Why Small Investors Are Gone

Includes: FB, GOOG, KO, MSFT
by: Dana Blankenhorn

A lot of people are complaining about how small investors are gone from the market.

<satire>Not you, obviously. You, the Seeking Alpha reader, are a different breed of cat. Handsome, debonair, discerning. I'm talking about that schlub over there who used to read Motley Fool back in the day.</satire>

But there is a good reason for that. As I've noted many times, the big returns aren't there for you. Your best shot is hitting singles, because you're not being given the chance to swing for the fences.

Facebook (NASDAQ:FB) is a classic example. It didn't come to market until it was valued at $100 billion. Until it was, in other words, a very mature company. Private equity grabbed the gains, and the public investor was left holding the bag. We were supposed to be the "greater fools" who would take out the smart guys at the top. The good news is most of us stayed away, and the stock price fell, and now it's bouncing around at about half that price, to the disdain of all.

But Facebook is just an extreme example of a trend that began at the start of the century. Since it's easier to maintain the fiction of privacy, and since private investors invest millions on a pitch while small guys want tons of data before they'll put in $100, the public markets have become much less popular, and the returns much more meager.

Barry Ritholz has a good example here. He matched the post-IPO valuations of Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG), starting with their IPOs, going out eight years.

What he found, citing David Wilson of Bloomberg, is that MSFT shareholders enjoyed 30-fold returns in the first 8 years of the IPO, while GOOG shareholders saw a doubling to 2007 and have since been struggling to regain that level.

Then he comes up with this little nugget:

The key to long term IPO performance is initial valuation when going public.

In other words, the sooner you get in, the more you can make. Of course, that entails risk. Which I would argue public investors aren't being given enough of.

The result is that public investor risks, and rewards, are limited while those of private equity are magnified. This is the big financial story of the century, and no one is talking about it. Why not?

You can still make money in this market. I've made good money on my Google investment, and I enjoy my Microsoft dividend. But the reason so many small investors want to talk about nothing but Apple has less to do with Apple's gains in the last few years than their rarity. If we were getting a taste of opportunity sooner we'd have more to talk about.

Agitating for better deals, however, is inherently a political activity. I don't want to sell politics, I want to make money. Despite everything Google makes me money. It's one of my best investments. That and Coca-Cola (NYSE:KO). Seeking profit in the trends among mature companies makes a lot more sense, and delivers a lot less aggravation, than trying to get in on the ground floor of the next big thing.

Disclosure: I am long GOOG, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.