To: Corporate chieftains, venture capitalists, investor relations departments, startups, and underwriters: Keep your nose clean because the best enemy you’ve ever had is going to keep sniffing around. Your future depends on it. The success of American business requires strong capital formation. Entrepreneurial spirit, technological innovation, and a motivated workforce are useless without the ability to raise money. Just take a look at this 2016 video of President Obama, Mark Zuckerberg, and a few Entrepreneurs, I’m still impressed:
The reason the United States is the king of capital formation is because investors think they are not playing a rigged game. Investing in the public financial market requires investors to trust their money — retirement savings, college funds — to the skills of people they can’t meet and to businesses they can’t visit. That’s a huge amount of trust for 50 million people to place, and they do it routinely.
Investors would not trust the market without lawyers and journalists, the twin banes of your existence. I spent thirteen years as a class action lawyer and two years as a business writer. My personal contributions have been minor, but I have seen the inside of both businesses. I know their faults and excesses, but I also know their massive role in making it possible for you to raise money. And this is not ony true for men. Women know that too!
The Securities Act of 1933 and the Securities and Exchange Act of 1934, the basis for public and private securities enforcement, were enacted because investors thought, correctly, that the New York Stock Exchange of the 1920s was little more than a carnival used to separate people from their money. With that legacy, class action lawyers – who end up sharing responsibility with the SEC for enforcing the Acts’ provisions – have put a lot of money in the hands of investors, and a lot of money in their own pockets.
The whole process of earnings estimates, guidance, and whisper numbers is ridiculed, but without securities enforcement, companies would just make the stuff up and say, “caveat emptor, sucker.” After investors got tired of getting burned, they would ignore projections of all kinds. Companies like Microsoft, Facebook, Sun Microsystems, and Merck would cease to command a premium.
And the prospect of a new company becoming “the next Cisco” wouldn’t excite anyone. There would not have been a “last Cisco” – a company that sustained a giant earnings multiple for a long time because of the widespread belief that everybody, working together in good faith, could project the company’s long-term prospects.
Now we face potential action on the favoritism in doling out IPO stock, and hearings and proposals about the links between analysts and their firms’ investment banking. My first reaction was, why bother? Everyone knew about these things and the markets adjusted. Investors were buying on Henry Blodget’s reports even though they knew his firm sought to provide good coverage. But they thought they could stay one step ahead of the crooked game if they could get in and out before “everybody else.”
This is exactly what happened with stock pools in the Twenties. Big investors would choose a stock, buy it in concert, let their interests slip, toss in some vague rumor about someone finding gold or getting a radio license, and sell into the horde of investors trying to ride the wave. When it became known that the rumors were fake and it was just a scam, investors didn’t get out of the market. In fact, they relieved the pool operators of the burden of making up rumors. People could tell the pools were buying, so they tried to follow before the (other) suckers did the same.
Today, if you complain and lobby enough, you can probably get rid of the lawyers. Reporters are tougher, and if they leave, they may take your future capital with them. I know you’ll never admit it, but you are better off with these irritating influences than without them. They keep the game fair, and you need that.