As we head into the end of the year, it seems investors are unfazed by the same old news. Throughout October, we were continually inundated with news regarding the same worrisome topics we have heard about the majority of the year (or at least for the last six months). This includes (in no particular order): The trade war, interest rates, the pending end to the bull market, and the much-discussed impeachment of our President. With all that, the stock market (as measured by the S&P 500 Index) methodically rose 6%+. Where is all the fear and loathing!?! Like I said, maybe investors are over it!
One headline that has not escaped us (or many investors) is the saga of WeWork. A wild ride for a once high-flying unicorn (a private business valued at north of one billion dollars) that hasn’t ended yet, but definitely is getting uglier by the day. It is a story that reminds us of how fortunate we are to have the American stock market in which to invest.
A brief background on WeWork… they are (were) a fast-growing company in the shared office space industry. Even though this industry has been around for a while, WeWork is credited with updating it (making it cool) and offering additional perks that competitors are not offering. The business took off and as you can see by the chart to the left, drew some sizable investments from notable financial firms. This support not only drove their private valuation to over $100 billion, but it also provided the capital for WeWork to continue to lease new office space across the country.
Fast forward to today (or the past month) when WeWork began to take the steps to take their company public… this is when things began to go sideways. When a company decides to go public, they need to produce documents, financials, etc. for potential public investors to peruse, dissect, and analyze with a fine-tooth comb. Well, it appears (as typically happens), the public investor is a little more detailed than the handful of private investors already invested in the company.
Anything wrong (or at least questionable) that you can think of was found within the WeWork filing. Items directly related to the eccentric CEO/Founder to the path to profitability (or lack thereof) to the existing dire capital needs were uncovered by potential investors. Even before WeWork can get out and start their road show (where a company begins promoting their pending IPO), the IPO was shelved. It became clear that WeWork’s worth was nowhere near $100 billion (or even $20 billion). If they came public at such a low valuation the majority of their existing private investors would be underwater on their investment on the day the stock came public! This is not how it’s supposed to work. Early investors are supposed to be rewarded for taking a leap at the outset.
Needless to say, WeWork has not come public (as of this writing) and their biggest investor, SoftBank, bailed them out with a sizable investment to keep them afloat (i.e., in business). WeWork needed the IPO in order to raise necessary capital to keep their business, well, in business. A horrific ending (or near ending) that only highlights the power and importance of the American stock market.
The highlights we are referencing have nothing to do with specific companies but more of the structure of the stock market and the requirements of companies seeking to (or already) list their stock on any of these exchanges. Some aspects that most of us overlook but somewhat form the foundation for our capitalism.
I touched on the required reporting above, which gives investors the opportunity to learn a lot about a company thus helping them make an informed investment decision. Just as important, the stock market is liquid, and it has millions of buyers and sellers. These two traits are why we choose to invest the majority of our net worth in publicly listed companies. Why?
Quite simply, this is how you avoid situations like WeWork. Yes, many people make lots of money by investing early in these private companies. But for every success story (i.e., Facebook, Google) there are hundreds of failures. Their stories are just not all told so publicly like WeWork. The problem (or risk) with private company investments (on this level) is that there are no sellers! It is all buyers! So naturally, valuations are going to continue to rise. And in this past decade where it is perfectly acceptable (and preferred) to forgo short term profits in order to invest for future dominance (via scale), as long as you show that you are growing market share (at any cost), your private company valuation is going to rise. For the average investor, this is risky business.
We will take our dollars and invest in the stock market where with the right timeframe (long term) we can invest on the same level playing field as the guy selling us the stock. The American stock market is powerful and it gives everyone an opportunity to build wealth… We don’t take this for granted as we know it does not exist in all countries.