082: What To Do With Company Stock

Full Transcript

Intro:
Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments. Here are your hosts, Josh Robb and Austin Wilson.

Austin Wilson:
All right. Hey, Hey. Hey, welcome back to The Invested Dads Podcast, the podcast where we take you on a journey to better your financial future. Today, Josh, we are going to be talking about company stock.

Josh Robb:
Company stock, right? And by the way if your company was a farm, you would own beef stock, chicken stock, vegetable stock.

Austin Wilson:
Do you know where you get all that stock?

Josh Robb:
From the farm?

Austin Wilson:
No, the stock market.

Josh Robb:
Oh the stock market.

Austin Wilson:
Yes. Well, considering this isn’t really a cooking show, although sometimes it creeps in there a little bit.

Josh Robb:
Yep.

Austin Wilson:
Because we’re foodies, we love to eat, mostly donuts.

Josh Robb:
Donuts.

Austin Wilson:
Oh, I just ate a donut this morning.

Josh Robb:
Was it good?

Austin Wilson:
Powdered sugar cake donut, delicious. Kroger, weirdly enough, in their bakery section, they have these little pre-packaged 12 donuts, three kinds.

Josh Robb:
Yes.

Austin Wilson:
There’s powdered sugar, powdered cinnamon sugar.

Josh Robb:
Those are good.

Austin Wilson:
And plain.

Josh Robb:
Yes. Boring.

Austin Wilson:
The cinnamon and the plain I like, but I prefer the cinnamon, but you know, I can’t have all the cinnamon.

Josh Robb:
Why not?

Austin Wilson:
I have to share. Actually Jenna likes the powdered sugar ones and I don’t.

Josh Robb:
That’s right, that’s right. That’s why it works.

Austin Wilson:
I usually get one cinnamon sugar and one plain one, and then I’m all set. And they’re moist-

Josh Robb:
The cinnamon are good.

Austin Wilson:
Delicious.

Josh Robb:
Whatever that-

Austin Wilson:
I know.

Josh Robb:
Because that powder, it’s just-

Austin Wilson:
It’s so good.

Josh Robb:
Now I’m hungry.

Austin Wilson:
Anyway, that was totally not what we’re planning on talking about today, but I love donuts and I had one today and I was jamming on it pretty hard, so yes, we are going to be talking about not cooking stock, but instead if it is a good idea to own stock in the company that you work for.

Josh Robb:
Okay, so that’s what we mean by companies.

Austin Wilson:
But Josh first.

Josh Robb:
Yes.

Austin Wilson:
First and foremost, how can people help us to continue to grow this podcast? Help lots of people and put out new episodes each week that are answering the questions that people have about finance today?

Josh Robb:
Are we at the end of the podcast already?

Austin Wilson:
You would think so, but guess what were not.

Josh Robb:
We’re switching it up. Yeah. If you’re enjoying this podcast, obviously subscribing gets you a new release every Thursday. Leaving reviews, like we’ve said in the past, help us rank. And emailing us, and this is the most important one, we love hearing from you guys and girls out there, email us questions, thoughts, topics, all that stuff. We love to see what you guys are thinking about, and what you would like to know more about. And then also we’re talking about company stock. If you know, someone that owns a lot of company stock or has been talking about that option with their employer, make sure you send this episode to them.

[2:40] – Ways to Own Company Stock

Austin Wilson:
All right, well, let’s get down to the nitty-gritty in ways that you can own company stocks. The first one is an employee stock ownership plan. And that also of course has a great acronym.

Josh Robb:
ESOP.

Austin Wilson:
Because it’s in the finance industry and everything that we do has fun acronyms. Some fun facts about ESOP’s, and I found an article that was from the NCEO, which is actually like an organization about company ownership, employee ownership.

Josh Robb:
There you go.

Austin Wilson:
I’ll link that in the show notes below, but I got some interesting statistics. Now they’re a little bit dated, but they should give us a directional idea of what we’re talking about here, so over 6,000 companies offer ESOP’s in the US and as a 2018, this represented over $1.4 trillion and covers over 14 million participants, over 600 of those companies of that 6,000, so about 10% are publicly traded. This actually means that you can own company stock in a privately owned company as well. But Josh dig in a little bit about an ESOP in general.

