Investment advice

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The Sybian
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Investment advice

Post by The Sybian »

Last year when we were considering moving, we liquidated a substantial portion of our savings. Now that we are not moving in the near future, we are looking for a relatively safe investment. When we were married, we opened a money market account which had a 5% interest rate. We bailed on it years ago, as the return plummeted. It was well below 1% for years. I haven't bothered checking as I am sure it is still way too low. My wife is extremely risk averse, but we do have money in various stocks and I am maxing out my employee stock purchase program, which is a significant amount. So, any suggestions for a low risk investment for the bulk of our nest egg? If not, some arguments to persuade my wife into slightly higher risk investments? We are probably not willing to have the funds tied down for several years in case we do move.

Speaking of my company's stock, can anyone (Howard?) explain WTF is happening in this premarket trading tonight? Q4 earnings were released at 4:30, and the stock immediately jumped, closing $1.10 up. Then, in the first 5 minutes of after-market trading, it plunged $4.88, and down $8 by 5:00. The numbers were all positive and above target. Duetche Bank raised their buy rating to a level $4 above yesterday's close. I don't remotely understand how the market works, but this seems absolutely insane to me. If my FIL hadn't called, I never would have seen the premarket trading. I just check the closing price, so I don't have a clue what it normally does after hours. WTF???
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Re: Investment advice

Post by sancarlos »

1. Look for an no-load index mutual fund with low fees. Dreyfus is a good company for this.

2. Ignore after-market trading. Low trading volumes and can be wildly different outcome than you see in normal trading tomorrow morning.
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Re: Investment advice

Post by howard »

I do not follow the markets, haven't for about three years.
The Sybian wrote:I don't remotely understand how the market works, but this seems absolutely insane to me.
Big companies borrow money at 0.5% or 1%. They use the cash to buy back stock, and to pay dividends. This gives them a return of 2 to 6% on the basis of those dividends and on the rise of the share price. Multiplied by lots of big companies, this is the reason the broad market has soared. It has nothing to do with actual profits, or economic growth.

It is absolutely fucking insane. It absolutely cannot last. When it ends? If i knew that I'd be rich.

Because it is completely irrational, I stopped paying attention.

ETA: don't believe me. One of the most recognizable figures in American Finance, Bill Gross, said what I wrote above. I happened to read this interview this morning, i remembered it pretty good: http://globaleconomicanalysis.blogspot. ... -many.html" onclick="window.open(this.href);return false;
Key Quotes

"Not even thin gruel is being offered to our modern-day Oliver Twist investors. You have to pay to come to the dinner table and then sit there staring at an empty plate."

"The interest rate can't be raised substantially even over the next two to three years."

"The US has escaped the liquidity trap that euroland and Japan are in. But, not necessarily for all time."

"[Low interest rates] keeps zombie corporations alive because they can borrow at 3 and 4 percent, as opposed to the 8 or 9 percent. It destroys business models. It's destroying the pension industry and in the insurance industry."

"ultimately, [low interest rates] destroy the capitalistic model at the margin. Instead of investing in the real economy, [corporations] can now simply borrow at close to 0 percent and buy their own stocks, which yield 2 or 3 percent on a dividend basis and provide a return of 6 or 7 percent on an earnings to price ratio basis."
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DC47
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Re: Investment advice

Post by DC47 »

Please say more about what you mean by 'nest egg.'

Regarding market fluctuations like you describe, this is nothing all that unusual. In most cases, no one (or no one who will speak publicly) has any idea. There can be multiple large players with different analyses, prior positions, or strategies acting at once. So, for example, hedge funds who have been negative about a stock can get news that causes them to cover their shorts, which raises stock prices (ceteris paribus). Others who have been positive might sell on the same news that confirms their belief, but which they believe lessens the stock's undervaluation -- this lowers stock prices (c.p.). And of course big players can move stocks based on simply re-jiggering their own internal positions, without regard for any news at all. The smaller the stock, the easier it is for a small number of players to change the stock price.

Finally, individual stock prices can go up and down with markets. "After-market" stock prices are really only this in a limited sense as to the status of the markets they are listed on. But their values are frozen in the real economic world. So, for example, they are not "after-market" in the sense that there are global markets that are trading, so their value is certainly going to fluctuate (as it is always relative to the financial world as a whole). So, adding to this example, if something is suddenly known about China at 2am ET and Asian markets react, then "after-market" prices for stocks on the NYSE can be affected even if the news (and Asia in general) are completely irrelevant to the activities of the individual stock. Put another way, the stock price of Joe's Rock Quarry, trading on the NASDAQ as JROXY and now proudly serving 2 counties in Arkansas, is most definitely a part of the global economic world, 24/365, with a changing value regardless of whether there are trades in JROXY occurring at a particular moment in time.

Some generic things to note regarding public announcement of financial results:
- earnings are not everything that is released; often they are trivial in contrast with other financial results
- news other than financial results can be far more important
- public 'targets' or 'expectations' for earnings and all other results are often not as important as 'whisper numbers' (predictions which are not public but are widely understood by some market participants)
- corporate financial results are often gamed by corporations
- in many cases, the results are already known (strong estimates or actual data) to parties who have been trading on them in advance

My personal opinion is that any thinking at all about the prices of individual stocks is a serious mistake for the non-professional investor. And for most of the pros. And I mean 'any' almost literally. If you are thinking seriously about the price of any individual stock more than a few seconds per week, it is a sign of profound lack of understanding of the investment world. Luck matters, so this doesn't cripple financial results for everyone. But in the long run, it does for most.

