HF Free time thesis

Ya, look into whether public equity valuations are structurally higher due to the fact that there are substantially less publicly traded companies than there used to be. My general thought on it is that there used to be around 8,000 US publicly traded companies in the 90's and today there are less than 4,000. If we assume that the amount of money that is available to be allocated to equities has not decreased at the same rate (and it has probably increased), that would lend itself to structurally higher equity valuations with the same or a larger amount of money chasing fewer opportunities (simple supply and demand dynamic). One possible push back is that you can use the SP 500 for valuation, because it is a fixed 500 companies throughout time. My counter to that is that this is true, but it still doesn't dismiss the fact that there are substantially less opportunities to invest outside of the SP 500, and could result in more dollars being pushed onto the index.

I haven't seen anyone really address this anywhere before, but I think it is worth looking into. In what I imagine is the equivalent of a Justin Bieber fan receiving a DM from him on instagram, I actually reached out to Professor Shiller of Yale (father of the CAPE ratio) about this and he responded, but didn't really have a good answer to it. It was just a quick email exchange but here is what he had to say about it:

From me: "Hi Professor Shiller, there’s no question that the CAPE ratio makes sense and that it is historically high today; however, the number of publically traded companies is ~50% lower than it was in 2000. Have you contemplated making an adjustment for this phenomenon? To me, with Market cap to GDP at levels that rival 2000, but the total number of companies ~50% lower, that would imply that the historically normal valuation would be sustainably higher today. I have not been able to find anyone who adjusts metrics for fluctuations in the number of publically traded companies, was curious to see what your thoughts were on that."

Shiller: "Interesting thought. There was a dispute between Jeremy Siegel and David Blitzer about the effects of negative earnings for some company with limited liability. If half of all companies have minus a million dollars earnings and half have plus a million dollars earnings, then total earnings are zero, but the stock market should not have a zero price. Instead, half of the companies should rationally be priced at zero and half at something on the order of ten million dollars. So, CAPE would be infinite but the market properly valued. If these two halve merge, then CAPE would come way down even though nothing substantive has changed. This suggests to me that CAPE is biased downward today from its previous levels, but I need to think this through more."

Never followed up with him on it past that response, but I think it's an interesting question. Would love to hear if anyone else on this board has opinion on that, could be something interesting for you to work on and I'd be interested to see what you are able to find should you take it on. I'll tag Aswath Damodaran here as the resident WSO academic assuming that is a real profile, maybe he has an opinion on it.