Josh Robb:
Yeah, so ESOP or employee stock ownership plan is just that stock ownership. And so they are giving stock to employees either as a bonus or some sort of incentive part of their pay structure. And like you mentioned, 90% of these are actually not publicly traded, meaning you can’t go out and buy them out on the market, so what is this ownership then? If I can’t sell the stock, what is it? Well, it is ownership in the company, so you get in a sense to participate when it does well. And so whether it’s publicly traded or not owning stock means you own a portion of the company.

Austin Wilson:
Yeah.

Josh Robb:
And so it’s there as a motivation, it’s usually alongside a 401(k) or some sort of other retirement plan as an additional piece of that and so that’s what it’s there for, but it’s a way that they can give you and motivate you through ownership in the company you work for.

Austin Wilson:
Not to be out done-

Josh Robb:
Yes.

Austin Wilson:
There’s another acronym employee stock purchase plans, so this is not necessarily the giving of the stock. This could be the purchasing of the stock through your employer. And that is an ESPP employee stock purchase plans.

Josh Robb:
ESOP, ESPP.

Austin Wilson:
Right. And this is kind of similar, but in general, one of the options that I’ve heard of in a lot of instances here is the employees with these options on their table can often purchase company stock at a discount.

Josh Robb:
Yeah, so they will say you get a 15% discount for what is currently traded.

Austin Wilson:
Exactly. Yep. And sometimes you have to hold them for X number of time before you can sell them. But no matter what you’re going to get a discount from the price when you bought it. And then if the price goes up or even stays the same, it could go down, but you could be ahead, so that’s another way to incentivize your employees to hold company stock. I know that speaking of local, Northwest Ohio things, Owens Corning up in Toledo used to have a plan like this, so a lot of employees could get company stock at a discount, and a lot of them did. Another way you can own company stock is through your 401(k) or retirement plan. Josh, talk about that a little bit.

Josh Robb:
Yeah, so if you have a 401(k) or 403(b) or any kind of retirement plan at work, you have usually a list of things you can own in that plan, so they usually give you a menu and say here’s your choices. Sometimes the company stock, especially, and probably only if it’s publicly traded, is it included in this, if it’s not publicly traded, it would be on the ESOP side of things. But if it’s a publicly traded company, you may not have an ESOP option, but you may be able to buy it in there.

Austin Wilson:
Correct.

Josh Robb:
And so what you’re able to do is say, okay, every paycheck X amount comes out. I want a portion of that to go into company stock.

Austin Wilson:
Right.

Josh Robb:
You elect that to be one of your holdings.

Austin Wilson:
First of all, two things.

Josh Robb:
Yes.

Austin Wilson:
Every time I see the word 401(k), I laugh in my head because I think of Phoebe Buffay from Friends saying 401(k).

Josh Robb:
401(k).

Austin Wilson:
And we just watched the Friends Reunion-

Josh Robb:
Was it good?

Austin Wilson:
On HBO Max. And it was heartwarming.

Josh Robb:
Yes.

Austin Wilson:
It was not necessarily… If you’re a Friends fan, you’ll love it. If you just want to watch it for entertainment and you didn’t really get into the show, you’ll be like this is kind of dumb.

Josh Robb:
Yep.

Austin Wilson:
Because there was a lot of crying and things like that.

Josh Robb:
Emotion.

Austin Wilson:
Anyway, we watched that, that was funny. Number two, the company that you have this option through, likely or should have some sort of limit and we’ll talk more about this later, but it is likely that you will have some sort of cap on how much of a percent of your retirement can be in your company stock, because we’ll talk about some examples where that can go bad, but that seems to be a protection for employers about their employees holding too much company stock.

Josh Robb:
In some companies they have a requirement for certain executives to hold a certain percentage of company stock as well.

Austin Wilson:
It goes the other way. Yeah, and we’re going to get into the benefits of those things later, but keep that in mind that there may be some sort of limit there. And I know that a lot of these changes aren’t actually that old. And I think there actually might be laws around this, but there was at one point, really not a lot of limits on what you could hold.

Josh Robb:
Do what you want.

Austin Wilson:
I used to work at Cooper Tire, there used to be pretty much free for all uncut holding company stock in your 401(k). And a lot of employees got burnt when… The stock price follows the tire industry pretty closely, and you have a bad couple of quarters and your retirement could look pretty bad.

Josh Robb:
Would you say the tire industry is circular?

Austin Wilson:
Oh stop.

Josh Robb:
I’m just wondering?