Just my opinion, of course.
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Re: Investment advice

Post by howard »

I'm feeling it tonight.
DC47 wrote:But in the long run, it does for most.
what did Lord Keynes say about the long run?

(I agree with about 99% of dc's post.) (and it's not like I agree with Lord Keynes' characterization of gold as 'a barbarous relic'.) (plus, I agree w/Keynes when the full, accurate quote is considered.)
Who knows? Maybe, you were kidnapped, tied up, taken away and held for ransom.

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Re: Investment advice

Post by The Sybian »

DC47 wrote:Please say more about what you mean by 'nest egg.'

Regarding market fluctuations like you describe, this is nothing all that unusual. In most cases, no one (or no one who will speak publicly) has any idea. There can be multiple large players with different analyses, prior positions, or strategies acting at once. So, for example, hedge funds who have been negative about a stock can get news that causes them to cover their shorts, which raises stock prices (ceteris paribus). Others who have been positive might sell on the same news that confirms their belief, but which they believe lessens the stock's undervaluation -- this lowers stock prices (c.p.). And of course big players can move stocks based on simply re-jiggering their own internal positions, without regard for any news at all. The smaller the stock, the easier it is for a small number of players to change the stock price.

Finally, individual stock prices can go up and down with markets. "After-market" stock prices are really only this in a limited sense as to the status of the markets they are listed on. But their values are frozen in the real economic world. So, for example, they are not "after-market" in the sense that there are global markets that are trading, so their value is certainly going to fluctuate (as it is always relative to the financial world as a whole). So, adding to this example, if something is suddenly known about China at 2am ET and Asian markets react, then "after-market" prices for stocks on the NYSE can be affected even if the news (and Asia in general) are completely irrelevant to the activities of the individual stock. Put another way, the stock price of Joe's Rock Quarry, trading on the NASDAQ as JROXY and now proudly serving 2 counties in Arkansas, is most definitely a part of the global economic world, 24/365, with a changing value regardless of whether there are trades in JROXY occurring at a particular moment in time.

Some generic things to note regarding public announcement of financial results:
- earnings are not everything that is released; often they are trivial in contrast with other financial results
- news other than financial results can be far more important
- public 'targets' or 'expectations' for earnings and all other results are often not as important as 'whisper numbers' (predictions which are not public but are widely understood by some market participants)
- corporate financial results are often gamed by corporations
- in many cases, the results are already known (strong estimates or actual data) to parties who have been trading on them in advance

My personal opinion is that any thinking at all about the prices of individual stocks is a serious mistake for the non-professional investor. And for most of the pros. And I mean 'any' almost literally. If you are thinking seriously about the price of any individual stock more than a few seconds per week, it is a sign of profound lack of understanding of the investment world. Luck matters, so this doesn't cripple financial results for everyone. But in the long run, it does for most.

Just my opinion, of course.
Thanks for the post. My takeaway, I was right to hate macro economics in college. I really liked the theories and the concepts, but the completely unpredictable and unexplainable events drove me nuts. Dark Science indeed. My father's comment was pretty good, "it's a rigged game. Don't even think about how it works."

My FIL, otoh, is obsessed with watching the markets. He retired from a career in investor relations, and now watches all of the market related shows all day. His moods alter tremendously based on the DOW. It's to the point that when my kids are with them on a weekday, my daughters first words are "the market did good today, so grandpa is happy." This started when she was 4. One day I asked her how the market was, and she told me "horrible, it was a blood bath." I don't know how or why someone would watch this closely daily. Fluctuations over the course of a few weeks are always going to happen, so why sweat it? I just freaked a bit when he called and told me it dropped over 25% in one hour.

The company announced we were going public about 2 or 3 months into my tenure, so I was initially really nervous about what that would mean for me. I have never worked for a publicly traded company either, so watching the first couple of weeks was a bit nervy. Up until now, it has been fantastic. The IPO was around $16, and it hit $38 today. There was only one analyst or journalist or whatever who was down on the stock, and he recently wrote an article saying he was the only person who missed it, and admitted he was wrong. That is the reason for my momentary panic. That, and I have never looked at after pre-market prices, so I have no concept of what it means big picture. Or little picture for that matter. How is the market closed if people are still buying and selling? WTF? Maybe I should get a subscription to Beckets and track the value of my baseball and hockey cards. That ought to cheer me up, right?
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Re: Investment advice

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Plastics.
Did you see that ludicrous display last night?
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Re: Investment advice

Post by howard »

The Sybian wrote: The IPO was around $16, and it hit $38 today.
May you get paid. Best of luck.
Who knows? Maybe, you were kidnapped, tied up, taken away and held for ransom.

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Re: Investment advice

Post by The Sybian »

howard wrote:
The Sybian wrote: The IPO was around $16, and it hit $38 today.
May you get paid. Best of luck.
I gotta say, it has been fun periodically totaling how much I have in the account, but to avoid tax penalties I need to hold onto the initial purchase for 2 years. I can't count on anything with 12 months to go.
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Re: Investment advice

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The Sybian wrote:Thanks for the post. My takeaway, I was right to hate macro economics in college. I really liked the theories and the concepts, but the completely unpredictable and unexplainable events drove me nuts. Dark Science indeed. My father's comment was pretty good, "it's a rigged game. Don't even think about how it works."
I wouldn't say it's rigged. In common use, that implies a small group of actors, on the same side, who have considerable control.

I'd say that it is not what it appears to be, in multiple ways. Those that can take advantage are often in conflict or at least some mild competition. And there are others with only modest advantages over average investors (who are not individuals) who have considerable power over investing outcomes.

