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Don’t Invest in the Company that You Work for

My friend Cody put out a piece today on not investing in the company that you work for.  95% of the time, that is correct.  Since this blog is about reduction of risk, I advise all readers not to increase their risk by risking their retirement funds on the the company from which they derive their wages.  That said, here is the other 5%, from a RealMoney CC:


David Merkel
Right On, Roger!
12/12/2006 1:54 PM EST

Roger is dead right when he says to diversify. My broad market strategy has 35 stocks in it. Biggest position is Allstate (boring, huh?) at 5%. Most of the rest are around 2.5%, with about 15% cash.

There have only been two times that my wife has suggested that I do something with respect to our investments. Both were when I let a position grow too big. The first was the St. Paul, when I worked there. The other is my only private equity holding: a company which makes the best commercial lawn mowers in the world (my opinion). She was right both times, in my opinion.

The secret to investing is risk control. Don’t make a move that could knock you out of the game, and over the long run, you can make decent money as you compound your gains.

If I compare my investing to baseball, I would say that I try to hit singles. Playing home run ball leads to too many strikeouts, and the strikeouts hurt more than the home runs help. Not only do you lose money, you lose confidence to stay in the game.

So, play the game with a margin of safety. Diversify broadly, and maybe, just maybe, buy some bonds too, to even out the ride. (I have an article coming on my bond holdings in the next month…)

Position: long ALL

There are exceptions, though, and I will point three of them out.  1) Executives often have to buy company stock; but they are beiong paid to take risk for the good of the shareholders.  2)  Occasionally, when your company is out of favor, and you know it has a strong balance sheet, it may be time to buy.  That’s what I did with the St. Paul back in 2000, and it paid off well.  3) If you understand your business better than anyone else (very rare), and you are in a fast growing industry, the stock of your company can be a good deal if the general market has not discovered it yet, and bid the stock price to high P/E ratios.

Aside from that, do not invest in the stock of your company.  Why put your retirement at risk?






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3 Responses to Don’t Invest in the Company that You Work for

  1. matt says:

    I was recently rooting down my company’s stock, hoping to find an entry point below book value (it might have made it if the SEC wouldn’t have pulled that “do not short” crap). I wasn’t too popular around the office, where I found waaaaaay too many people with 100 percent of their retirements in company stock.

  2. In March 2000, I had the opposite problem. The St. Paul had traded down to 55% of liquidation value. I had my pension money conservatively invested, and gloom was pervasive at The St. Paul. I reviewed the balance sheet, and moved 100% into SPC common. I told one person, a close friend what I had done, and she was so horrified, that she told a few other people what I had done.

    People in the investment department came to me and told me this I was nuts. I ended up selling 4-5 months later for a double. I never expected it to move that quickly. I was expecting to hold for 2-5 years. At that point, everyone was coming to me and telling me they they were now buying into SPC as well. I told them that it was the wrong time. In the end, most of them lost money on their positions.

    One of the key problems for retail investors is that they chase performance. But that seems to be an unchangeable reality of the markets.

  3. Amen! and i second the motion to that!

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.


Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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