Austin Wilson:
Josh, that’s not where we’re going today. You and your jokes. Another way you can hold company stock Josh in an outside investment-

Josh Robb:
account.

Austin Wilson:
Yeah, so again, if it’s a publicly traded company, anybody can buy the stock. And as long as you don’t have any restrictions or rules for your employment, that you’re limited to what you can do then yeah, you can just buy it on your own and hold it in an outside account, a taxable account, Roth IRA, doesn’t matter. Traditional IRA, who cares? You could own it.

Josh Robb:
Yes.

Austin Wilson:
But again, if you’re in certain industries, you may have rules or restrictions on what you can and can’t do, based on what knowledge you have and in what part of the company you work for.

Josh Robb:
Yes.

Austin Wilson:
But that is an option for anybody in most cases.

Josh Robb:
Yeah.

Austin Wilson:
Just to say, Hey, you know what? I work for Disney. I’m just going to buy Disney in my taxable account here.

Josh Robb:
Right, that’s fine.

Austin Wilson:
And you have more flexibility when that is the instance.

Josh Robb:
Yes.

Austin Wilson:
However, yeah, like you mentioned depending on where you work, or what industry, or what part of the company you work at, you might be privy to insider information and thus you might have blackout periods and you could be, if you’re not careful you could violate SEC rules.

Josh Robb:
Yep.

Austin Wilson:
And people get very unhappy about that sort of things.

Josh Robb:
The SEC definitely might.

Austin Wilson:
Mostly the SEC, yes. And finally, I guess it’s not finally, but the last bucket we’re going to talk about today is you can really attain company stock through grants and stock options.

Josh Robb:
Yep.

Austin Wilson:
That’s just kind of self-explanatory, you can be given stock through a stock grant from your company as an incentive of some sort, that can be a variety of different things. You can also be given options to buy company stock at X price, that’s usually how it works. These are usually call options, the right to buy. I always remember like call and put verse because call is C and buy as B. And that’s at the beginning of the alphabet and put his P and sell is S and those are at the end of alphabet, so I just think right to buy a stock.

Josh Robb:
And there you go.

Austin Wilson:
A call options, so you’re usually given… If you’re given an option, it’s usually a call option, it’s to buy stock.

Josh Robb:
Yes, they don’t need you to sell things.

Austin Wilson:
And the option is to buy stock typically at a very low price.

Josh Robb:
Yep.

Austin Wilson:
And I’m thinking of specifically in my mind, the example is Elon Musk.

Josh Robb:
Mm-hmm (affirmative).

Austin Wilson:
He obviously actually owns a lot of Tesla stock, but a lot of his in his compensation as the Tesla stock hits X number of prices, he gets huge stock options.

Josh Robb:
He gets gold.

Austin Wilson:
He gets options.

Josh Robb:
Yes.

Austin Wilson:
He doesn’t necessarily get shares, he gets options. And then his profit comes from the spread between the option price, which is usually really low.

Josh Robb:
Yep.

Austin Wilson:
And the current price, which is usually really high, which is how he’s so rich.

Josh Robb:
Yep. And so it’s kind of like, all right, I’ve worked for this company, if I hit these goals, I’m going to get some stock options. In the stock option it will say, hey, you have the right to buy X amount of shares and you can buy it for $10 a share. Now, if it’s trading for $8 a share, I’m not going to exercise those options.

Austin Wilson:
Correct.

Josh Robb:
I could go on the regular market and buy it for $2 less.

Austin Wilson:
Yep.

Josh Robb:
If it’s trading for $20 a share, man, I’m going to exercise those options.

Austin Wilson:
Heck yeah you are.

Josh Robb:
I’m going to buy them for $10, and it just doubled in price because it’s currently worth $20, so that’s how the stock option works. Like you said, you have a set amount that you can buy, usually they limit you. And then they also tell you what the price is that you’re paying for it. Then you decide, you don’t have to, it’s an option, you don’t have to, but you can if you want. And they usually give you a time period.

Austin Wilson:
Yes.

Josh Robb:
It expires after a certain time.

Austin Wilson:
Exactly.

Josh Robb:
That’s what they are. Pretty easy.

[10:58] – Benefits to Companies

Austin Wilson:
Let’s kind of look at this as we often do in two different ways, so let’s talk about the benefits to the company. And then we’ll talk about the benefits to the employee after that. Speaking of the company.

Josh Robb:
Yep.

