[Chart] Proof That Stocks Are Collapsing

By Matthew Milner, on Wednesday, January 6, 2016

This is the first trading week of 2016—and already, money is pouring out of your pockets:

The Nasdaq is down about 200 points. The Dow has dropped more than 400.

In the news, you hear it’s because manufacturing data from China looks weak. Or because tensions are rising between Saudi Arabia and Iran.

It’s always something—and as always, investors are afraid it will get worse.

But not me...

Time to Ditch the Stock Market

I’m not entirely immune to the ups and downs of the stock market—I still keep money there.

But like other investors looking for opportunities with big upside potential, I’ve gradually shifted more of my investable assets to another market entirely.

Historically, the returns in this “other” market have been tremendous…

On average, this market returns roughly 27% per year—that’s nearly four times higher than the returns from the public stock market.

What’s this market I’m referring to?

If you’re a longtime reader, you already know the answer: the private market.

In particular, the market for private, early-stage start-ups.

And while I’ve been investing in this market for years, I’ve recently decided to focus even more of my capital and efforts there.

With one simple chart, I’m going to show you why...

[Chart] Proof That Stocks Are Collapsing

As you can see in the below chart (compliments of venture firm Andreessen Horowitz), over the last ten years or so, there’s been a major shift in the type of investor who captures the largest returns...

The grey portion of each bar chart reflects the profits captured by public stock market investors. The orange shows the profits captured by private investors.

As you can see, for many years, public investors reaped the lion’s share of a company’s returns. But starting around 2004, that started to change.

To see what we mean, let’s look at Microsoft (NASDAQ: MSFT):

When it went public in 1986, Microsoft’s earliest private investors made about 200 times their money. Not bad—but after it went public, stock market investors made even more than that:

They made about 600 times their money.

As the chart reflects, prior to 2004, public investors also did well in other fast-growing tech companies like Apple, Oracle and Amazon.

But look what happened after 2004:

Time and again, from Google to LinkedIn to Twitter, early private investors made hundreds of times their money—while public market investors made just a tiny fraction of that.

And for stock market investors today, this story just keeps getting worse:

According to Renaissance Capital, for example, the average IPO in 2015 provided a negative return on its first day, falling 3.5%.

What’s going on here?

The Two Trends Crushing Stocks

Long-time Crowdability readers might already be familiar with the two critical trends taking place here—the two trends making it less and less desirable to invest in the stock market:

Trend #1: Staying Private Longer – In 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.

Those four extra years allow a company to build its business—and allow it to increase its value dramatically.

Privately-held Uber, for example, is six-years-old and is already worth an estimated $60 billion.

In markets of old, Uber would have gone public years ago, but in today’s market, it has no plans to go public anytime soon.

Trend #2: Raising More Money in the Private Markets – These companies can stay private longer because instead of tapping public markets for capital, companies now have access to massive pools of private capital.

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

In the past year, for example, Tiger has raised two separate $1.5 billion funds to back private companies such as home furnishing site One Kings Lane, eyeglass company Warby Parker, and real estate site Redfin.

And these two major trends contribute to a clear conclusion:

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 144 of them.

Only a Few Months Away...

Here’s the bottom line:

The stock market can no longer provide you with the type of financial growth you’ve become accustomed to:

By the time a company goes public, private investors have already sucked out all the big gains.

Historically, this would have spelled disaster for individual investors like you—that’s because for the past 83 years, only very wealth individuals and institutions were granted access to the private markets.

But because of a new set of laws known as The JOBS Act, beginning on May 16th, you’ll be able to invest in companies while they’re still private—and you’ll be able to capture those big gains.

If you’d like to learn more about the private market—and what you can do to prepare—check out the videos we’ve put together for new investors here »

Best Regards,
Matthew Milner
Matthew Milner


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Tags: The Jobs Act End Of The Stock Market

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