Wednesday, March 4, 2015

Millionaire Anecdotes – Diversification edition

Occasionally, I will share some relevant anecdotes from my years of working with individuals and their investments. I hope you find these both entertaining and educational. Here are some stories relevant to the topic of diversification.


I once met with an investor who had $2M in investable assets, with $1.5M of that in the stock of his former employer. In order to help this person understand the absurdity of having so much in one company I simply asked "If you had $1.5M in cash and no stock in 'XYZ', would you buy $1.5M worth of 'XYZ'?" The response was priceless, the person said "Of course not, what do you think I am, an idiot?" I didn't have to respond, as the person immediately realized the error of their way of thinking. My rule of thumb when advising clients was that if they insisted on having a lot of a particular stock, I never advised having more than 5-10% of investable assets in that particular company. Personally, I don't allow any individual stock to be more than about 1% of our assets.

One other former client was head of Investor Relations for a multi-billion dollar company. This client shared with me that although he probably knows the details of the company better than most people in the organization, he would not own any individual company stock, including that of his employer (as part of his compensation, he was given stock grants that he would immediately sell and invest in a more diversified portfolio). His reasoning for this was because in his line of work, his job was to talk to and answer questions from analysts from Wall Street banks and Hedge funds all day. He was always amazed at how they seemed to be able to read between the lines of many of the footnotes and details in their annual reports. He noticed that they would usually be asking questions about details that, although already publicly available, were several weeks or months away from getting any attention in the mainstream media. Because of all the brainpower being dedicated to this type of research, it became apparent to this former client that there was no way he, as an individual investor, could ever know a single company well enough to have any type of advantage when buying their stock.

Another former client was the President of a different multi-billion dollar company. He was very highly compensated, and a large portion of his compensation came in the form of company stock. By my rule of thumb of not having more than 5-10% of your portfolio in a single stock, he definitely had too much in one stock. His situation was somewhat unique, however, in that part of his job is to be optimistic about the company stock, and since all of his purchases and sales of stock are public record, significant sales could reflect negatively on the company. I never pressed him too hard to sell his company stock though, because even if he lost it all, he still had several million dollars of other assets that would be more than enough to support his lifestyle for the rest of his life.

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