But if there are 10K (I just made this up -- I mean a whole lot, but it might be 5K or 50K) serious and non-coordinated (except about the generally favorable government rules they play under) actors with considerable power, that's a very different playing field than one that is 'rigged.'

And on top of it all, there are enormous economic forces, far outside the control or prediction of the 10K.

Then, over-riding everything, are the powerful cognitive biases that evolution has baked into all human beings, and the powerful career motivations of all the players.

So, it gets confusing. Those who think the market is simply 'rigged' are missing virtually all of the reality about the investment world. However, there is one way that this world is systematically 'rigged' to produce a reliable result: individual investors are screwed. This is via a combination of all the factors above, though primarily cognitive bias and lack of understanding the investing world from a macro point of view. Based on seeing a lot of relevant data, my estimate is that 95-98% of individual investors will do worse than a relevant composite index over any long period of time (to wash out some but not all luck).
My FIL, otoh, is obsessed with watching the markets. He retired from a career in investor relations, and now watches all of the market related shows all day. His moods alter tremendously based on the DOW. It's to the point that when my kids are with them on a weekday, my daughters first words are "the market did good today, so grandpa is happy." This started when she was 4. One day I asked her how the market was, and she told me "horrible, it was a blood bath." I don't know how or why someone would watch this closely daily. Fluctuations over the course of a few weeks are always going to happen, so why sweat it? I just freaked a bit when he called and told me it dropped over 25% in one hour.
This is no surprise at all. He is experiencing the usual results of a variable reinforcement scheme, where he presumably has a significant stake in the game. It's like he is pulling a handle every time he hears a quote on a stock index. Everyone from B.F. Skinner to your local casino operator will tell you that this is a direct path to addictive behavior.

After a few years as an investor, decades ago, I started to remove information about current market performance from my world. I'm now to the point where I confuse the scales that represent the Dow, S&P 500 and NASDAQ. I think one is around 2,000 and another is around 20,000, but I can't keep them straight. I have a three foot stack of Wall Street Journals in my office. Unread. It's cheap, and I'll get to some of the articles eventually. My wife likes the crossword puzzle and the arts columns on Saturday.

It is not unusual for me to lose $1M in a day. It's not all mine, but that can leave a mark. I do my best not to ever be aware of even an estimate of what I lose (or gain), for years at a time, much less a single day. Even typing these words is a bit of a problem, because it raises my awareness. But I'm lowering my defenses for a moment in order to try to make a helpful point more salient, for whatever it's worth to anyone reading.
The company announced we were going public about 2 or 3 months into my tenure, so I was initially really nervous about what that would mean for me. I have never worked for a publicly traded company either, so watching the first couple of weeks was a bit nervy. Up until now, it has been fantastic. The IPO was around $16, and it hit $38 today. There was only one analyst or journalist or whatever who was down on the stock, and he recently wrote an article saying he was the only person who missed it, and admitted he was wrong. That is the reason for my momentary panic. That, and I have never looked at after pre-market prices, so I have no concept of what it means big picture. Or little picture for that matter. How is the market closed if people are still buying and selling? WTF? Maybe I should get a subscription to Beckets and track the value of my baseball and hockey cards. That ought to cheer me up, right?
I don't know your industry and certainly not your stock. But I am pretty confident that the price of $38 is not a lot more meaningful to your long-term (that is, the one that matters) financial future than the number of clouds in the sky out your window. Not unless you are cashing out soon, and own a lot of shares. The most constructive thing you can do is own as little as possible, pretend you don't own any stock at all, and start humming loudly while walking away when anyone around you starts talking about this topic.

One of the most common and most foolish of a million common and foolish investing errors is to voluntarily own stock (or options, warrants, units, etc) in your employer unless 1) you are getting it a steep discount (say 20+%) or 2) the discount is smaller but you can cash out soon. For several reasons, it is completely irrelevant how good the stock has performed over any period of time, or how bright the prospects are. But fewer than 10% of employees with the potential to own company stock will follow this commonly offered, completely sound, advice. Even though an intelligent child could understand the wisdom behind it. Maybe under 1%.
Last edited by DC47 on Wed Mar 04, 2015 7:09 pm, edited 1 time in total.
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Re: Investment advice

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DC47 wrote: One of the most common and most foolish of a million common and foolish investing errors is to voluntarily own stock (or options, warrants, units, etc) in your employer unless 1) you are getting it a steep discount (say 20+%) or 2) the discount is smaller but you can cash out soon. For several reasons, it is completely irrelevant how good the stock has performed over any period of time, or how bright the prospects are. But fewer than 10% of employees with the potential to own company stock will follow this commonly offered, completely sound, advice. Even though an intelligent child could understand the wisdom behind it. Maybe under 10%.
This is an interesting take, and you are the first person to tell me this. I do get a 15% discount. The shares are purchased on set dates twice a year. The purchase price is 15% off the lower of the stock price on the first day of the period or the last day (date of purchase). To me, that sounds like a good deal. If the business was a startup or in a volatile industry, I'd be much more cautious. The company is 26 years old and has steadily grown throughout. In the past 5 years, they diversified their clientele by acquiring similar companies that serve different sectors. We are an HR outsourcing company, so payroll, benefits, legal compliance, preparing all contracts and handbooks, advice, handling workplace complaints... I firmly believe that is the future of small and midsize businesses, as all of these areas continually get more complicated, and it is much more cost effective to outsource rather than hire internal HR people.

So, all of that said, am I still being stupid buying into the stock? Genuine question, as I clearly drank the Kool-aid.
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Re: Investment advice

Post by DC47 »

As I (quickly) read this, the terms make it effectively a larger average discount than 15%. So I'd project you to be past my 20% discount threshold. So I wouldn't rule this out completely.

