The Dow is Dead

By Wayne Mulligan, on Thursday, May 28, 2015

A few months from now, one of the most powerful organizations in the U.S. will make a major announcement.

We believe it could trigger one of the largest transfers of wealth our country has ever seen.

If you own stocks, ETFs, mutual funds or have a 401(k) or IRA, you need to be aware of what’s happening.

This announcement has nothing to do with the stock market itself…

But it could impact nearly every asset in your existing portfolio.

The Announcement

In October of this year—5 months from now—the SEC is set to make one of the most significant changes to U.S. securities laws in its history.

By enacting the final portions of a new law known as “The JOBS Act,” the SEC will open up the private equity markets to all investors.

You see, under current laws, only certified millionaires can invest in private companies. But after the SEC’s October announcement, that will change…

You—and tens of millions of other hard-working citizens—will finally get access to the types of deals that were once reserved exclusively for the wealthy.

Historically, the returns on these private-market deals have been tremendous:

Research conducted by the Kauffman Foundation—a non-profit think tank that studies entrepreneurship and venture capital—found that investors who invest in private, early-stage companies earn an average of 27% per year.

That’s nearly four times higher than the returns from the public stock market.

Why You Need to Prepare Now

Matt and I created Crowdability to help individual investors like you prepare for this historic change.

The private market is new territory for a lot of people—and we realized that investors who aren’t prepared for it run the risk of losing their money.

Some investors think they can afford to wait until after these new laws go into effect before they start learning about the private market.

Those people might be making a mistake.

Let me explain…

The Dow is Dead

We believe that the stock market as we know it is dying.

Maybe it’s dead already.

This is a trend that’s been taking shape for many years… the JOBS Act is simply the “straw that breaks the camel’s back.”

In order to understand why this is the case, first you need to understand one of the primary functions of the stock market:

It provides businesses with access to large amounts of capital.

You see, historically, when a fast-growing business needed hundreds of millions or billions of dollars, the public stock market was the only place to go.

A business would hire a big investment bank like Goldman Sachs or JP Morgan, then it would go through a process known as an Initial Public Offering (IPO).

During the IPO, the bank would sell stock in the business to the general public—thereby delivering an influx of cash to the company, and delivering a stake in the company to thousands of investors.

But over the last decade, a number of trends started taking shape…

And the “traditional” IPO scenario started to fall apart…

Trend #1: Staying Private Longer

Recent studies have demonstrated that companies are staying private longer.

In the past, start-up founders would try to rush through the IPO gates as soon as they could…

But that’s just not the case anymore.

As recently as the year 2000, the average amount of time between a company being founded and going IPO was 6 years…

Today, that number is closer to 10 years.

That extra four years allows a company build its business—and allows it to increase its market value dramatically.

As long as companies don’t have financial pressure to IPO, they’re often very happy to wait—and thanks to the next trend we’ll tell you about, these companies often have the financial latitude to wait as long as they’d like…

Trend #2: Raising More Money in the Private Markets

Instead of tapping public stock market investors for capital, companies are now tapping private investors…

From massive private hedge funds like Tiger Global to global mutual fund companies like Fidelity, some of world’s biggest private investors are pulling back on their public market investing in favor of private market investing.

These private market players are supplying fast-growing companies with billions and billions of dollars.

This shift was “unprecedented” just a few years ago…

Now it’s become the “new normal.”

Trend #3: Private Value Creation

And finally, these first two trends are contributing to the third and most important trend:

More of a company’s value is being created when it’s still private.

For example, if you look back at private companies in the year 2000, you’ll find that just 10 companies had valuations above $1 billion.

Today, there are 108 of them.

What This Means For Your Portfolio

Everything you’ve read here today boils down to this:

The Dow Is Dead.

In other words, going forward, you can’t count on the stock market to provide you with the type of financial growth you’ve become accustomed to.

Much of the growth of the world’s most exciting companies—and much of their financial gains—is happening on the private side.

You see, if companies are already worth billions of dollars by the time they go public, most of the gains have already been squeezed out by private investors…

By the time these companies get to the stock market, there’s not a whole lot more juice to squeeze.

Don’t Make This Financial Mistake

Because of The JOBS Act, all investors will soon be able to participate in these private gains.

And once people start to realize that the private markets are the place to find financial growth, it’s likely they’ll start selling various assets in their public-market portfolio—and they’ll start shifting their growth capital to the private markets.

This will cause stocks—and your portfolio—to decrease in value.

So while it might be tempting to think you can wait until next year before you begin preparing for the private market…

That might turn out to be a serious financial mistake.

Best Regards,
Wayne Mulligan

Founder
Crowdability.com

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