Austin Wilson:
It is a good thing for the company, they have some benefits that they can do by issuing stock or offering stock options to their employees. Number one, it’s cheaper than cash. You’re just really using your equity.

Josh Robb:
Yes.

Austin Wilson:
Your company equity to fund incentives, which is a good thing.

Josh Robb:
Yes.

Austin Wilson:
And there’s tax benefits wrapped up in all of that, which is actually the reason that it’s most beneficial.

Josh Robb:
And you’ll see too, a lot of startups do this, right? Because they don’t have a lot of cash flow. In fact, they probably have negative cashflow, they’re burning money.

Austin Wilson:
Right.

Josh Robb:
In order to give motivation and incentive to the employees, they may say, Hey, we’ll give you a little bit of ownership in this company. You know it’s going to do well, we know it’s going to do well, just not there yet.

Austin Wilson:
Correct.

Josh Robb:
Jump on board. And so yeah, you see a lot of startup companies, especially do that early on, and you hear those stories right. About the janitor or the, I think there was a story about a misuse that came in and were given stock as incentive pay and then down the road, Oh look, we went publicly now, publicly traded stock price jumped, and now millions of dollars. Yeah, and like you said, cheap incentive and a cheap way of motivating and giving compensation.

Austin Wilson:
Absolutely, another benefit to the company is you can get key buy-in from key employees, so think about a company’s leadership team.

Josh Robb:
Mm-hmm (affirmative).

Austin Wilson:
If you’re either giving them stock as part of their compensation or as bonuses or whatever, you’re motivating them to be a part of the vision and the mission of the company to continue to grow and do well.

Josh Robb:
Yep.

Austin Wilson:
And then they will do well as well, if that continues. Another reason that’s very in the front of investor minds now is that it aligns employees with employer interest, so to the company they have a goal to do whatever the company’s goals are. And if the employees own a bunch of the company, they’re aligned to do the same thing.

Josh Robb:
Yep.

Austin Wilson:
And the shareholders are all aligned to point the same direction, and they’re all on a common goal and I guess, a point that we should talk about is that you think that companies are issuing new shares or offering new shares for their employees or whatever. You would think that shares would go up, right? Well, they do, but companies have, this is really the reason, one of the reasons that stock buybacks became a thing in the eighties is to offset the new shares being issued. Just so you could have at least a flat share account for your EPS calculations.

Josh Robb:
Yep.

Austin Wilson:
However, companies actually typically are buying back a lot more than they’re issuing in new shares, which is helping their earnings.

Josh Robb:
And one other thing for a benefit of the company, when you talk about the compensation, some employees, especially the highly compensated. Saying you have a 401(k), well, that’s great. But if maxing it out, I could put 19,500 in, that may not be a very big percent of my compensation and so I want more, right? What other ways can I save for my retirement?

Austin Wilson:
Right.

Josh Robb:
And so adding these things is another layer of helping that employee to save for their retirement by saying, Hey, not only can you max out your 401(k), but we’re going to give you these options or you have the ability to purchase whatever the plan is.

Austin Wilson:
Right.

Josh Robb:
You give them another way because they’re looked at as another plan, it doesn’t count as part of the 401(k).

Austin Wilson:
And if you look at the percentage breakdown on like key executives, CEOs, CFO, these kinds of big wigs at publicly traded companies, their compensation is usually broken down so that the vast majority of their compensation is within stock options and stuff like that. It’s not necessarily cash payments for their salary. Sure, they might make a few million dollars in cash. That’s a good living, right?

Josh Robb:
Yeah, that’s all right.

Austin Wilson:
But they can make many millions of dollars in stock and stock options.

Josh Robb:
Yes. And if it does well, like you said, motivation, then that is even more valuable of an incentive than just cash.

[14:52] – Benefits to Employees

Austin Wilson:
Absolutely. So let’s flip the page, talk about benefits to the employee. And I think we kind of hit on some of these things, but it’s additional incentive to push the company to financial success, so your interest as you’re a larger shareholder now of the company, your incentive is to make the company do well and which is going to make other shareholders do well and everyone wins.

Josh Robb:
Yep.

Austin Wilson:
You’re a part of the company there, obviously wealth creation is a big portion of that as well in terms of your compensation. But you also get a sense of loyalty to your employer and companies will benefit from you being incentivized to stay.

Josh Robb:
Mm-hmm (affirmative).