I'd determine the extent to which you should invest primarily based on these factors:
- your balance sheet (e.g., how much can you afford to lose, as any single-firm investment is inherently highly risky, especially if you work there due to the correlation with your return on human capital)
- your alternative investment uses of the money (e.g., if they are as poor as most individuals' then company stock becomes more attractive)
- how likely you are to be able to force yourself to liquidate company stock as soon as there is no major tax incentive to hold it (e.g., paying 30% in taxes is not a major tax incentive)

I share your beliefs in the business sector you describe. As it happens, I've both consulted in it (over 15 years ago, when it was a minor trend) and invested in it. Years ago, in BBSI (which I don't hold at the moment). I imagine you know what happened to that oh-so-promising firm last year. But nothing you describe would make me think that your firm or industry is a good investment. The story is now known in extreme detail by any major investor who cares to know it. And they are less biased and employ better analysts than you do. Unless you are almost socio-pathically insensitive to the thoughts of others, you are actually at a major disadvantage due to being too close to the action and the intra-company vibes. If it was me, I would try hard to develop the skill of laughing at my own thoughts in this particular area. And thus not acting on them.

A small story.

X was a mid-level person in what was once a small bio-tech firm with no successful drugs, but several in the pipeline. She didn't work in the labs, but worked closely with those who did. Over the years, she periodically told me about how she thought they were doing, without crossing the line into proprietary information. Just to be sure, I never traded the stock personally. The company had successes, and failures. Many of each. There were endless rumors of buy-outs, FDA rejections, wins and losses in the research trials of direct competitors (which could permanently make or break X's employer, and nearly did both). Good people came, bad people got senior jobs. In other words, this was an information-rich, highly-volatile investing environment. Just the place where insiders could really do well if they actually could develop a superior understanding compared to outsiders.

In theory.

X acquired options and grants of various types. So did her peers. Over the years, when she told me things were going to be great or they were going to be bad I asked her: Can I ignore your comments from an investing point of view without you being angry with me?

That's not really easy to say yes to, but she did and kept her word. I dealt with these securities on that basis. She may have followed my advice to file without reading her company account brokerage statements. I was generally positive when she was negative. Typically negative when she was positive. Mostly I did nothing. After many years, she's now almost all out of this security, and did better than at least 90% of her equally-well informed peers, who traded based on their highly-informed beliefs (at least) whenever this was legal to do (i.e., outside of black-out periods).

My take-away is this. This firm has been wildly volatile, but over time a real success. Drugs that worked, stock that is (last I looked) way up. Yet X's mid-level (below VP) peers did not actually do that well with the stock. They would have probably done far better -- with far less risk -- to liquidate any company securities they received (or bought at a discount) as soon as feasible and invested the proceeds in a composite of multiple global market indexes, re-balanced automatically. But there is almost no chance that they would have done this, given the salience of the corporate environment they were living in. And even though they've lived the experience I described above, I suspect virtually none would choose the re-balanced global composite approach today. Even X, who knows I ignored her well-informed views for on her own firm and who came out a winner as a result, suggested that I buy stock in Company A the other day. It's in the same industry, so she understand a lot about what's going on, and she knows people who work there. She thinks it will do well.

I am only mildly surprised by this suggestion. She is quite bright and has loads of common sense. She has heard my pitch for years, and seen the results. But there is evolutionary hard-wiring in our brains that is hard to overcome. There are ways we can almost not help but think. We think we can learn, but mostly we fool ourselves about this. Things are inevitably different this time.

See my comments above about the benefits of sociopathology. I used to joke that if I could find someone who was sociopathic enough to be highly immune to the views of others about finance, but not so sociopathicly dishonest and hostile that I'd be a fool to trust him, I would give him all of my money to invest. Ideally, I'd hire another another relatively high-functioning sociopath to watch over him. I'm still looking for the first guy. Until I find him, I've had to resort to back-up plans that aren't nearly as good.
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Re: Investment advice

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DC47 wrote: See my comments above about the benefits of sociopathology. I used to joke that if I could find someone who was sociopathic enough to be highly immune to the views of others about finance, but not so sociopathicly dishonest and hostile that I'd be a fool to trust him, I would give him all of my money to invest. Ideally, I'd hire another another relatively high-functioning sociopath to watch over him. I'm still looking for the first guy. Until I find him, I've had to resort to back-up plans that aren't nearly as good.

I certainly lack the sociopathic ability, probably swing too far in the empathetic side of the line. That is very useful advice, and I need to be cognizant of my rose colored glasses. I am certainly outside of the insider circle, so I don't have the information. All of the sales numbers, retained clients, addition of new clients, etc... were all well above targets and continue the trend of increased growth year over year. It all sounded great, which probably explained the initial spike when the Q4 results were released. The info I lacked was the extremely high amount lost on catastrophic medical claims last quarter. With 288,000 employees on our payroll (our clients employees are considered on our payroll), I imagine it is difficult to project how many are going to have extreme medical claims. We offer something like 64 medical plans, so I have no idea how much the company is on the hook for.

My investment is a percentage of my paycheck, and I have the ability to adjust the percentage every 6 months. I can afford reduction in income, and it is small percentage of our portfolio. Buying at the discount and based on constantly increasing targets from all of the ratings group, as well dozens of articles recommending to buy the company, it seemed like a no-brainer to me. But clearly I know nothing about the market. I consulted my FIL, who is the most conservative investor imaginable. He read the entire prospectus and told me I'd be crazy not to max out the discounted shares allowed. I bought in at $13, so even if it plummets, I have a lot of room before hitting losses. Actually, there was a protection clause on the sale of the stock if the value dropped below our discounted IPO rate. I'll have to see what that was.

