The danger of holding company stock

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Taylor Larimore
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The danger of holding company stock

Post by Taylor Larimore » Mon Mar 17, 2008 2:17 pm

Hi Bogleheads:

Last year investment bank Bear Stearns stock was valued at $170/share. I doubt if anyone anticipated that today the stock would be worth only $2/share. How does this affect its 14,153 employees?

According to the Wall Street Journal, "The pain could be most acute for Bear Stearns's (14,153) employees, who are steeped in a culture of personal ownership, and hold about a third of the firm's shares outstanding."

Bogleheads often warn newbies about the danger of overloading their portfolios with company stock. What's happened at Bear Stearns is a good example.

Best wishes
Taylor

leonard
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Post by leonard » Mon Mar 17, 2008 2:20 pm

Great point, especially for those who may be on autopilot using an Employee Stock Purchase Plan and holding the stock or holding company stock after exercising options.

Huge risk.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

PatrickS
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Post by PatrickS » Mon Mar 17, 2008 4:12 pm

A friend of mine actually exercised his company stock options near the peak of the tech bubble and held the shares. He eventually sold them for around 5% of the value they were at on the day he exercised, and he owed taxes on the difference between his strike price and share price on the day he exercised. A LARGE net loss on what should have been risk-free opportunity.

The most amazing part is that he did this on advice from a financial planner :roll:

moneyhoney
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hard times unless your one of the exhalted

Post by moneyhoney » Mon Mar 17, 2008 6:36 pm

Maybe they could ask the ex-ceo ( Cayne ) for a loan to tide them over, I read he walked away with something like half a billion in compensation for his heroic efforts to save the company from staying solvent. Used to be this sort of thing was what one would expect from a banana republic, now it's just business as usual in the good ole USA. After Enron, and all the shady dealings of tech firms,Arthur Anderson,etc.,etc. ,etc. there was a lot of hot air about how a house cleaning was going to be done to ensure this sort of BS wouldn't happen again. Well here we are just 5 years later, with hundreds of billions of taxpayer dollars going down the rathole to prop up these bastions of toxic waste, , a recession of possibly epic proportions looming, thousands of lives disrupted, jobs lost, and many financially ruined, and for what? So the same bunch of crowned princes of greed can make their killings.

I guess they're pretty smart though, because they know they can get away with it. I used to wonder why third world countries didn't rise up and throw the bums out for cr*pping all over them. Well I see now it that same apathy is alive and well in this country. Someone please tell me why anyone should believe what comes out of corporate boardrooms , when the fraud, mismanagement , and utterly corrosive greed is so pervasive, and the oversight so lacking. People always say don't give up on America, but right now those sound like empty words. The US has become a joke the world.

P.S. Why is everyone so quick to dump on the employees for keeping a large share of company stock in their portfolios? That used to be the sign of a loyal employee, who felt good about his company. Now it just means "sucker". How low we have sunk!

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hollowcave2
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I agree

Post by hollowcave2 » Mon Mar 17, 2008 6:48 pm

I agree with you Taylor. I watch the amount of company stock I have in my own 401k and I keep it at a certain level. The majority of my 401k is in index funds.

Steve

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Post by leonard » Mon Mar 17, 2008 7:00 pm

moneyhoney wrote:
Why is everyone so quick to dump on the employees for keeping a large share of company stock in their portfolios?
Doesn't really make any difference whether the company is good or bad. Also, it doesn't matter if the employee is "loyal" or not. Undiversified risk is present in any concentrated holding of a single stock, whether it is an employee's company or not.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

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burt
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Re: hard times unless your one of the exhalted

Post by burt » Mon Mar 17, 2008 7:36 pm

moneyhoney wrote:Maybe they could ask the ex-ceo ( Cayne ) for a loan to tide them over, I read he walked away with something like half a billion in compensation for his heroic efforts to save the company from staying solvent. Used to be this sort of thing was what one would expect from a banana republic, now it's just business as usual in the good ole USA. After Enron, and all the shady dealings of tech firms,Arthur Anderson,etc.,etc. ,etc. there was a lot of hot air about how a house cleaning was going to be done to ensure this sort of BS wouldn't happen again. Well here we are just 5 years later, with hundreds of billions of taxpayer dollars going down the rathole to prop up these bastions of toxic waste, , a recession of possibly epic proportions looming, thousands of lives disrupted, jobs lost, and many financially ruined, and for what? So the same bunch of crowned princes of greed can make their killings.

