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Don’t Buy Too Much Company Stock

by Ryan Guina

I went to lunch with a couple former coworkers the other day and we discussed the current issues at my former company. I never mentioned it when I was looking for a new job, but my former company was having financial difficulties. Those problems have recently intensified, and in the last 12 months the company’s stock has dropped over 75%. That is an extreme amount and it is putting the future of the company in doubt. I am happy I am no longer employed by them, but I am not happy for the situation some of my friends and former coworkers are in.

Don’t put all your eggs in one basket

One of the things I try to do with my investment portfolio is diversify my holdings among several different investments. I primarily invest in index funds because they have the lowest fees and generally cover a wide range of options. One thing I stay away from is investing in my company’s stock.

It’s not hard to find examples of people who lost their life’s savings after investing heavily in their company – only to watch it go belly up. Prime examples include Enron, WorldCom, and dozens of DOTcom’s that had inflated prices before the world realized they were only speculations and the bottom fell out.

Another reason is that your job is probably your main source of income, so it already represents a huge portion of your total income producing assets (remember, you can consider your ability to create income as an asset). In high school my Dad told me the reason he didn’t invest in his company stock was that if the company was doing well, chances are he would have a job that would be going well. He chose instead to invest in index funds and similar holdings which has done well for him.

What about company matching?

Sometimes companies give matching 401(k) funds as stock, or they fund pensions with company stock. If that is your only choice, then you should probably take it. After all, it is free money, right? But you should be careful that the amount of company stock you own doesn’t become too heavily weighted based on your total portfolio. You might look into selling some of it when possible to maintain a balanced portfolio – jsut beware of possible tax implications.

What about company discounts?

Some companies offer Employee Stock Purchase Plans that allow their employees to buy stocks at a discount. Sometimes this can be a good deal. If you know your company and think it is well valued (and you aren’t trading on insider information), then making a stock purchase can be a good thing. Just remember not to own too much company stock relative to your total holdings.

However, you should only buy your company’s stock based on its intrinsic value and not only because you are getting a discount. After all, a 10% discount on something that is over-valued means you might be breaking even at best, or at worst losing money.

Owning company stock isn’t bad – it’s all about balance

Just like everything else, balance is the key. Your career is already heavily invested in your company, so focus your other investments in places that will give you the best return. The last thing you would want to happen to your company is another Enron type situation.


Published or updated June 26, 2008.
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{ 8 comments… read them below or add one }

1 john

I usually agree that diversification is the best policy for most people. but like bufett says, diversification means you don’t know what you are doing. if you think your company stock is going to sky rocket, there is nothing wrong with being over extended in one direction

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2 Ryan

John,

Very true. But this is more of a generalization instead of a “one size fits all” article. Buffet is a rare individual who is among the best in the world at what he does. Most people don’t have the time, energy, knowledge or discipline to track their company’s stock well enough to understand all the risks involved with holding too much company stock.

Thanks for the comment, I always appreciate those who take a different view. That always helps me learn!

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3 Curious Cat Investing Blog

I agree that diversification is the answer. I think you should buy some stock in the company you work for – just don’t have huge amounts and percentages there.

Here is what Buffett said to a group of business students:

“If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification. The economy will do fine over time. Make sure you don’t buy at the wrong price or the wrong time. That’s what most people should do, buy a cheap index fund and slowly dollar cost average into it.”

I think that is pretty clear – that almost everyone should use diversification. He also has recently bet funds of hedge funds managers they will not beat the S&P 500 after taking into account their fees over the 10 years. So there he is really indicating more what I think he believes than the quote says – essentially nonly a very few professionals should do it (like him and Munger, maybe Soros, Rodgers…).

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4 Mrs. Micah

Note, John, that Buffet also seems to think it’s right for 99% of people who don’t have the time to be industry geniuses and do their work and live their lives. Hence indexing and the like…at least follow the market (vs. dumb diversification where you just invest in anything).

I think people often have too much confidence in company stock. One ex-boss wanted to have company stock because she thought we were a good company. We were good as people, but I have no idea how we were financially. She had even less. But it was a good company. Fortunately, she was primarily invested in a Target retirement fund. Not as dynamic, but avoids major screwups too.

I wouldn’t mind getting company stock as the match if I could sell it in a certain period. I’d rather it mimic my choices, however.

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5 Dividend Growth Investor

Well getting company stock at a discount is a good investment depending on the final print. Can you sell it right after you buy it, or do you have to wait for 2 years? If the holding period is less than 6 months it might make sense to buy the stock at a discount and hedge with a put option.

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6 Ray@TipHero

Great post and the caution over owning too much company stock in my opinion can’t be stressed enough. Just ask the employees at Bear Stearns and others. My heart really goes out to faithful employees who have been burned by company stock.

I also feel there may be a psychological factor at work when it comes to company stock. I get the sense that some people feel they should own company stock out of loyalty to their company and feel disloyal when they sell shares. I tell people owning a few shares is ok but having a significant percentage of ones savings in your company can be a huge mistake.

I recieved stock in a company I worked at recently and sold the entire stake upon vesting. My reasoning was the same as Ryan’s in that I had a very high exposure to this company simply from the fact that it was my sole source of income. Since I sold it the stock is down 25%.

It’s funny that people mention Buffett. When I recieved shares in my company I asked myself a simple question. Would Buffett own this? The answer was no.

@Dividend Growth Investor, great comment. One thing to keep in mind is that some companies have a policy on taking a negative position on the company whether through selling short or buying a put. Not sure how they would every find out, but it was a policy at my last company and I guess a terminable offense.

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7 RC@ThinkYourWayToWealth

I think it depends on the rules on selling, as Dividend Growth Investor mentioned, the company (whether well-established or relatively new), and the discount you will get. My company used to offer a decent discount, that was the lower of either the start or end date of each 6 month period, now it is only a small discount and the end date price only. That has made it much less attractive, and I therefore don’t participate in the stock purchase plan anymore.

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8 JJAstor

Behold the fool saith, “Put not all thine eggs in the one basket” – which is but a manner of saying, “Scatter your money and your attention;” but the wise man saith, “Put all your eggs in the one basket and-WATCH THAT BASKET.”
-Mark Twain

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