Tiger

According to the World Federation of Exchanges database, there were about 15,000 publicly traded companies worldwide, in 1975.  This count grew to just over 43,000 by 2015.  What’s interesting is the change across these 40 years. 

Picture Credit: www.businesswire.com

In 1975, according to WFE data, Australia, Canada, and Japan each had about 1400 publicly traded companies, with Germany, France and Spain coming in at between 500 and 1000 companies.  Over the next 40 years, the Australia count grew by 44%, while Japan and Canada more than doubled.  Germany grew by just 13%, while the France public company count dropped.  The winner in headcount growth though, is Spain, which went from 940 to 3480 publicly traded companies, a multiple of almost four over these years.

We haven’t audited the WFE data, as posted at worldbank.org, and we question some of the information.  However, the trends can be instructive.  According to this dataset, South Korea, Malaysia, Poland, Singapore, and Thailand had no or few public companies in 1975.  In 2015, they each had from 650 to more than 2000 companies whose stock was available for purchase on exchanges.

Picture Credit: www.visualcapitalist.com

The story in the U.S. is also instructive.  In 1975, there were about 4500 publicly traded companies.  This number grew to almost 9000 by 1997, and stands today at about 4500.  With a generally healthy (though slow growing) economy, why has the number of publicly traded companies stalled?

Most observers, of which we are one, offer three compelling reasons.  First, the cost of going public is substantial, with underwriting and regulatory costs absorbing as much as 14% of funds raised.  So on a $500 million offering, investment banks and attorneys could absorb as much as $70 million.  And, there is significant ongoing regulatory and administrative expense with a public company.

Second is market volatility.  The underlying or intrinsic value of a company is just one of the components that can drive stock price.  The others include, but certainly aren’t limited to, interest rates and investor sentiment.  If I as company founder don’t need the liquidity, why go through the pain of the price volatility, when the price on so many days may poorly represent underlying value.

Third is ease of access of funds.  With private equity available to fund growth or owner exits, options other than a public offering are attractive. 

It would seem that to foster a healthy public market for stocks, the regulatory and underwriting costs need to make sense, the ongoing reporting requirements need to work from a cost standpoint, and the overall costs of maintaining the stock in a public environment need to compete well with other options available to ownership.  In too many cases, in the U.S., this isn’t the case.

Looking at the economy across the world, the Eurozone is hoping for economic growth of 1% annually, while the U.S. is growing at 2%, and many of us think we can move toward 3% annual growth.  Stateside, unemployment is less than 5%, which means employers are scraping the bottom of the barrel looking for those who are employable.  Meanwhile, the Eurozone features unemployment at or near 12%.

Picture Credit: wikipedia.com

As a result, foreigners are investing heavily in the U.S.  This week, the Treasury reported net long-

term inflows, of international funds, of $59.8 billion in March, and this on top of $53.1 billion in inflows in February.  Just $1 billion went to equities, with the large majority of these funds going to Treasury and corporate bonds.

Canada and Mexico were the largest sellers of Treasury bonds, Russia the largest buyer.

Always Dreaming won the Run for the Roses this year, paying $11.40 on a $2 bet, and landing his owners a $1,635,800 purse.  Always Dreaming got the glory and the roses, though it wasn’t a one horse show.  Also involved were owners Tony Bonomo and Vince Viola, trainer Todd Pletcher, and jockey John Velazquez.  And of course, the generous U.S. tax code.

Code Section 183, which contains the “hobby loss” rules, says you can deduct business losses against your other income but…you can’t deduct losses from your hobby against other income.  The basic rule that distinguishes business activity from hobby activity is that you have to enter the activity with an intent to make a profit.  A helpful rule of thumb is that for most activities, if you make a profit in three out of five years, you are presumed to be engaging with the intent to make a profit.

Picture Credit: TestCountry.org

But, one kind of business gets a special pass.  That business is the one “which consists in major part of the breeding, training, showing, and racing of horses”.  For these businesses, the rule of thumb for profitability is two years out of seven.  In addition to this relaxed standard, racehorses are depreciated over three years, compared to a seven year depreciation for other horses, such as service animals.

Keep in mind that horse racing is generally a very expensive hobby for those with very large wallets, so we wouldn’t suggest adding racehorses to your list of alternative investments.  

However, a good race can be fun to watch, and for the owners, those losses can offset what for many is significant income.

Quote of the week:

“Some people regard private enterprise as a predatory tiger to be shot.  Others look on it as a cow they can milk.  Not enough people see it as a healthy horse, pulling a sturdy wagon.”   

                                                                                 

                                                                               Winston Churchill

“I’ve often said there’s nothing better for the inside of a man than the outside of a horse.”

                                                                              

                                                                               Ronald Reagan