to screw your workforce to squeeze every possible penny into the earnings report, you get happier, more productive people who feel good about their jobs and their employers. Who would have guessed?

 

[Midpack]

Plus it's noteworthy that a steadily growing percentage of the "best places to work" are privately held. Apparently when you aren't beholden to Wall Street to screw your workforce to squeeze every possible penny into the earnings report, you get happier, more productive people who feel good about their jobs and their employers. Who would have guessed?

I only have two data points, but I wouldn't count on that correlation. I spent my first 16 years working for a publicly held Fortune 500 company, and my last 18 working for a middle sized ($500MM/yr sales, about 600 employees) privately held company - both manufacturing firms. How employees were treated and paid were very similar, if anything employees were treated less consistently (nepotism, arbitrary promotions) with the private firm. The private firm had stock (just not publicly traded), shareholders and a board of directors just like a public firm, and the private firm focused on short term earnings just as the large public firm did. May have been because the private firm had to compete with public firms, they really couldn't act a lot differently.

And there seem to be public companies that employees flock to, presumably they don't all 'screw their workforces.'

Again, two data points doesn't provide a sound conclusion by any means, so FWIW...

 

[clifp]

It is significantly more expensive to go Public now than it was back in the 90s mostly due to Sarbane Oxley (sp). For most startups the exit plan is to be acquired by a larger company, as opposing to going public which was the dream during the dot com bubble.

I did find Rick's article to be very interesting. I've always been overweight small cap stocks but was unaware that private companies account for 1/2 of profits in the US.