I transcribe Ben Felix's speech (BSc Mechanical Engineering (Northeastern University), MBA Finance (Carleton University), CFA, CFP, CIM) starting from 8:33. I just screen shot his animation, rather than taking the time to create a GIF out of it.

But growth in aggregate corporate earnings does not directly benefit investors. It is increase in earnings per share that benefits investors. The problem here is that per share earnings growth can only keep up with GDP growth, if no new shares are issued.

Let me explain. If you own shares in a company in a rapidly growing economy, and a new company listed shares on the stock exchange, you don't benefit from the new company's economic impact. You'd need to re-allocate some of your capital to the new company, to participate in its earnings. But doing so does not increase the value of your portfolio. The economy is grown, but your portfolio has not. Over time, the effect of this slippage has been meaningful.

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China might again be a good example. Much of the growth in the market value of Chinese equities has come from an increase in the number of listed companies, as opposed to price appreciation from existing listed companies.

  1. Please see the titled question.

  2. I don't fathom the boldened phrase. What if company B's share price rockets faster than company A's? Wouldn't company B's faster rate of share price increase increase my portfolio's value?

  • 3
    $\begingroup$ Why don't you directly ask that person? This site is not well-suited to the task of parsing/interpreting/correcting/explaining random videos and comments on YouTube and Reddit. $\endgroup$
    – user18
    May 31, 2020 at 4:45

1 Answer 1


The question is really about industry jargon, not economics.

Wouldn't company B's faster rate of share price increase increase my portfolio's value?

What he's referring to is that, at the moment company B went public, shifting your portfolio to company B stocks is simply a re-balancing of your portfolio. There is no profit from re-balancing.

(Of course, once a stock is in your portfolio, there is capital gain if stock price increases, vice versa.)

On the other hand, in the scenario where equity value increases at the moment of IPO, the value of the company increases, which contributes to increase in overall market value (what he calls "GDP growth" and "economic impact"). The difference in value is captured by investors who holds private equity prior to public listing (e.g. venture capital firms).

Each time this occurs, there is capital gain in the economy that's not captured by investor in public markets, simply because they are late to the bandwagon. This is what he calls "slippage". He claims "over time, the effect of this slippage has been meaningful", which implies the gains of public market investors lag gains of private equity investors.

(If one compares the historical returns of the public market---e.g. that of stock indices---and the average VC firm, the latter is probably higher. However, it's not clear whether this is still the case after adjusting for risk. The risk profiles are very different. The typical VC portfolio may have 30 companies, with one eventually turning a profit.)

A rephrasing of the quoted statement might be:

"...per share earnings growth [for investors in public markets] can only keep up with GDP [(market cap)] growth, if no new shares are issued [i.e. no new public listings occur]..."


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