Concentrate to Get Rich, Diversify to Stay Rich

My wife works for a public company. They IPO’d soon after she started working there.

For hitting certain performance metrics she was given a certain amount of restricted stock units (RSUs). The vesting schedule was such that after every year we were able to sell 25% of the total RSUs. So if we were given 1,000 RSUs at the onset, we would be able to sell 250 each year for the next four years. Note how I switched from the she pronoun to the we pronoun. Marriage.

Not only were we given RSUs the first year, but also every year for the past four years. Every time we were gifted different amounts of units based on where the stock was trading at the time.

We had a lengthy discussion about what we should do with the RSUs and set forth a plan to sell the them every time they vested, regardless of what price the stock was trading at. This decision was driven solely by over-concentration of this company within our portfolio. Even with consistently selling available RSUs every year as they became available for sale, our current position accounts for approximately 20% of our combined total net worth.

This begs the question: How much concentration risk you are willing to take on a single position?

The answer to this has a lot to do with risk tolerance and age.

I don’t believe this company is the next Enron or the next Amazon either, but there’s always the possibility it could be the next General Electric. I’d rather not end up on Reddit asking questions like this:

D1PORCLWsAEaOFp.jpg large.jpg

I’ve spoken with some of our friends in the company who haven’t sold a share yet and so far it has paid off for them as the company has gone up more than threefold since the IPO. We’ve missed out on some upside gains. Hindsight bias.

The following chart from The Geometry of Wealth: How To Shape A Life Of Money And Meaning shows the total lifetime returns of 14,455 U.S. Stocks from 1989-2015. Currently our company is in the upper quartile for total return, but it doesn’t mean it has to stay there. Notice how the chart is the opposite of a bell curve and how the highest and lowest returns at at the extremes. Based on this data set, more than half of stocks during this time underperformed cash.

Since the stock IPO’d, there have been four instances where the drawdown has been more than 35%. Our average selling price is still below the current price by approximately 30%. Kind of hard to have an average selling price above the current price when it’s near all time highs.

Part of the reason for selling RSUs as they became available was to limit our exposure to a single company. We didn’t need the cash so we parked the proceeds into some mutual funds in a separate retirement account.

The following Twitter thread has some additional discussion points on the topic of concentration risk but more than 5 to 1 voted in favor of selling the RSUs instead of holding them and I believe we made the right decision.

The great thing about the vesting period and our planned sales is that we get to lock in some gains but are still leaving some on the table for further potential upside gains. It would be much harder to watch this stock hit consistent new highs if we didn’t have any skin in the game. What a great retention tool.

From hard work and generosity we concentrated to get rich. Now we are diversifying to stay rich. In every instance, rich is just a state of mind.