Unless the stock remains a better than average investment, I will probably sell my IPO purchase as soon as it becomes qualified. Even with the major drop, I still have a rate of return of $250%, right?

I do appreciate the advice and I am finding this educational, as you are the first person to make me stop and think about it. I'm curious to hear your take on this article: https://blog.wealthfront.com/good-espp-no-brainer/ I just feel that any time you can buy at a discounted rate, as long as it isn't a high risk investment, it is worth it.
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Re: Investment advice

Post by sancarlos »

One thought on your options, after they vest. Don't exercise the option until you are ready to sell, or else you could get crucified on Alternative Minimum Tax. It really hurt a bunch of folks at a place where I used to work.
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Re: Investment advice

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sancarlos wrote:One thought on your options, after they vest. Don't exercise the option until you are ready to sell, or else you could get crucified on Alternative Minimum Tax. It really hurt a bunch of folks at a place where I used to work.
From what I have read, the AMT doesn't apply to Employee Stock Purchase Programs. Not sure why that is different than other stock options.
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Re: Investment advice

Post by howard »

DC, I appreciate reading your thoughts here, very interesting and informative. I once had a conversation with Jim Cramer along similar lines of your story of your friend working in a firm and her decisions about vested options and the like.
Who knows? Maybe, you were kidnapped, tied up, taken away and held for ransom.

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Re: Investment advice

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howard wrote:DC, I appreciate reading your thoughts here, very interesting and informative. I once had a conversation with Jim Cramer along similar lines of your story of your friend working in a firm and her decisions about vested options and the like.
Did he scream his answer and set off alarms and flashing lights? I don't trust that guy at all. He has the crazy eyes and looks like a charlatan. I mentioned it when we first went public, but Cramer had our CEO on and raved about the company. I took that as a bad omen, and he had our CEO on 2 more times.


Sancarlos, the ESPP is different than a vesting stock option. If we choose to participate, the funds are withheld from my paychecks. The shares are purchased twice a year, and go into my account. We choose a percentage of our salary that we want to invest, and can change that or opt in or out prior to the next period starting. If you opt out, that opportunity is gone, but you can opt in during the next period. That is probably why the AMT doesn't apply. Our purchase price is tied to the fair market value, not a predetermined rate that remains unchanged.
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Re: Investment advice

Post by DC47 »

The Sybian wrote:I certainly lack the sociopathic ability, probably swing too far in the empathetic side of the line. That is very useful advice, and I need to be cognizant of my rose colored glasses. I am certainly outside of the insider circle, so I don't have the information. All of the sales numbers, retained clients, addition of new clients, etc... were all well above targets and continue the trend of increased growth year over year. It all sounded great, which probably explained the initial spike when the Q4 results were released. The info I lacked was ...
There's this thing about information. When you are swimming in it, you feel 'well informed.' And most people equate this with lack of risk and likelihood of positive future investment returns.

This is a delusion. You are never truly well informed about a stock. "The info I lacked" (above) is typically about 90% of what is relevant in an investing situation. The info that you believe you have and find so precious is largely irrelevant, as it is all known to major investors. They have twice as much information as you (e.g., say 2-4 times everything you know about your employer, plus the same about your competitors, customers, and regulators) and also can analyze it much better. You are actually functionally blind. But you are confident that you have excellent sight. After all, everyone around you has the same confidence.

Check out the stock chart of Barrett Business Services (BBSI). It's a firm that I imagine might be similar to yours. It was highly rated, beloved by analysts, and in a growth industry perhaps a bit like yours. Note the events of January and October 2014. Imagine you were an option holding employee at that time. Your peers at BBSI were most likely actually far more fully informed than you, as the firm had been public for a longer time. Think they felt so fully informed after those elevator shaft drops?
My investment is a percentage of my paycheck, and I have the ability to adjust the percentage every 6 months. I can afford reduction in income, and it is small percentage of our portfolio. Buying at the discount and based on constantly increasing targets from all of the ratings group, as well dozens of articles recommending to buy the company, it seemed like a no-brainer to me. But clearly I know nothing about the market. I consulted my FIL, who is the most conservative investor imaginable. He read the entire prospectus and told me I'd be crazy not to max out the discounted shares allowed. I bought in at $13, so even if it plummets, I have a lot of room before hitting losses. Actually, there was a protection clause on the sale of the stock if the value dropped below our discounted IPO rate. I'll have to see what that was.
1. Unless you have two FILs, based on your earlier description the person you consulted is the opposite of 'the most conservative investor imaginable.' He is a gambling addict with the judgement of a petulant child (in this area). That this is not obvious to you is a gigantic red flag about your suitability to make investment decisions. If you cannot manage to completely avoid his presence due to family factors, you should at least never again discuss financial topics with him. As you say you are low on the sociopath scale, you are no doubt heavily influenced by those around you. Choose your influences well.

2. "... constantly increasing targets from all of the ratings group, as well dozens of articles recommending to buy the company, it seemed like a no-brainer to me." It's nice that this has worked out so far. However, this should be seen as random chance. Short-term 'success' is the most dangerous thing for long-term success. It is dangerous because it teaches the wrong lessons. The reality is that you are chum for the vastly smarter, more objective, and better informed sharks. The rosy scenario you paint would be a heavy strike against me owning this security for any longer than I had to in order to capture the discount (if this was determined to be big enough to be worthwhile assuming no gain in the security price). Is it not obvious that the market price reflects the collective bliss? And that you don't have a very good chance of making money when investing in a security at a price that already reflects the consensus projection of a long future period of wonderfulness?

