Eggs and The Basket : ESOP se pyaar

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 : https://corporatefinanceinstitute.com/resources/wealth-management/lehman-brothers/)

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

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

Me and My ESOPs : Till Death do us part 😊

ESOPs are quite the norm amongst some of the best 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 why it makes sense to have some proportion :

 

If the company does well if the company does not do well
Earnings( Career) Net worth( ESOPs) Earnings( Career) Networth( 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, is the most optimal solution.

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 30th 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