Remember when you used to be able to go to large events, like a concert or a ball game? Remember way back – like just over a year ago when that was a normal thing in our lives?
Well, put yourself in the shoes of the person organizing a large event like that. You have the event itself with all its normal challenges and deadlines to manage. And then you have the crowd to control, as well. Depending on the event, effectively managing the crowd can be the hardest part of the job. You’ve seen videos of people jumping over barricades and storming the field or blocking traffic in the streets after their team wins. Managing the crowd well could be the difference in a good event or a disaster.
And that’s where we are with the stock market right now. There’s a new crowd of investments flooding the market at a pace we haven’t seen in over 20 years. This glut of new supply is hitting investors from every angle and thinning positions in stocks across the board.
The first wave of these new investment options are the traditional IPOs, or companies who are coming to the market to be publicly traded for the first time. This is a normal occurrence, but the rate at which these new companies are entering the market is remarkable. For example, in 2020, there were 407 initial public offerings in the United States. This was more than twice as many as in the previous year. And so far this quarter, we’ve seen more than 100 additional new deals introduced too. That makes this the biggest quarter for new public offerings since 2000. That creates two problems. The first is the fatigue and overwhelm caused by the sheer number of opportunities investors have to digest. The second has to do with speculation. The more IPOs we see, the lower quality they are – and that's a huge drag on the market.
But IPOs aren't the only problem. We've also seen a record in companies coming public via special purpose acquisition companies, or SPACs. These companies raise enough money to invest in private companies, becoming their largest shareholder. They then use their influence to take the company public through an IPO, like a regular company does, but without as much red tape and regulation. That can be good for companies who want to fast track their way to the market, but it also removes some of the safeguards that are in place to make sure a company is ready to be a part of the public market exchange. That can be a major problem for the company and for those who invest in it.
With that understanding in place, you can see why there is concern about many of these types of investments. Plus, we’ve already seen almost 300 SPAC deals enter the market this quarter, more than all of 2020.
Additionally, beyond the crowded conditions IPOs and SPACs are creating, other companies are issuing additional stock, called secondary offerings, that dilute the market’s supply with more fresh shares for investors to buy. Here, too, we're seeing record levels of activities as companies try and take advantage of soaring share prices to raise additional capital. And finally, there's also a wave of insider selling as the lockup periods from last year's IPOs are expiring, allowing insiders to finally sell their shares. These “restricted shares” become regular shares when that lockup period ends, and they can (and do) enter the market to be sold and bought by someone else, spreading the overall market even thinner than it already is.
Remember that the stock market is at its core a market of stocks. Nothing hurts a market faster than oversupply and we’ve seen that impact more this quarter as supply exceeds demand. Like the person organizing an event, we still have regular financial-related problems to deal with, like reopening the economy, keeping a lid on inflation, and overcoming the pandemic. But the ever growing crowd has made things significantly more complicated.
More than ever we have to stay focused on first principles and find solid investment opportunities in growing industries so we don’t get run over by the crowd. They may push us around at times, but if we rise above them, we can avoid much of the chaos they cause on those around them.
The show must go on and I’m still optimistic about the future for things like gold, bitcoin, and well run medical, technology, and communication companies that will lead us into the next wave of innovation. Just be aware of the crowds and how they will likely influence our progress for a while. Eventually, there is a thinning of the herd so to speak and it ends in tears for those who didn’t think through their investment choices carefully. Those periods are unfortunate, but necessary to keep the market healthy.
We’re not following the crowd, but rather leading the way to finding great values in a crowded market. Be patient and stay focused on your goals in spite of the noise and busyness the crowd causes. The view from my vantage point still looks good and we’ll keep you up to date on any developments that need your attention.
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