Austin Wilson:
Because a lot of times, like we said, there’s some restrictions on what you can do with those, so that’s something to keep in mind as well. Yeah, I think that there’s benefits to both sides of the picture there.

Josh Robb:
Yep. Both. It’s not a one-sided where look at the company really makes out when they do this.

Austin Wilson:
Right.

Josh Robb:
Both people get a benefit. Like you mentioned, the sense of loyalty comes with a piece of that. Usually being what we call a vesting schedule.

Austin Wilson:
Yes.

Josh Robb:
Meaning not all of what they give you is available right away.

Austin Wilson:
Yeah.

Josh Robb:
And depending, and again, there’s rules around it, but you may see a 3, 5, 7 year… It just depends. But the vesting means how much is yours and how long do you wait for it to show up? Let’s say you have a five-year vesting schedule, okay? Each year, 20% of what they gave you becomes yours.

Austin Wilson:
Right.

Josh Robb:
Over the five years, you get a hundred percent of it in the fifth year, so that motivates an employee to say, Hey, you know what? I should stick around for five years to get all this stuff they just gave.

Austin Wilson:
Yes.

Josh Robb:
Right. And then if you add along the way, you kind of layer these vesting schedules, so you’re always kind of encouraging the employee, Hey, keep sticking around and you’re going to get more stuff.

Austin Wilson:
It’s similar to a 401(k) plan in general.

Josh Robb:
Mm-hmm (affirmative).

Austin Wilson:
Where a lot of companies have vesting periods where you may be completely vested after two years, but if you left before two years, you would not be able to take all the money that the company contributed.

Josh Robb:
Yeah.

Austin Wilson:
Whatever.

Josh Robb:
Yeah. There’s all different rules there, so that is there. But overall employee stock option plans or any kind of company stock incentives are there not only to help the employees, but also the company itself gets some tax breaks as well as motivation to keep those employees, low turnover is great.

[17:03] – Dad Joke of the week

Austin Wilson:
Absolutely. Josh, I have a dad joke a week for you.

Josh Robb:
All right. I’m ready.

Austin Wilson:
What do you call a bear with no teeth?

Josh Robb:
A bear with no teeth? I don’t know what is a bear with no teeth?

Austin Wilson:
A gummy bear.

Josh Robb:
A gummy bear. I like it.

Austin Wilson:
A gummy bear. That was a really good one.

Josh Robb:
I like it.

Austin Wilson:
That was from Reddit.

Josh Robb:
I love gummy bears.

Austin Wilson:
Of course. That’s where they all come from.

Josh Robb:
That’s the best place to get jokes apparently.

Austin Wilson:
And gummy bears. Speaking of gummy bears, Haribo, the German gummy bears?

Josh Robb:
Yeah.

Austin Wilson:
Those are the best.

Josh Robb:
Yeah.

Austin Wilson:
For sure, the best gummy bears.

Josh Robb:
Those are good. Oh man.

Austin Wilson:
I would eat a couple right now. I can’t eat too many, it’s a lot of sugar.

Josh Robb:
I like gummy snacks in general, yep.

Austin Wilson:
They are pretty good. Fruit snacks, I’m not above a fruit snack. I don’t want to know a person-

Josh Robb:
I had one the other day.

Austin Wilson:
I don’t want to know a person who doesn’t like Gushers.

Josh Robb:
Aw man.

Austin Wilson:
They’re not my friend. All right.

Josh Robb:
Gushers though are dangerous. If you don’t know they’re a gusher and you take a bite, you could choke.

Austin Wilson:
Give it to your grandma.

Josh Robb:
Yeah.

Austin Wilson:
And then she’ll be like putting it in her mouth and then it will pop. And she will be like oh my land. That would be so funny.

Josh Robb:
Surprised.

[18:00] – Historical Examples of Owning Company Stock

Austin Wilson:
Okay, so yes, let’s kind of get a little bit more practical.

Josh Robb:
Yes.

Austin Wilson:
And talk about some historical examples even, so why should or shouldn’t you own company’s stock, Josh?

Josh Robb:
All right, so why should you? Well, I’m participating, I’m getting value for me working there, right? I should own company stock if one, I’m able to get it at what would either be a discount or free. If it’s a play stock option plan, they’re giving it to you. If it’s some sort of grant or stock option, make sure it’s of value.

Austin Wilson:
Right.

Josh Robb:
Again, I don’t want to buy a $10 option when it’s trading for eight.

