Tuesday, December 08, 2015

Putting all your eggs in one basket

There are employment benefits like discounted share options for people working in listed companies. I think it's a great option to buy such discounted shares since they do add up to a substantively, especially when there's not a lot of restrictions on selling. The point is that if you offer employee shares of the company they are working in, they will be more aligned to perform better since they are all stakeholders and shareholders.

But that's the problem. I think it's a case of putting all your eggs in one basket. When all goes well, everyone benefits. But if things go bad, you might end up with a really bad case of rotten eggs.

All companies are safe and good - until they aren't. Enron is a classic textbook example. Enron employees lose both their job as well as their financial assets in the form of pension when Enron crashed and burnt. All their employees are encouraged to subscribe to their shares as it's a good form of bonus for them, and everything is good while the stock goes up and Enron stays afloat - until it didn't.

The question is, which company is going to be the next Enron? Will it be the company that you're working with?

I think we need to reach a middle point here. Of course they give a good discount to encourage employees to buy their shares. And you'll be an idiot if you don't buy it at a discount from other retail investors. But the problem comes when you're betting too much for the continuation of one single company to provide both your active income as well as your passive income (in the form of share dividends). If we talk about Nicholas Nassim Taleb's framework of antifragility, then I'm afraid you're in a precarious situation. You're setting yourself up for fragility, not antifragility.

But you know the investment greats advice you to invest within your own circle of competence. You can't get closer without actually being the relative of the CEO. As a supposed insider of the company because of your status as an employee, you do have the advantage of information that other retailers do not yet possess. I'm not talking about illegal stuff here. Just a feel of how the morale of the employees there, whether there are good bonuses or hiring freeze and the general buzz of the work can give you a grounded sense of what is happening in the company. This is something an armchair investor couldn't sense from the financial reports. Even a hardworking one who goes to AGM can only get a vague sense of it from the tone and manner of the management's replies.

So how?

1. Don't invest a large percentage of your networth into one company. If the bet goes wrong, you'll be screwed both ways - your active and passive stream will dry up. How much is too much is for you to decide.

2. Make use of your privilege status as both an employee and an investor to really dig deep into the innards of the company. Since you have informational advantage, make use of that advantage to plan ahead. Legally, of course.

3. Hedge your returns. Not always do-able, but try lah. Get something that will do well if your industry didn't do well, lol

Okay, let's have full disclosure. My wife and I also works in the same industry, but here I am talking about putting all my eggs into one basket. But my case is different, and I'm sure you will say that for your case too. Our cases are all different, yet we're all the same hahaha


TheFinance.sg said...

Hi LP,

Thanks for the timely reminder. Imagine falling in love with my work and my company. Once my love breakup with me, I will literally be left with nothing.

la papillion said...

Hi Derek,

Well, I guess you know your situation the best. Everyone else is an outsider. You're the insider of your own situation haha :) At least your company is not that bad. I know people who work in listed companies that even if they are given options they also don't want to buy in. I wonder why they are still working there.

Createwealth8888 said...

Stock options are not free, they will need capital to exercise them. No money?

Singapore Man of Leisure said...


There's a simple hedge - sell some of the options or discounted shares ;)

It's a bit like opting to have dividends paid in cash instead of script.

The bird in the hand is worth two in the bushes ;)

la papillion said...


Ya, you can always don't subscribe. But if there's a good discount, and it's a good company, one might be tempted to over invest.

la papillion said...


Yes, agree, that's a good hedge :) Not sure if there'e selling restrictions, though pretty sure there is. Cannot be sell you at discount, then you suka suka flood the market with cheap shares right? haha

dsea said...

Usually copmapny programs have some form of selling restrictions like vesting period.

re the company options, most US MNCs have "cashless" exercise & sales simultaneously, in which you are receive the profit. no upfront cash is required and you dont hold the stock either.

further to that, most companies corporate ethics code would have specific prohibition against hedging, ie., you are not allowed to enter into financial transactions that would mitigate any losses in share price.

la papillion said...

Hi dsea,

Thanks for giving your views on this. I don't think I know much about it since I don't have such options given to me. All that I knew are from books, haha

I guess it's important to have such restrictions, otherwise the management might really pay themselves discounted stock options given at the expense of retail shareholders.

SMK said...

normally got quite a lot of restrictions. ask your friends.

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