3. Only a fool believes that you can not 'hit losses' if the current price of a security is above the purchase price of a security. This is true only when determining capital gains and losses for the IRS. You should always consider assets as 'marked to market.' They are worth what people will pay you for them right now. If the value goes down a minute from now, you just experienced a loss. If you happened to pay zero for this security (this is a simplified example) it does not mean that in every relevant economic sense you have not experienced a loss. You have. Period.

You should have no different view of your stock dropping from 40 to 24. than you do if it drops from 15 to 9. Even if your purchase price was 13, you experienced a loss of 40% in both cases. Thinking otherwise is fantasy accounting. Experimental work has also shown that this is among the many economic fallacies that evolution has hard-wired into our brains. This is not just about economic theory. Thinking about stocks in terms of where the price is now compared to the purchase price tends to drive people towards investment strategies that don't work well.

4. Where are their yachts? If the analysts and journalists who love your firm were actually good at determining how to make money investing, do you think they would still be analysts (the kind whose work you can access at least) and journalists? Or making 10-100 times as much money working investing on their own, for a hedge fund, or institutional investor? Analysts and journalists are 1) not that smart; 2) not that well informed; 3) have major conflicts of interests; 4) are herd animals, for a variety of reasons. Try this thought for awhile: if you are reading something, it is a combination of false information or something already priced into the stock and thus useless.
Unless the stock remains a better than average investment, I will probably sell my IPO purchase as soon as it becomes qualified. Even with the major drop, I still have a rate of return of $250%, right?

1. Thinking that you can actually know if any stock 'remains a better than average investment' is another big red flag about your investment ability. If you can actually know this on a semi-reliable basis, you are an investment genius and are wasting your time in your current occupation.

2. Why is it relevant what your total return was on this investment? Does it teach you something useful? If it was negative, would you drop the ESOP investing idea?
I do appreciate the advice and I am finding this educational, as you are the first person to make me stop and think about it. I'm curious to hear your take on this article: https://blog.wealthfront.com/good-espp-no-brainer/
Thanks. But you should realize that's a dangerous state to be in. Yet another reason to work on educating yourself rather than gambling against the house.
I just feel that any time you can buy at a discounted rate, as long as it isn't a high risk investment, it is worth it.
This is a giant red flag statement.

First, only a big discount offers you adequate cushion to make this form of investment. I mentioned my target for this previously. Small discounts are just lures. Consider it like the modest 'sales' that stores offer on merchandise that is heavily marked up previously. It doesn't necessarily make the product a good deal unless you can turn the discount into cash. That's the rub.

Second, and more important, any investment in the stock a single firm is intrinsically high risk. There is virtually no exception, apart from quirky situations that are far from standard. This is essentially a mathematical fact according to the people who have done Nobel-winning work on risk assessment.

If the stock in question is that of your employer, then the risk is exponentially increased. You investing in your firm (which I assume to be only moderately risky, per se) is roughly the same risk as you investing in a Nigerian beer company.

This may seem amusing, but I am completely serious. To put this simply:
- any single stock is risky (see above)
- your firm is only recently public, so the chances of surprises (including accounting fraud) are much higher than usual
- to the extent that your firm has grown via acquisition the risk is high, for several reasons
- your comments about being well-informed and analysts' rosy views mean you are poorly informed and gullible, which raises the risk that you won't see obvious danger signals
- there are more, but I lack time

And then this multiplier effect applies:
- your firm employs you

Many forms of trouble that would lower the firm's stock price also will serve, directly or indirectly, to damage a reasonable projection of your future income. This is less true if you are a janitor (though still true) and more true if you are a senior executive or whose value as an employee is significantly tied to a single employer (e.g., you have company-specific skills).

But it's always and everywhere true. In this situation the returns on your human capital are far more likely than normal to be correlated with the returns on your investment capital. That's the biggest reason why owning stock in your firm is more risky than owning stock in a publicly-traded Nigerian beer company or a Russian bank. I will note here that I believe the latter are appropriate investments for many; I'm looking into them right now.

But this current discussion is about knowing your risk, not determining if it is worth taking. If you vastly underestimate risk, you cannot make sound investment decisions. So too with overestimating risk (e.g., some people unwisely rule out Nigerian beer companies).
Last edited by DC47 on Thu Mar 05, 2015 11:26 am, edited 2 times in total.
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Re: Investment advice

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A big, fundamental question in investing is what is the appropriate level of risk to take. It should be obvious that this is very hard to answer. It's very hard to determine the risk of individual investments, as well as collections of investments, and then to determine how your family circumstances play into this. They can moderate or amplify investment risk. Many people take far more risk than appropriate. Many take far less (which can be equally devastating in the long run). By far, I mean like 2-5X too much or too little. Catastrophically bad risk levels. I have no idea what is true for you. But it might be a good idea to try to learn more about this topic.

As a start, you could try a thought experiment. Become an investment agnostic. Try coming up with several reasons why anything you hear about an investing concept or about a particular investing idea (e.g., your firm) is at least partially false or misleading. Try cultivating the belief that everyone around you is living in an illusion on this topic. Try to come up with reasons why an apparent authority (expert on TV, book author, brokerage firm, analyst) has a serious conflict of interest that prevents them from speaking the truth if they actually know it (rare, but not impossible).

The better you get at this, the better your potential to make sound investment decisions will be. It doesn't solve the entire problem. Not at all. But it's a precursor.

