Most of us save for retirement by diligently filling our 401-k and IRA accounts with common stock. Regardless of whether we buy Ford, Apple or Citigroup for our accounts, we have been trained to believe that common stock always gives the best investment returns. The mainstream financial media applauds and reinforces this conventional approach to investing, assuring us that we’ve made the right choice and that financial nirvana surely awaits us once retirement arrives. The reality, unfortunately, is probably somewhat less sanguine than Wall Street firms would have you believe.
We would all like to think that when we invest in stocks we are acquiring something truly valuable and scarce in return for our hard-earned money. Sometimes this is the case, but all too often it isn’t. For example, most publicly traded companies have hundreds of millions or even billion of shares outstanding. As of December 31, 2015, industrial giant General Electric has 9.44 billion shares issued and outstanding. Online marketplace Amazon.com has 470.84 million shares in existence. Copper miner Freeport-McMoran Inc. has issued 1.25 billion shares.
As if having a billion shares outstanding wasn’t bad enough, publicly traded companies can – and routinely do – issue more shares on a regular basis. The reasons for doing so range from paying for bloated executive compensation packages to refinancing high interest corporate debt to acquiring industry competitors in a fit of ill-advised empire building. In any case, you can rest assured that these highly dilutive bouts of corporate stock issuance will almost never be advantageous to existing shareholders.
The worst part about publicly traded companies is that they are often forced to issue additional shares of common stock precisely when they are highly stressed financially – during financial panics, for example. This effectively means they heavily dilute existing shareholders in order to get the financing they need to keep the lights on. I suppose the upside of this arrangement is that existing shareholders recover some value from what would otherwise be a bankruptcy case. The downside, however, is that the company management gives away most of your equity stake in the firm for pennies on the dollar. Oil and gas exploration companies are the latest object lesson in this dirty secret of the securities industry.
The one hundred shares you own in a publicly traded company makes you one of a very exclusive group of several million owners in the same company. That is to say, when you buy common stock you are a member of a not very exclusive group at all. The juxtaposition of stocks versus fine art and antiques could not be starker. An investment grade antique is often unique – a one-of-a-kind item that has no peer in the world. Even those antiques that aren’t unique will rarely have a total surviving population of more than a few thousand at most. The equity markets, on the other hand, are literally flooded with billions and billions of shares of common stock, with the ever-present promise of many more to be issued in the future. When stated in these terms, it becomes obvious why good art has not only appreciated so rapidly over the past couple of decades, but are likely to do so in the future as well. I’m not so certain we’ll be able to say the same about common stock in most publicly traded companies ten years from now.