I guess they're pretty smart though, because they know they can get away with it. I used to wonder why third world countries didn't rise up and throw the bums out for cr*pping all over them. Well I see now it that same apathy is alive and well in this country. Someone please tell me why anyone should believe what comes out of corporate boardrooms , when the fraud, mismanagement , and utterly corrosive greed is so pervasive, and the oversight so lacking. People always say don't give up on America, but right now those sound like empty words. The US has become a joke the world.

P.S. Why is everyone so quick to dump on the employees for keeping a large share of company stock in their portfolios? That used to be the sign of a loyal employee, who felt good about his company. Now it just means "sucker". How low we have sunk!

Well said !

Your post is also fits an earlier " Executive Compensation" post.

Burt

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Post by gassert » Mon Mar 17, 2008 7:50 pm

Ya, ask Cayne to loan them the company stock that makes up his entire net worth which has gone from a billion to a couple million

Little guys always piss on the big guys without discussing the concentrated risk that each posses since we only hear about the winners.

Urvile1
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Adding to Taylor's point

Post by Urvile1 » Mon Mar 17, 2008 8:51 pm

If you only listen to the professionals, they know what's really going on. For example, last week ...

Jim Cramer 3/11/08: Don't Sell Bear Stearns!

http://www.liveleak.com/view?i=2b7_1205751955

What seasoning goes best for one's foot when it is one's mouth?

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Taylor Larimore
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Jim Cramer

Post by Taylor Larimore » Mon Mar 17, 2008 9:00 pm

Hi Urvile:

Thank you for your post. It's a classic!

Best wishes.
Taylor

grok87
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Re: I agree

Post by grok87 » Mon Mar 17, 2008 9:09 pm

hollowcave2 wrote:I agree with you Taylor. I watch the amount of company stock I have in my own 401k and I keep it at a certain level. The majority of my 401k is in index funds.

Steve
I agree- I have no stock in my company. I have some options because you can't sell them for fair market value, but even then I probably exercise earlier than some.

The obvious comparison (I think someone in this thread has already made it) is to Enron. In an earlier discussion on Citigroup someone was adamant about how Citigroup was "NOT" another Enron. Well I guess it turns out that Bear, and maybe Lehman, and possibly even Citigroup are bascially Enron reincarnated. Suspect accounting and worthless assets that are a highly leveraged house of cards...

cheers
grok

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Re: I agree

Post by foodnerd » Mon Mar 17, 2008 10:23 pm

hollowcave2 wrote:I agree with you Taylor. I watch the amount of company stock I have in my own 401k and I keep it at a certain level. The majority of my 401k is in index funds.

Steve
Steve, what level do you set as the maximum level for your company's stock in your 401K, just curious.

FN

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Post by Random Musings » Mon Mar 17, 2008 10:38 pm

Taylor L. wrote:
Hi Bogleheads:

Last year investment bank Bear Stearns stock was valued at $170/share. I doubt if anyone anticipated that today the stock would be worth only $2/share. How does this affect its 14,153 employees?

According to the Wall Street Journal, "The pain could be most acute for Bear Stearns's (14,153) employees, who are steeped in a culture of personal ownership, and hold about a third of the firm's shares outstanding."

Bogleheads often warn newbies about the danger of overloading their portfolios with company stock. What's happened at Bear Stearns is a good example.

Best wishes
Taylor
When I see the phrase "steeped in a culture of personal ownership" it makes me a bit wary. Shouldn't Bear Sterns, a financial company been educating their people to diversify, diversify, diversify when they have the opportunity to do so (especially in light of Enron and so on)? Or was the education tempered by subtle hints for employees to retain shares? We will see if claims like that will surface, and pretty soon, if that is the case.

Regards,

RM

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Post by dgrdfd » Mon Mar 17, 2008 10:51 pm

How much do you consider to be too much in company stock? In my personal situation my company stock in my 401k is around 4% of my total portfolio. It makes up around 6.5% of what's currently in my 401k. I have a REALLY long time to retirement (30+ years). Is it advisable to consistently (every quarter or so) move this into my target retirement fund? I know the risks are there, but I am technically not even vested in this money yet so I really don't really put a lot of thought in it. I am curious what others do.

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Post by Richard Berg » Mon Mar 17, 2008 11:19 pm

How much do you consider to be too much in company stock?
$1, assuming you're a Boglehead. If anything, there are good arguments for taking a short position in your company and/or industry.

