Thursday, May 7, 1998
Towaco, NJ (May 7, 1998) -- In my column of March 12 I spoke about diversification and why we expect that we will ultimately end up owning around 12 Cash-Kings in our portfolio. Tonight I'd like to revisit the issue from a different perspective.
Many companies offer their employees a number of different ways by which they can acquire company stock. Sometimes, the employees don't have a choice in the matter, either.
This practice often goes so far as to allow employees to purchase stock through payroll deductions, oftentimes at a discount. The most common discount I've seen is 15%.
Yep, that's right, many companies allow their employees to purchase stock in their company at a discount just because they are employees. Sounds like a fabulous deal, doesn't it? So good that you'd consider buying stock through such a plan even if you thought that there were other investments that had better appreciation potential.
When most people first hear about these types of plans, their response may be something like "Where do I sign up?" Or, "What a deal. I better get started before they change their minds and cancel the plan."
It's true that on the surface, the opportunity to purchase company stock at a discount sounds like a deal that's too good to pass up. However, before deciding that it's a "no-brainer" to enroll in such plans, there are a few things that should be considered. For example, how long are you required to hold stock that you purchase through such plans? Are you fortunate enough to participate in your company's stock option plan? If so, how many shares do you hold rights to under that plan? Are you a participant in your company's 401(k) plan and if so, how much of your contributions and the related company match are used to purchase stock in your company?
Once you've answered these questions you should add up these pieces and determine how much of your overall portfolio (whether it represents amounts that are in taxable or non-taxable accounts) is represented by your company's stock. There's another piece that should be considered, as well. This is the one that's easiest to overlook, too.
Who is it that pays the salary that you need to meet your daily expenses? Why, your employer, that's who. This is just another way in which you are dependent upon the company that you work for in order to meet all past, present and future financial obligations.
What this means is that you could be placing yourself in a really precarious position. You see, the more stock that you hold in your company, the bigger the chunk of your financial health and well being you that is dependent upon that company's performance.
If your company starts to struggle financially, the first thing that you're likely to see is a decline in its stock price. This could cause a significant decline in your net worth. If things get really bad, it could ultimately result in you losing your job.
Many of us probably think that nothing like this could happen at the company that we work for. The reality is that it happens a lot more than we like to think it does. Imagine that you were an employee of Oxford Health Plans (Nasdaq: OXHP) last fall. The company's performance had been top notch. You expected to watch its stock price continue its upward trend for the foreseeable future. So you added as much of it to your 401(k) plan as you could. Plus, you were eligible for the company's stock option plan and held some shares through that as well.
On Friday October 24, 1997 when you left work for the weekend, the stock was trading at $68 3/4. You had a rather tidy sum of appreciated stock in your 401(k) plan, plus you were sitting on stock options that were significantly in the money. The company stock that you own had also appreciated substantially. You felt so great about Oxford and its prospects for the future that you never even considered the fact that your confidence in the company had led you to have a portfolio that was so heavily weighted in Oxford stock that it amounted to 60% of your overall portfolio. In the back of your mind you figured you were going to be set for life. Here you were with a great job at a great company. The pay and benefits were good. You owned a lot of company stock and were going to ride its appreciation right down easy street. You'd be able to retire early and have plenty of time to travel and enjoy life. That vacation home in Hawaii was within your grasp.
Then disaster struck. After you arrived at work on Monday morning you were shocked to learn about some significant financial problems that the company had. The stock closed that day at $25 7/8 -- a single day decline of 62.4%! There goes a big chunk of your portfolio's value. It went away faster than the blink of an eye. You couldn't believe that your stock options were now essentially worthless. You had serious concerns that you would never be able to recover from this debacle.
Worst of all is that doesn't have to be the end of it, either. Say Oxford decides that it needs to cut some jobs to make ends meet. You could get the pink slip and be part of a company-wide downsizing.
I know this sounds extreme, but it certainly could happen. It's also one reason why so many corporate executives often decide to regularly exercise some of their stock options as a means of rebalancing their portfolio. As a matter of fact, I read on Monday that Bill Gates sold $1 million of his Microsoft stock for just that reason. Though in his case, that's really not much more than a token effort.
So, before deciding how much of your company's stock to purchase, you might want to consider determining what percentage of your overall portfolio will be invested in that stock. The general guideline that I've seen is that if you have more than 20% of your total portfolio in your company's stock, you ought to consider diversifying into other investments.
I'll be back tomorrow with some thoughts as to why, even though we claim that the short-term doesn't matter, many of us still check on the performance of our stocks regularly.
Have a Foolish evening,
Day Month Year History C-K -1.34% -1.98% 6.32% 6.32% S&P: -0.88% -1.50% 9.37% 9.37% NASDAQ: -1.16% -1.78% 11.03% 11.03% Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 22 Pfizer 82.30 107.00 30.01% 2/27/98 27 Coca-Cola 69.11 75.75 9.61% 2/3/98 24 Microsoft 78.27 83.38 6.52% 2/6/98 56 T. Rowe Pr 33.67 34.88 3.57% 5/1/98 37 Gap Inc. 51.09 51.69 1.17% 2/13/98 22 Intel 84.67 81.00 -4.34% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 63.15 71.94 13.92% 3/12/98 20 Exxon 64.34 73.13 13.66% 3/12/98 15 Chevron 83.34 84.50 1.39% 3/12/98 17 General Mo 72.41 66.88 -7.64% Cash-King Stocks Rec'd # Security In At Value Change 2/3/98 22 Pfizer 1810.58 2354.00 $543.42 2/27/98 27 Coca-Cola 1865.89 2045.25 $179.36 2/3/98 24 Microsoft 1878.45 2001.00 $122.55 2/6/98 56 T. Rowe Pr 1885.70 1953.00 $67.30 5/1/98 37 Gap Inc. 1890.33 1912.44 $22.11 2/13/98 22 Intel 1862.83 1782.00 -$80.83 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 1262.95 1438.75 $175.80 3/12/98 20 Exxon 1286.70 1462.50 $175.80 3/12/98 15 Chevron 1250.14 1267.50 $17.36 3/12/98 17 General Mo 1230.89 1136.88 -$94.02 CASH $3910.83 TOTAL $21264.14 *The year for the S&P and Nasdaq will be as of 02/03/98