Finding the Needles in the Haystack

Posted by Steve Musick | December 03, 2018

One of the benefits of doing in-house research is that you can occasionally spot trends as they're forming. As an investment firm, being ‘early’ in spotting trends means that it could be possible to invest in areas of future demand, which brings the possibility of generating better returns. Since the turn of the century, our Investment Committee has met every Thursday.  Our Investment Committee is a seasoned, knowledgeable team dedicated to managing our clients’ capital. It requires strong discipline to rigorously look at large sets of data with the intent of detecting meaningful trends. In the ever-increasing wave of more and more information, it is a massive task to sift through the ‘noise’ to obtain important and actionable information. Very often, we keep this information to ourselves as a strategic advantage (we have never published or sold any of our research, nor will we). In the case I outline below, our research is becoming validated in others' published research. Like Sherlock Holmes, we think we have discovered something meaningful.

 

In the past, the pinnacle of success for a new company was to bring the company into the publicly traded markets in an initial public offering (IPO). In the trophy case of many public organizations sits the gavel used by their executives to ring the bell at the stock exchange on the day their company went public. For many, it is a very special day. Here is an important piece of IPO data; fewer companies are going public. In the November 2018 issue of The Atlantic, an article written by Frank Partnoy postulates that the IPO is dying. Perhaps even more important than the reduction in IPO’s is the fact that companies are delisting so that the number of companies in the available public investment pool continues to shrink. In 1997, about the time we first started doing Investment Committee meetings, there were roughly 7,500 companies to choose from on the exchanges. Today there is less than half of that number. The ‘haystack’ is getting smaller.

 

The opportunities for investing in individual companies (owning stocks) is shrinking. There is an index that tracks the overall U.S. stock market and every publicly traded company in the U.S.  This index is called the Wilshire 5000. There used to be roughly 5,000 companies in this index. Today, they should rename it to the ‘Less Than 5,000’ index.

 

Even the major institutional portfolio managers are beginning to feel the effects of a shrinking investment pool. Our research from over the last year is starting to tell us a story about the way intelligent capital is going to be managed. As the shrinkage continues, which is now clearly a trend, the risk of owning individual companies increases. Here at Destiny Capital, we always analyze risk before making investment decisions, and you will begin to see changes in how we manage our portfolios. We intend to ‘mitigate and manage’ with this new trend in mind. You will likely see fewer individual companies and more investment in specific asset classes.

 

The trend toward fewer publicly traded companies creates a new wild west for capital. The private equity business is now becoming more mainstream in capital finance. Destiny Capital will continually research how to best manage in this new wild west in order to obtain risk-managed returns. We will continue to do what we have always done, which is to look for value and opportunities for our clients.

 


 

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