Austin Wilson:
Yeah.

Josh Robb:
I would just go out and buy it on my own.

Austin Wilson:
Be smart.

Josh Robb:
But why I should own it is because I have a buy-in to this company. It makes me more motivated to see it do well. And I get to participate more in the success. Why should I not?

Austin Wilson:
Yeah, there is a downside.

Josh Robb:
There is a downside.

Austin Wilson:
Think about this.

Josh Robb:
Now I’m not saying that you shouldn’t own any, but the big piece. And this is what we’re going to talk about when you look at historical examples, do not own too much in company stock.

Austin Wilson:
Yes.

Josh Robb:
And this is where Austin and I, there’s no hard number to this thing.

Austin Wilson:
No.

Josh Robb:
But the idea is you don’t want to be over concentrated in any one of your investments. And this is true not just for company stock but in general, you want to be diversified. We’ve talked about that in the past. Diversification is important. If you have 50% of your net worth tied up in your company, that may be a little bit too much.

Austin Wilson:
And you might actually have indirectly more than that. Because if you think about it, your company is already probably providing all of your insurance, all of your actual paycheck, all of these other benefits to you, your livelihood. If you want to add on an extreme amount of additional leverage to that company’s success through the stock ownership. Some we say is okay, but if you do too much you have a lot of your eggs in one basket.

Josh Robb:
Yep. Be very careful.

Austin Wilson:
And not all companies are going to be around forever.

Josh Robb:
You can have a little bit of bias because you’re working there. You’re like, oh, this is the best company ever, and maybe the stock market doesn’t agree. And you may actually be doing well, the company is doing great, but their stock price is not.

Austin Wilson:
That’s correct.

Josh Robb:
That could be a problem. Yeah, just be very careful why you should not own too much in company stock.

Austin Wilson:
Let’s look at some examples, Josh.

Josh Robb:
Yes.

Austin Wilson:
There are some great examples of company stock ownership plans working out well.

Josh Robb:
Mm-hmm (affirmative).

Austin Wilson:
And the things that come to mind are Big Tech, right?

Josh Robb:
Yep.

Austin Wilson:
Google, Apple, Facebook, they have excellent company stock plans, excellent incentives for employees around that. And those thus far have done exceptionally well and have really made some fabulously wealthy Silicon Valley people.

Josh Robb:
Yes.

Austin Wilson:
Those are some great examples, so let’s just put that off to the side. Great examples.

Josh Robb:
And like you said, 90% of these plans are-

Austin Wilson:
Private.

Josh Robb:
Private companies.

Austin Wilson:
Yeah.

Josh Robb:
Again, you’re not seeing these stock market ideas.

Austin Wilson:
Right.

Josh Robb:
If the company continues to just grow and do well, that ownership is going to grow, you’re just not going to see that value daily because it’s not traded.

Austin Wilson:
Right.

Josh Robb:
And so those are great. These are all publicly traded. It’s easy to see that success in the stock price, but it’s so small, a couple, maybe 50 employees type of thing where they’re saying, all right, you know what we want everybody to have an ownership, here’s some stock. They call it stock. It’s not traded on stock, but it’s ownership in the company. You guys all have that. And then when you leave, okay, here’s the new value of our company it’s grown.

Austin Wilson:
Right.

Josh Robb:
And now each of your stock is worth more and you get an incentive when you leave.

Austin Wilson:
Right.

Josh Robb:
You’re right, great examples. A lot of times there’s the unknown, so those little small companies you just don’t see.

Austin Wilson:
Yeah.

Josh Robb:
Are great plains.

Austin Wilson:
Other side of the coin?

Josh Robb:
Yes.

Austin Wilson:
There are some bad examples.

Josh Robb:
Bad examples.

Austin Wilson:
And I’m going to talk about one here.

Josh Robb:
Okay.

Austin Wilson:
We all remember a company called Enron in about 2000. It was the hottest company in the world.

Josh Robb:
It was doing well, it was big.

Austin Wilson:
It was doing well.

Josh Robb:
Doing well.

Austin Wilson:
Air quotes on a podcast.

Josh Robb:
Okay.

Austin Wilson:
The numbers that were fudged made it look like it was doing great, right?

Josh Robb:
Yes.

Austin Wilson:
The story goes 2000, so I was nine.

Josh Robb:
You were so young.

