5 ms·

As an aside to the parent poster, an often-stated guideline for the maximum amount you should own in the companies you work for is 10% of your portfolio value [

by cVwEq 7y ago

As an aside to the parent poster, an often-stated guideline for the maximum amount you should own in the companies you work for is 10% of your portfolio value [1][2]. Modern portfolio theory (Markowitz, et. al.) calculations for a bundle of assets probably would bear out that 20% in a single stock is not on the efficient frontier [3]. [1] https://www.marketwatch.com/story/dont-invest-in-your-companys-stock-2013-08-24 https://www.marketwatch.com/story/dont-invest-in-your-compan... [2] https://www.forbes.com/sites/maggiemcgrath/2013/10/22/how-much-of-your-companys-stock-is-too-much/ https://www.forbes.com/sites/maggiemcgrath/2013/10/22/how-mu... [3] https://en.wikipedia.org/wiki/Efficient_frontier https://en.wikipedia.org/wiki/Efficient_frontier

gwd 7y ago
Thanks for that! Just to be clear, what I meant was, "I wouldn't consider 20% as a target to be indicating he thought the stock was going to crash / was a bad value." I had thought of adding that even 10% or 5% would be reasonable, but I didn't really have any good grounds for saying so other than my totally untrained, amateur intuition. So thanks for the supplement. :-)
C1sc0cat 7y ago
That not really applicable for "Directors" who are quite different to "employees /workers"
pmart123 7y ago
I’m not a big believer in MPT as correlations are unstable, but a simple rule of thumb would be anything over 10% as having significant exposure. With some big tech, there’s some diversification due to different business segments, ex: Amazon ecom/AWS vs recent IPOs where the stock might function more like an option.
nostrademons 7y ago
Depends how the company is doing. Depending on the internal transparency of the company, as an employee you're often privy to a lot of information that Wall Street does not have access to, eg. you'll oftentimes know their upcoming product pipeline, employee morale, culture, and key metrics for the success of the business that are not published in their financials. If those are doing well but Wall Street is treating the stock poorly, it makes sense to max out your stock compensation and never sell, at least until the metrics turn or you leave the company. (Yes, technically this constitutes insider trading, but it's virtually impossible to prove that inaction was because of inside information vs. because of lazyness or inattention, unless there's a pattern of action.)
- kcanini 7y ago
  Even in that case, it may make sense to diversify. The market can remain irrational longer than you can remain solvent.
  - nostrademons 7y ago
    That saying's usually not true when you're dealing with employee stock compensation, where you own the shares outright and make enough in cash salary to live on. Ownership is forever (modulo a revolution or other forcible overthrow of the rule of law, in which case you have bigger problems). In the absence of leverage, you can afford to be perfectly rational and have an infinite time horizon.
- Stasis5001 7y ago
  As an employee at a megacorp, sure, you can see a little bit about how things are going from the inside. That said, you probably spend less time looking at reports than professional analysts. Secondly, sure, maybe you can see how great your company is, but do you have a frame of reference to a million other companies and their projects and cultures? There's a strong bias towards thinking you know more than the market that I would be wary of.
  - nostrademons 7y ago
    That depends a lot on your past background. A number of the employees at these megacorps have either worked in finance before, or at one of the big consulting firms, or they've done the Valley dance between the hot growth companies of the moment. So they do have that reference point between many different companies. There's sort of a revolving door among many of the elite institutions that run the world - Ivy League universities, large dominant corporations, big-name consulting, finance, and government. If this doesn't apply to you, and a megacorp was your first job out of college that you stuck with for your whole career, you may want to be a bit more cautious with your capital.
  - icedchai 7y ago
    You forgot to mention that many analysts are full of BS anyway: https://www.inc.com/geoffrey-james/financial-analysts-are-utterly-clueless-says-oxford-university.html https://www.inc.com/geoffrey-james/financial-analysts-are-ut...
manigandham 7y ago
Diversification is for people who have no idea what they're investing in. Portfolio theory is spray/pray with no information which is what VCs do with unestablished startups, hoping for the wins to beat the losses. If you want to be that passive then just buy an ETF or all the large-cap blue-chip dividend stocks instead to keep it simple. Investment funds with a real thesis and research don't do this. Concentrated positions and proper risk management is active investing and generates much greater profits. If you know a sector and company is doing well, diversifying will only reduce your returns.
- perl4ever 7y ago
  Diversification can mean different things to different people. If you mean that >30 stocks is pointless, I agree. How much different is the Dow than the S&P 500 or the whole market, even though its methodology is atrocious? If you mean that even with a large edge, you should take positions that are >20%, I don't agree.
  - manigandham 7y ago
    Then we don't agree. The concentration of a position depends on the confidence of the investment and direction. 20% isn't a magical rule, no point in following it blindly.
    - perl4ever 7y ago
      I mean, it's like sticking a knife in an electrical socket. Can you get away with it, possibly? Sure. That doesn't mean there's a significant downside to a rule of not doing it.
- ram_rar 7y ago
  In theory, you sound good. But, in a 10 year window I have barely seen anyone beating S&P500.
  - manigandham 7y ago

