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Glory Days- How decluttering your house relates to Concentrated Stock Positions

Glory Days- How decluttering your house relates to Concentrated Stock Positions

| September 28, 2017

Last week my wife and I decided to get our wood floors refinished.  Before we could get the people in to work on the floors we had to move everything out of the rooms and closets.  For those of you who have done a house project or even some “spring” cleaning will know exactly what cleaning out these rooms can be like.  There were things that we found that I never knew we owned and some things that brought back memories from years past. 

Given that we had already ripped everything out of its place we figured it would be a good time to get rid of some things we didn’t need and declutter before we put everything back.  We knew full well going into it that we wanted to throw some things out, but as we started to pull things out the discussion on whether to keep or throw things away got quite comical.

  • The baby bath temperature gauge, still in its original box from before our first child and never used (We are expecting #3 soon.) KEEP IT!
  • The little boy’s shoes that never made it onto any feet of our children but most likely the dogs mouth a few times. (Our third will be a girl.)  KEEP IT!
  • A box of 100 count of our wedding invitations that we over ordered. THROW IT OUT!  Wait, maybe we can use a few of these for some cool craft we saw on Etsy.  LET’S KEEP 20 JUST IN CASE!

This is not a reaction that is exclusive to us and there are differing degrees to the severity of our need to hoard.  Some keep everything and never throw it out while others throw it out the second they get home. 

There are many scientific reasons to why people hold onto stuff and for many people those reasons can be completely different.  In fact, here are a few examples of why we hold onto things if you want to learn a little more.

What I want to focus on today relates more to some of the feelings we have regarding stuff and how it relates to a particular type of investment… concentrated or legacy stock positions. 

A legacy or concentrated stock position is usually a stock in a particular company that you have accumulated over the years either through early investing or through a company that you worked for or even founded.  This particular stock will make up a large percentage of your portfolio which may not be bad for overall return but absolutely increases idiosyncratic risk.  Early in your investing life this is not necessarily a bad thing, as the return expectations are far greater for any one stock vs an index.  In addition, you may be able to tolerate the single stock swings because you know the company well, influence the decision making, or have had success already with this stock.  However, as your life changes, the risk and reward of holding such a position should constantly be monitored.  I have had hundreds of conversations with clients and prospects about selling or reducing these positions and always get similar responses that revolve around why they want to continue to hold those stocks.  These conversations always seem to revolve around the following 3 emotions.  These are the same 3 emotions that I recently experienced while decluttering my house. 

Nostalgia – This is an undeniable emotion that brings back those memories of glory days.  When you go through that closet and find your baseball mitt from little league or the hair from your child’s first haircut.  It brings back fond memories of good times and general happiness.  You want to keep these things because you like the way it makes you feel. 

Nostalgia tends to effect founders, entrepreneurs, and high level executives more than it does others because they helped create this company and the stock wealth.  They remember the sacrifice, long hours, and rewards of watching a company and stock grow year after year after year.  A lot of the success of that company can be attributed to their work and it comes with a sense of accomplishment.  There is nothing wrong with rewarding yourself and your employees with stock options, in fact, it is part of the American Dream.  However, long after retirement or leaving that company people tend to hold onto that stock even though their hard work no longer effects the bottom line of that company. 

Hope – This is another emotion that can crop up while cleaning your house.  How about that juicer that you bought when you were on your health kick and decided to make juice every morning.  The juice tasted good for the most part, but after about one week of cleaning a big contraption with 25 different parts it didn’t seem like the best use of your time so you put it away.  Years later when it comes time to declutter you think about how you want to get healthy and hope that you will start to get into your juice kick again.  Back goes the juicer into the bottom of the cabinet to collect dust and hope for the day it comes out again. 

This is a very similar feeling to those with concentrated stock positions. There was a time when this particular stock was useful in getting your retirement goals in a healthy position.  There is hope that since it worked at one point in your life it can work again to bring greater gains in the future.  While hope is a good thing to have, it is not always the most practical for you or your financial health.   

Fear – This emotion is one that can dominate all other emotions at any point in someone’s life and comes in many shapes and forms.  The fear I am talking about in this instance is FOMO or fear of missing out.  You should throw out those old VHS tapes of classic movies you used to watch.  However, you get scared because they could be worth something someday as a collectible like vinyl records or beanie babies.  The same thing happens with a concentrated stock position.  You accumulated this stock over a long period of time and have ridden it through good times and bad, but it always ended up moving higher in the end.  You become scared that after you sell this stock it will go on one of its classic 30% higher runs right after.  In reality, even if you do not hold this particular stock you will hold others and even if it runs up 30%, your new positions could do better. 

There are a lot of emotions that come with personal belongings and stocks in many ways become part of your personal belongings.  It is important to understand where you are in the life cycle of your investing and make sure that you separate the emotion from what is most practical for you.  By no means is this an investment recommendation, because there are many other factors that go into a concentrated stock analysis such as tax consequences, risk management, valuation, income projections, return expectations, industry fundamentals, financials, etc.  The thing I want my readers to take away from this is it is ok to have certain feelings towards your belongings and in turn your stocks.  Just make sure that you are aware of those feelings and use that to help guide you forward in the best way possible.  After all, as Bruce Springsteen made so fashionable, there is nothing wrong with keeping a few things that remind you of those glory days.