A Curious Tale





In this tale, we explore the lack of curiosity.  This tale teaches us to differentiate between an investment approach and an investment opportunity.  What is the difference?  If you interview wealthy people and ask them how they accumulated their wealth, they seldom say they invested in stocks or systematically followed an investment approach.  They often talk about specific events or opportunities.  They speak about a great investment they made, a business they started or a great career move that catapulted them to high earnings.  They seldom say they steadily saved money and invested it wisely using a tried-and-true investment approach.  They view their wealth as event driven.  This tale’s purpose is to let you recognize when an event or opportunity is happening in your life that can alter your future.  As I always say, everyone’s financial objective is to get wealthy, stay wealthy and then get wealthier.  The cardinal rule is once wealthy never go backwards.

Bill, a high achiever, was in his early thirties when a high tech growth company recruited him for a high-profile engineering position.  Bill joined the company just before the start of the technology bubble that developed in the late 1990s.  He was well paid, but more importantly he was issued stock options when he joined and for the next few years thereafter.  By late 1999, these options were on a pre-tax basis worth in excess of $10 million.  Bill had increased his net worth in less than five years from less than $100,000 to a level that most anyone would call wealthy.  He had one problem, however.  The bulk of his wealth was concentrated in one stock, and there were restrictions on how he could behave or access his wealth.  The particulars were that he couldn’t cash in or exercise his stock options as he pleased.  He could only exercise 20% at the end of year one, 20% at the end of year two, and 30% each at the end of years three and four.

What did Bill do?  Every anniversary, Bill cashed as many of his options as permitted.  He did this for several years and thankfully had accumulated almost $2 million in a personal portfolio that wasn’t associated with his company.  This portfolio had nothing to do with his company stock.  However, Bill failed to differentiate between a life-altering investment opportunity and an investment approach.  His advisor could only focus on the $2 million of investments and didn’t provide counsel on how to protect the bulk of his wealth.  Bill’s lack of curiosity, as well as his advisor’s, did not compel him to seek what I call situational financial advice from someone who was well versed in dealing with predicaments such as his.  I also found it surprising that Bill’s company didn’t provide their newly minted millionaires with a consistent methodology on how to deal with their new wealth.  What happened?  When the prices of technology stocks plummeted, the price of his stock plummeted as well, and his options were worthless.  The $10 million was gone.  I suppose you could say easy come, easy go, but in my mind, this was a real loss and an avoidable one.

Could Bill or his advisor have prevented this disaster?  There’s no doubt.  What should Bill have done?  Bill should have consulted with more than one advisor.  He had to know that he was vulnerable to a price decline in his company stock, but apparently he and his advisor were oblivious to the situation, or drinking the same Kool-Aid.  Another advisor might have told Bill that there was a way to buy insurance on his company’s stock so that if the price fell before he could cash in, he would keep between 80–100% of his $10 million in options without losing the potential to be even richer if the stock price kept going up.

The moral of the story is—get a second or third opinion when you are dealing with a situational or event-driven investment decision.  I know that when my clients face decisions such as these, I refer them to those that know far more about their situation than I do.  Bill should have kept asking for ways to protect what he had until he got the right answer.  They say curiosity killed the cat.  Unfortunately, investing frequently has a dual nature.  In this case, the “lack” of curiosity killed the cat.  It doesn’t hurt to get a second or third opinion.  Ask, and you shall receive.

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