Austin Wilson:
And Enron, the leadership at Enron more specifically, was urging its employees to buy company stock right around August of 2000. And shortly thereafter, employees were in a lock-up period. As we kind of talked about, they couldn’t trade their shares.

Josh Robb:
A lock-up period is just saying, Hey, because either you bought the stock or have insider information.

Austin Wilson:
You have insider information, who knows.

Josh Robb:
Or the company is getting ready to do something, there’s a freeze.

Austin Wilson:
And the freeze really was around earnings.

Josh Robb:
Yeah.

Austin Wilson:
And what was coming with earnings, and what came with earnings. And so earnings were released, they were terrible, there was a billion dollar write down, all these things. Worst quarter in the history, oh wait, we’re also going to file for bankruptcy because-

Josh Robb:
We’re out of money.

Austin Wilson:
We were pretty much out of money and we were running a fraud the whole time, so company shares $90 in August. September earnings came out, all that happens. Within a month stock down to $25 a share.

Josh Robb:
Ouch.

Austin Wilson:
That’s less than a third of the original stock price. Okay. Then another month later $15 a share, another month later $4 a share. And within four months of that original push from the leadership, shares were de-listed from all major stock exchanges because they went bankrupt and they were only traded over the counter, which is not on a major stock exchange, much less liquid, much more volatile, yada, yada, yada.

Josh Robb:
There is no actual counter that you’re trading over, I looked, I couldn’t find it. But it just means outside of the normal exchanges.

Austin Wilson:
Yes.

Josh Robb:
Is you’re finding another person to trade with.

Austin Wilson:
Yeah, so within four months, stock was trading at 51 and a half cents per share from $90.

Josh Robb:
Wow.

Austin Wilson:
Many employees got utterly toasted.

Josh Robb:
Yes.

Austin Wilson:
By being encouraged by people that they believed in to lead them. And a lot of them probably thought, Hey, things have been going so well, look at our numbers. I’m going to put a lot of money into company stock here because it’s just gone crazy.

Josh Robb:
Yep.

Austin Wilson:
And then they weren’t able to retire.

Josh Robb:
Yes.

Austin Wilson:
Probably.

Josh Robb:
Or their retirement was completely changed and destroyed.

Austin Wilson:
Yeah exactly. Like if you put all your eggs in that basket.

Josh Robb:
Yep.

Austin Wilson:
You were severely pushed back on your plans, no matter what stage of life you were.

Josh Robb:
Yep, so bad example.

Austin Wilson:
Another more recent example is GE.

Josh Robb:
Yeah.

Austin Wilson:
And there was a high ownership of company stock there as well. GE had some really bad issues in the last decade or so, their stock price dropped significantly. I think they stopped paying their dividend for a little while, there was a lot of issues. Now since recovered.

Josh Robb:
Yeah.

Austin Wilson:
But again, it’s a timing thing. If I’m getting ready to retire, I may not have another 10 years to wait for that stock price to recover.

Josh Robb:
Right.

Austin Wilson:
And if I have a lot of my retirement tied up into there, so that’s… Again, the problem is it’s not everywhere where it’s going to be bankruptcy, end of the company. But there may be a time period where your company under performs and the stock price follows suit.

Josh Robb:
Right.

Austin Wilson:
And if you have too much of your net worth tied up into that, that’s where you could struggle.

Josh Robb:
Yeah.

Austin Wilson:
And I’m thinking specifically, if you’re working in industries that are extremely cyclical.

Josh Robb:
Yes.

Austin Wilson:
Energy, oil industries.

Josh Robb:
Tires are circular.

Austin Wilson:
Tire industries, that’s a circular one. Suppliers for these industries, upstream, downstream, whatever. Materials, industrials, things that follow economic cycles and stuff like that, commodity cycles. Those can be tough to time with your retirement.

Josh Robb:
Yep.

Austin Wilson:
Suppose you’ve got a lot of your eggs in one of these baskets and you’re working at an oil company and oil prices tank, and you’re about to retire. Well, guess what? The company stock is going to tank too.

Josh Robb:
Yep.

[25:52] – How Much Company Stock Should You Own?

Austin Wilson:
And that’s not necessarily great for timing, so that’s why we’re preaching diversification is key. And on that note, Josh, how much company stock should you own?

Josh Robb:
It depends.

Austin Wilson:
Yes.

Josh Robb:
It depends. Like I was like, but not more than you can stomach from one individual stock holding.