If you're not a Boglehead, obviously you'd want to take a concentrated position in whatever stocks you predict will beat the market. At least 10%, maybe more depending on how many other winners you've picked.

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Post by Sheepdog » Tue Mar 18, 2008 12:44 am

Much of these Bear Stearn employee losses was in their high amount of stock option compensation. That compensation became worthless Sunday.
My son, an executive with a large international conglomerate, receives a considerable amount of stock options annually. If the stock price does not increase, this compensation is worthless. He hesitates to exercise his options when he has had a profitable gain I think because he does not want to seem unloyal. That is my feeling, but I am not certain. I am going to try to have a conversation with him about his stock options and stock ownership when he visits over Easter.
Jim
“One moment of patience may ward off great disaster. One moment of impatience may ruin a whole life.” — Chinese Proverb

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Adrian Nenu
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Lewis, Barrow Hanley Lose Combined $2 Billion on Bear

Post by Adrian Nenu » Tue Mar 18, 2008 1:26 am

http://www.bloomberg.com/apps/news?pid= ... refer=home

[quote]Lewis, the New York-based firm's second-largest holder, paid an average of about $107 apiece for 11 million shares, according to a filing submitted last year to the U.S. Securities and Exchange Commission

Lewis, a former currencies trader who was born in an apartment above a pub in London's East End, declined to comment through a spokesman. The loss is almost half his $2.5 billion fortune, as estimated by Forbes magazine in its 2007 survey. [quote]

Adrian
anenu@tampabay.rr.com

ttcbj
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Also shows how concentrated risk can seem smart, for a while

Post by ttcbj » Tue Mar 18, 2008 4:48 pm

I worked at a technology company many years ago with an ESPP. It convinced me of two things:

A. It is really hard to predict whether a stock will go up or down, even with inside information - frequently, we would hit our earnings, or even beat them, and the stock would drop when the market opened. There is nothing like watching a stock from inside a company to convince you that the market discounts information in strange ways, often before its even public. The idea that the market discounts key information very quickly is, obviously, a key rationale for index investing.

B. Individual stocks are highly volatile (particularly if you are used to index investing). The concentration risk can make you feel really smart when the stock is going up, because the stock can go up a lot (say 3x) while the general market is doing something more moderate. You feel smart until that concentration risk goes the other way, and the stock loses 2/3 of its value while the market stays flat.

I ultimately got to a point where I didn't hold any of the company's stock as an owner (though I did hold options, which have different characteristics). It was simpler to use an indexed investing strategy all around, rather than trying to treat my ESPP as a special case.

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Post by Grt2bOutdoors » Tue Mar 18, 2008 7:34 pm

dgrdfd wrote:How much do you consider to be too much in company stock? In my personal situation my company stock in my 401k is around 4% of my total portfolio. It makes up around 6.5% of what's currently in my 401k. I have a REALLY long time to retirement (30+ years). Is it advisable to consistently (every quarter or so) move this into my target retirement fund? I know the risks are there, but I am technically not even vested in this money yet so I really don't really put a lot of thought in it. I am curious what others do.
I can tell you from watching people at my own firm; they have way way too much in the company stock. I've been with the firm 8 years, and the stock has not recovered from it's high 8 years ago. I own 5% of my 401k value in the stock, but that will be diluted over time as I continue to purchase index funds only with my contributions/matches. I think I take enough risk by working at the firm, I would not like to have my retirment riding on the stock. If I want to gamble, I'll go to Vegas or Atlantic City.

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Post by tfb » Tue Mar 18, 2008 8:14 pm

And there is the Google masseuse who became multimillionaire on Google stocks and options. Don't forget it cuts both ways.
Harry Sit, taking a break from the forums.

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Post by stratton » Tue Mar 18, 2008 8:24 pm

tfb wrote:And there is the Google masseuse who became multimillionaire on Google stocks and options. Don't forget it cuts both ways.
Not the same comparison. They became millionaires when the stock IPO'd and they could finally sell some of it as it vested. Before that it was locked up and not sellable. They might have been "millionaires" before it vested, but it wasn't their stock yet.

Paul

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Post by tfb » Tue Mar 18, 2008 8:44 pm

If you read the article, it says the Google masseuse didn't sell immediately after the IPO. In fact she was still holding a chunk at the time the article was published. I'm sure a large part of the money was earned after the IPO and after the stock was vested. So she rode the stock up and profited.
Harry Sit, taking a break from the forums.

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