Consider it to be like clearing a plot of overgrown land, so that you can eventually plant a garden. You may not ever be a good gardener; this is very hard and most people have close to zero potential. But how much chance do you have if you are planting under tall trees, and where invasive species will crowd out your seedlings? It might work for awhile, with some luck (a tree falls, the weather is good this summer). But in the long run, for most, the results will be bad.
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Re: Investment advice

Post by howard »

DC47 actually didn't wrote:Try cultivating the belief that everyone around you is living in an illusion on this topic. Like Patriots fans.
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Re: Investment advice

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Q: What are both Janet Yellen and Tom Brady masters at producing?
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Re: Investment advice

Post by sancarlos »

DC47 wrote:Q: What are both Janet Yellen and Tom Brady masters at producing?
Erections? No, wait, that can't be right...
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Re: Investment advice

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No, but not so far off.
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Re: Investment advice

Post by The Sybian »

DC47 wrote:Q: What are both Janet Yellen and Tom Brady masters at producing?
Something about deflation?

Speaking of Janet Yellen, my Mother-in-Law is standing next to her in this picture of their high school newspaper staff. This picture popped up all over the place, and it still cracks me up. MIL is far left, plastered with an orange arrow.

Image
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Re: Investment advice

Post by DC47 »

Yep. And that's quite the family picture. Perhaps your MIL can call up her old friend and get some financial insights.
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Re: Investment advice

Post by DC47 »

I do appreciate the advice and I am finding this educational, as you are the first person to make me stop and think about it. I'm curious to hear your take on this article: https://blog.wealthfront.com/good-espp-no-brainer/" onclick="window.open(this.href);return false; I just feel that any time you can buy at a discounted rate, as long as it isn't a high risk investment, it is worth it.
This material on ESOPs contains good general advice. Get in and get out as soon as your allowed, even if the tax treatment is not ideal. The tax benefits of holding don't justify the risk, in most cases.

Key caveats:

- This website is offering GENERAL advice. I can think of many specific cases where it wouldn't be smart to follow it, even if they execute properly.

- Most will find it hard to execute the advice about when to exit. My guess is that the majority with this intention will fail to execute. The reasons are many, and predictable.

Socrates was right: know thyself. This is the most important investment fundamental. If you are shaky on executing the exit part of the plan, you should reluctantly pass on the discounted stock. Discounts are not everything. And in this structure, they come with somewhat hidden costs (adverse tax treatment, constraints on selling, intrinsic high risk). There are other sound investment options that don't involve discounts, but have far better risk-reward attributes apart from this.

- The amount to invest is an important question, and isn't really addressed adequately. It depends on the investor's circumstances. Obviously website operators don't like to say this. As previously belabored, buying company stock is intrinsically a very high risk investment. The question is how much risk is appropriate given your financial and personal situation, and the personalities of you and your wife.

By the way, I'm familiar with Wealthfront and consider it one of the very few promising operations in this space. Are you a client?
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Re: Investment advice

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This is the closest thing to a "Do you guys invest in stocks?" thread, so here it goes:

My supervisee likes to play around with stocks and whatnot and he showed me one of the ones he invested in. It's this company called StrikeForce (SFOR) that makes a security app for mobile devices.

Right now the stock is a penny stock that debuted at .0001 and is currently sitting at .0093. It's been consistently going up slowly over the last couple months. He has nearly 1.3 million shares. My interest in peaked for sure. He's done his research and the stock is expected to go up. He showed me this stock when it was around .0004.

I kinda feel like buying a bunch of this stock right now. He bought his through USAA. Is that the best way to get this? I'm just wondering. What do you guys think?
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Re: Investment advice

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I think you should invest your life savings in it.
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Re: Investment advice

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Don't forget to cash out the 529s!
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Re: Investment advice

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1) I assume you've seen The Wolf of Wall Street, but if not before you even consider investing in any penny stocks, go re-watch it.

2) Good movie, eh? Now if you have money to invest consider investing in literally almost anything other than a penny stock.

It's not that it's impossible to make money, but it's so unregulated and so shady that you might as well take your money to Vegas and try to double it there. In fact in many respects that as good an analogy as you're going to find for penny stocks. You could plug $1000 into a slot machine and make $5000 or you could lose all $1000 very easily. Neither makes you a genius or an idiot if you go into it with your eyes wide open.
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Re: Investment advice

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From LinkedIn, it looks like that company is over 15 years old and has fewer than 10 employees. Maybe they are juuuuuust now getting to the fun part of the hockey stick.
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Re: Investment advice

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Johnnie wrote:This is the closest thing to a "Do you guys invest in stocks?" thread, so here it goes:

My supervisee likes to play around with stocks and whatnot and he showed me one of the ones he invested in. It's this company called StrikeForce (SFOR) that makes a security app for mobile devices.

Right now the stock is a penny stock that debuted at .0001 and is currently sitting at .0093. It's been consistently going up slowly over the last couple months. He has nearly 1.3 million shares. My interest in peaked for sure. He's done his research and the stock is expected to go up. He showed me this stock when it was around .0004.

I kinda feel like buying a bunch of this stock right now. He bought his through USAA. Is that the best way to get this? I'm just wondering. What do you guys think?
I wouldn't buy a penny stock after a run up like that -- the increase in stock price is often due to pump and dump schemes (as Brian alluded to up top). If you really want to invest in cyber security I would suggest investing in one of cyber ETFs (HACK or CIBR) or one of the larger cyber security firms.
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Re: Investment advice

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Shirley wrote:From LinkedIn, it looks like that company is over 15 years old and has fewer than 10 employees. Maybe they are juuuuuust now getting to the fun part of the hockey stick.
I've learned a ton working for a company through their IPO. The major lesson, the market reactions bear almost no relation to reality. I get daily Google alert updates, which is mostly market analyst updates, countless ratings systems, and target prices by all the rating companies. Changes in all these ratings don't tie very closely to the reality of the business or price of the stock. The stock opened at 16, and immediately skyrocketed, topping out at 38. Sweet, I maxed out my Employee Stock Purchase Program discounted buy in. I'm watching my contributions triple in value! This is the greatest! All but one "expert" raved about my company, set high target prices from the beginning, and kept raising them. The one guy trashed the company at first, then wrote several pieces saying the market over valued the stock, the business is shaky... He finally admitted he was the only person down on the stock, and that he was wrong. explaining why my company was such a great investment.