Austin Wilson:
Right.

Josh Robb:
And that’s really the key. And you need to talk to your financial advisor about what that number is.

Austin Wilson:
Absolutely.

Josh Robb:
Again, depending on where you’re at, maybe you have a big pension, so maybe you can take a little more risk because you’re not going to need as much to draw out of and you can let it recover. Who knows where you’re at, but talk to your financial advisor and help them come up with how much should I own in company stocks? What are your thoughts, anything different?

Austin Wilson:
Yeah, no, I totally agree. I think moderation is a thing you’ve preached a lot. I think that this is an excellent opportunity for some moderation you can… Yeah, treat it like a stock holding in your portfolio, not like the base of your portfolio.

Josh Robb:
Yes. Mm-hmm (affirmative).

Austin Wilson:
And that’s good. And it’s cool to see that you own the stock where you work and you’re following its success and its news and all of that. But let’s keep the long-term picture of a well-diversified plan in mind here.

Josh Robb:
And don’t think you’re going to offend your company by selling company stock. They gave it to you as an incentive for you to use to better yourself and your family, so whatever that means.

Austin Wilson:
Right.

Josh Robb:
Whether it’s selling or holding, you make that decision. It’s not like you’re showing disloyalty by diversifying.

Austin Wilson:
Right. And I guess another thing that we should probably point out is depending on how long you work there and how much of this company stock you accumulate, you could, if you go to retire, you could run into some liquidation issues that involve big tax bills and things like that.

Josh Robb:
Yep.

Austin Wilson:
Because you could have had a really low cost basis. You’ve been working there for a long time and the stock could have gone up a lot. Well, if you would have been a little bit more diversified over time, you could have avoided some of these big bills.

Josh Robb:
Yep.

Austin Wilson:
This is things to consider when you’re looking at your overall picture.

Josh Robb:
And on that note, there is a thing called net unrealized appreciation NUA.

Austin Wilson:
NUA.

Josh Robb:
NUA is a way of getting your employee company stock, your company stock out of an ESOP plan and getting it taxed at a more favorable rate. It’s really detailed and nuanced, but high level, all of…

Austin Wilson:
NUA is nuanced?

Josh Robb:
Yeah.

Austin Wilson:
Oh man.

Josh Robb:
All of your cost basis, so whatever your cost is. Let’s say you are given these shares in the ESOP.

Austin Wilson:
Cost basis is going to be zero.

Josh Robb:
Well, they’ll assign a cost basis to what it’s worth in your compensation.

Austin Wilson:
Oh, fair market value, gotcha.

Josh Robb:
And it’s usually actually even lower than that, so you may have a stock trading for… Again, 90% of these are not publicly traded. They still have to assign a value. And so they have to have this whole thing and they get somebody to come in and evaluate, and then you divide it and blah, blah, blah. But they may say, you know what, it’s a dollar, your cost basis is a dollar. Now it’s trading for $15. And so you have a capital gains of $14. And so that dollar, if you use the net unrealized appreciation, you pull it all out of the employee stock option plan, it goes into a taxable account, but you only pay for the cost basis, you pay income tax, but that’s a lower amount. You have a dollar per share of income tax, the rest is capital gains and long-term capital gains.

Austin Wilson:
Lower rate.

Josh Robb:

Which is either zero, 15, or 20 at the current tax brackets, so you actually could save some money, but that’s a big tax bill. And that’s only due when you sell. And so if you hold onto some of that stock, you only realize it at the sale, so you could spread it out over a couple of years. There are ways around it, but there is going to be a tax bill at some point.

Austin Wilson:
This could also be an option for doing some gifting.

Austin Wilson:
Yes.

Josh Robb:
Appreciated stock is a great thing.

Austin Wilson:
As we’ve talked about a couple of times before, so we’re not going to hammer on those things right now, but just things to keep in the back of your mind because taxes are real.

Josh Robb:
Yes.

Austin Wilson:
You got to pay the Piper at some point. Josh, any closing thoughts?

Josh Robb:
Nope, just remember that, that’s a great incentive if your company offers it. Just be careful you don’t get too concentrated into one stock, even if you really like the company you work for.

Austin Wilson:
All right. Well until next Thursday, have a great week.

Josh Robb:
All right. Talk to you later. Bye.

Outro:
Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe, and don’t miss the next episode.

Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management, all opinions expressed by Josh, Austin or any podcast guests are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.