by cVwEq 7y ago

gwd 7y ago

Thanks for that! Just to be clear, what I meant was, "I wouldn't consider 20% as a target to be indicating he thought the stock was going to crash / was a bad value." I had thought of adding that even 10% or 5% would be reasonable, but I didn't really have any good grounds for saying so other than my totally untrained, amateur intuition. So thanks for the supplement. :-)

C1sc0cat 7y ago

That not really applicable for "Directors" who are quite different to "employees /workers"

pmart123 7y ago

I’m not a big believer in MPT as correlations are unstable, but a simple rule of thumb would be anything over 10% as having significant exposure. With some big tech, there’s some diversification due to different business segments, ex: Amazon ecom/AWS vs recent IPOs where the stock might function more like an option.

nostrademons 7y ago

Depends how the company is doing. Depending on the internal transparency of the company, as an employee you're often privy to a lot of information that Wall Street does not have access to, eg. you'll oftentimes know their upcoming product pipeline, employee morale, culture, and key metrics for the success of the business that are not published in their financials. If those are doing well but Wall Street is treating the stock poorly, it makes sense to max out your stock compensation and never sell, at least until the metrics turn or you leave the company. (Yes, technically this constitutes insider trading, but it's virtually impossible to prove that inaction was because of inside information vs. because of lazyness or inattention, unless there's a pattern of action.)

kcanini 7y ago
Even in that case, it may make sense to diversify. The market can remain irrational longer than you can remain solvent.
- nostrademons 7y ago
  That saying's usually not true when you're dealing with employee stock compensation, where you own the shares outright and make enough in cash salary to live on. Ownership is forever (modulo a revolution or other forcible overthrow of the rule of law, in which case you have bigger problems). In the absence of leverage, you can afford to be perfectly rational and have an infinite time horizon.
Stasis5001 7y ago
As an employee at a megacorp, sure, you can see a little bit about how things are going from the inside. That said, you probably spend less time looking at reports than professional analysts. Secondly, sure, maybe you can see how great your company is, but do you have a frame of reference to a million other companies and their projects and cultures? There's a strong bias towards thinking you know more than the market that I would be wary of.
- nostrademons 7y ago
  That depends a lot on your past background. A number of the employees at these megacorps have either worked in finance before, or at one of the big consulting firms, or they've done the Valley dance between the hot growth companies of the moment. So they do have that reference point between many different companies. There's sort of a revolving door among many of the elite institutions that run the world - Ivy League universities, large dominant corporations, big-name consulting, finance, and government. If this doesn't apply to you, and a megacorp was your first job out of college that you stuck with for your whole career, you may want to be a bit more cautious with your capital.
- icedchai 7y ago
  You forgot to mention that many analysts are full of BS anyway: https://www.inc.com/geoffrey-james/financial-analysts-are-utterly-clueless-says-oxford-university.html https://www.inc.com/geoffrey-james/financial-analysts-are-ut...

manigandham 7y ago

Diversification is for people who have no idea what they're investing in. Portfolio theory is spray/pray with no information which is what VCs do with unestablished startups, hoping for the wins to beat the losses. If you want to be that passive then just buy an ETF or all the large-cap blue-chip dividend stocks instead to keep it simple. Investment funds with a real thesis and research don't do this. Concentrated positions and proper risk management is active investing and generates much greater profits. If you know a sector and company is doing well, diversifying will only reduce your returns.

perl4ever 7y ago
Diversification can mean different things to different people. If you mean that >30 stocks is pointless, I agree. How much different is the Dow than the S&P 500 or the whole market, even though its methodology is atrocious? If you mean that even with a large edge, you should take positions that are >20%, I don't agree.
- manigandham 7y ago
  Then we don't agree. The concentration of a position depends on the confidence of the investment and direction. 20% isn't a magical rule, no point in following it blindly.
  - perl4ever 7y ago
    I mean, it's like sticking a knife in an electrical socket. Can you get away with it, possibly? Sure. That doesn't mean there's a significant downside to a rule of not doing it.
ram_rar 7y ago
In theory, you sound good. But, in a 10 year window I have barely seen anyone beating S&P500.
- manigandham 7y ago