Very soon after this guy changed his outlook, the price tanked. Despite destroying expectations in every category, increasing rate of growth/profits and how much we beat targets by every quarter, and outpacing all competitors, the bottom fell out. Our health insurance expenses were over projections for one quarter, due to 3 employees having expensive medical issues in the same quarter. Medical expenses were below projections for the year, just missed one quarter. Within minutes after the earnings call, the after-market trading saw the price of the stock instantly drop $9. WTF? The following quarter, all economic aspects continued grow by a larger percentage than the previous quarter, but medical expenses were higher than projected. Not even a significant amount. Stock went down to $11. Again, WTF??? The stock slowly crept back into the $20s, then we had a major fuckup that got some embarrassing press, and a $1 million dollar penalty from a government agency. The stock price continued to rise.

The entire system is a fucking scam. Our executives have made fucking fortunes. Every decision is geared towards making the numbers at earning calls look good with much less thought to the overall health of the company. I get an update every time an executive or board member sells shares, and they just keep selling off millions of dollars of shares. A couple left the company, so they didn't give a fuck about the long term. Drive up the price, sell off the stocks, jump ship without a care in the world about the future of the company.

So Shirley, my advice, don't gamble any money you would be upset if you lost. Throw in whatever you feel comfortable losing and buy the lottery ticket. Hey, you never know.
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Re: Investment advice

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rass wrote:Don't forget to cash out the 529s!
Odd. I thought Syb was asking the question when I said this. Not sure why. Sorry!
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Re: Investment advice

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rass wrote:
rass wrote:Don't forget to cash out the 529s!
Odd. I thought Syb was asking the question when I said this. Not sure why. Sorry!
No, it was Shirley that asked.
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Re: Investment advice

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A_B wrote:
rass wrote:
rass wrote:Don't forget to cash out the 529s!
Odd. I thought Syb was asking the question when I said this. Not sure why. Sorry!
No, it was Shirley that asked.
Hey. I think we're finally on the same page with a joke today!
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Re: Investment advice

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The Sybian wrote:I've learned a ton working for a company through their IPO. The major lesson, the market reactions bear almost no relation to reality. I get daily Google alert updates, which is mostly market analyst updates, countless ratings systems, and target prices by all the rating companies. Changes in all these ratings don't tie very closely to the reality of the business or price of the stock. The stock opened at 16, and immediately skyrocketed, topping out at 38. Sweet, I maxed out my Employee Stock Purchase Program discounted buy in. I'm watching my contributions triple in value! This is the greatest! All but one "expert" raved about my company, set high target prices from the beginning, and kept raising them. The one guy trashed the company at first, then wrote several pieces saying the market over valued the stock, the business is shaky... He finally admitted he was the only person down on the stock, and that he was wrong. explaining why my company was such a great investment.

Very soon after this guy changed his outlook, the price tanked. Despite destroying expectations in every category, increasing rate of growth/profits and how much we beat targets by every quarter, and outpacing all competitors, the bottom fell out. Our health insurance expenses were over projections for one quarter, due to 3 employees having expensive medical issues in the same quarter. Medical expenses were below projections for the year, just missed one quarter. Within minutes after the earnings call, the after-market trading saw the price of the stock instantly drop $9. WTF? The following quarter, all economic aspects continued grow by a larger percentage than the previous quarter, but medical expenses were higher than projected. Not even a significant amount. Stock went down to $11. Again, WTF??? The stock slowly crept back into the $20s, then we had a major fuckup that got some embarrassing press, and a $1 million dollar penalty from a government agency. The stock price continued to rise.

The entire system is a fucking scam. Our executives have made fucking fortunes. Every decision is geared towards making the numbers at earning calls look good with much less thought to the overall health of the company. I get an update every time an executive or board member sells shares, and they just keep selling off millions of dollars of shares. A couple left the company, so they didn't give a fuck about the long term. Drive up the price, sell off the stocks, jump ship without a care in the world about the future of the company.
As someone who understands finance but not the stock market, this has always been my presumed unintelligent take. Thanks for ruining my night.
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Re: Investment advice

Post by howard »

It has been a long time, and my memory fails me more often as I age, but wasn't Hood yammering about his penny stock fliers when I entered this place?
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Re: Investment advice

Post by sancarlos »

I would echo most of what was said in this thread. I've been working with investment professionals for 25 years, and if I've learned anything it is that a layman cannot beat the market. Personally, I'd say that if you want to invest in the stock market, you should just buy index mutual funds. Good online brokerages such at TD Ameritrade, E-Trade, Scott Trade, etc. all have comparison tools, so I'd suggest you look for a no-load fund with a low fee ratio at an established firm.

And, don't buy fucking penny stocks.
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Re: Investment advice

Post by Shirley »

howard wrote:It has been a long time, and my memory fails me more often as I age, but wasn't Hood yammering about his penny stock fliers when I entered this place?
I was going to bring that up too. He loved the pink sheets!

(and yes, I'm all about investing in mobile security companies with 6 employees.)
Totally Kafkaesque
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