Perils of Optimism

‘the feeling that good things are more likely to happen than bad things’

This is how Cambridge dictionary defines optimism. Most of us are wired to stay positive. That’s what self-help books, YouTube videos, Good morning messages on WhatsApp try so hard to do. It actually makes lot of sense as well. However, when it comes to investment, it can sometimes be a limiting factor (to put it mildly).

Uncertainty & Transition

History of capitalism has taught us repeatedly, that no institution’s existence is sacrosanct. TIMES CHANGE. Old guard, gives way to the new one.

Lehman Brothers’ stock was selling at $86 a share in February 2007, giving the company a market capitalization of nearly $60 billion. For the year, the company reported a new record high in net income, over $4 billion. In January 2008, Lehman Brothers was the fourth-largest investment bank in the U.S.(source : Lehman Brothers)

On 15^th Sept 2008, Lehman Brothers filed for bankruptcy.

Moral of the story : you might be the strongest and yet can’t take that for granted

I love my company and I adore my ESOPs 😊

ESOPs are quite the norm amongst some of the best contemporary companies in the world. Salaries and bonuses are better than most peers and star performers end up owning significant ESOPs. Often this forms a huge part of a family’s net worth ( sometime 70-90 % of their net worth).  In my conversations, I have found people to be reluctant in trimming their ESOP exposure.

Even if you work in the best firm on the planet Earth, rationalising one’s exposure to their employers’ shares makes lot of sense. Often people hate selling it, to avoid a feeling of regret in future. However, the below matrix will help one understand on why it makes some sense to have some proportion :

	If the company does well		If the company does not do well
	Earnings (Career)	Net worth (ESOPs)	Earnings (Career)	Net worth (ESOPs)
Reduced Exposure( sold some shares)	Positive	Negative	Negative	Positive
High Exposure(ESOPs continued to be 60-90 % of Networth)	Positive	Positive	Negative	Negative

As you can see, having a balanced exposure, hedges us in both the scenarios

Why is forecasting share price so difficult ? Even for your own firm( Employer). Bill Gates and his friend Buffet

The funny thing is, it’s equally (predicting stock prices) difficult for CEOs and. Let us look at Bill Gates Portfolio ( as on 30^th June 2022) :

Ticker	Company	% Portfolio	Number of Shares	Value ($1000)
BRK.B	Berkshire Hathaway Inc.	53.56%	34,689,845	9,471,021
WM	Waste Management Inc.	16.12%	18,633,672	2,850,579
CAT	Caterpillar Inc.	7.43%	7,353,614	1,314,532
CNI	Canadian National Railway Co.	6.54%	10,278,630	1,156,038
ECL	Ecolab Inc.	3.80%	4,366,427	671,382
WMT	Walmart Inc.	2.08%	3,020,859	367,276
KOF	Coca-Cola Femsa SAB de CV	1.94%	6,214,719	343,550
DE	Deere & Co.	1.52%	899,655	269,420
MSFT	Microsoft Corp.	1.37%	944,620	242,607

Microsoft is no 9 on that list and hardly 1.4 % of his overall portfolio. However, look at the difference in the stock performance of Microsoft and Berkshire in the last 5 years

Microsoft :

Berkshire :

If Bill Gates can get it wrong, you can imagine how tough it must be to predict future stock movement

Bottom Line:

There should be a sense of proportion in terms of ESOPs allocation in one’s portfolio. All eggs, one basket, you get the drift 😊.

Disclaimer: Any calculation shown in this post is only for illustrative purposes  and based on prevailing tax laws and the past performance of a fund or investment is not an indicator of it’s future performance. The data used in this presentation has been taken from several sources. Neither BuckSpeak nor any of its employees or Subir Jha vouches for the authenticity of the data. Investing in mutual fund comes with market risk. Please read all Scheme Information Documents (SID) /Key Information Memorandum (KIM) and addendums issued thereto from time to time information and other related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund. Investment should be done in consultant with a financial planner/consultant, who would recommend products aligned to your needs and risk profile. There are no guaranteed returns.  Neither BUCKSPEAK NOR ITS EMPLOYEES, makes any warranties or representations, express or implied, on products offered and would be responsible for any losses from these investments. The company earns commission from Asset Management Companies when the user buys mutual funds. However, the recommendations on funds is not influenced by the commission earned