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By Michael J. Wiener
When I’m asked for investment advice and I say “nobody knows what will happen to an individual stock,” I almost always get nodding agreement, but these same people then act as if they know what will happen to their favourite stock.
In a recent case, I was asked for advice a year ago by an employee with stock options. At the time I asked if the current value of the options was a lot of money to this person, and if so, I suggested selling some and diversifying. He clearly didn’t want to sell, and he decided that the total amount at stake wasn’t really that much. But what he was really doing was acting as though he had useful insight into the future of his employer’s stock.
He proceeded to ask others for advice, clearly looking for a different answer from mine. By continuing to ask others what they thought about the future of his employer’s stock, he was again contradicting his claimed agreement with “nobody knows what will happen to an individual stock.”
How a seemingly token amount can become a painful loss
Fast-forward a year, and those same options are now worth about 15 times less. Suddenly, that amount that wasn’t that big a deal has become a very painful loss. He has now taken advantage of a choice his employer offers to receive fewer stock options in return for slightly higher pay. It’s hard to be sure without seeing the numbers, but in arrangements I’ve seen with other employers, a better strategy is to take the options and just sell them at the first opportunity if the stock is far enough above the strike price. Again, he’s acting as though he has useful insight into the future of his employer’s stock.
The lesson from this episode isn’t that people should listen to me. I’m used to people asking me for advice and then having my unwelcome advice ignored. What I find interesting is that even if I can get someone to say out loud “I don’t know what’s going to happen to any individual stock,” they can’t help but act as though either they know themselves, or they can find someone who does know.
Michael J. Wiener runs the web site Michael James on Money, where he looks for the right answers to personal finance and investing questions. He’s retired from work as a “math guy in high tech” and has been running his website since 2007. He’s a former mutual fund investor, former stock picker, now index investor. This blog originally appeared on his site on Sept. 20, 2022 and is republished on the Hub with his permission.
