Brenda Vingiello, Sand Hill’s Chief Investment Officer, joined Squawk Box to discuss her thoughts on the latest market trends and market outlook for 2025. This
The Fortuitously Aligned Misconception Error (FAME) Principle
Published Date : October 14, 2020
October 14, 2020
As the capital markets have gone through turmoil in 2020 due to the global pandemic, significant portions of the equity universe have been able to hold steady and, in many cases, thrive. While many investors have benefitted by purchasing winning stocks in their portfolio, others are fortuitously exposed to public companies due to their employment. For those aligned with a large, concentrated holding in their company stock, it might be time for a gut check as it relates to one’s exposure. This moment in history seems an appropriate time to paraphrase Louis Pasteur, a key leader in bacteriology, who stated that “chance favors the prepared mind” as it isn’t by a stroke of luck to be employed at a leading company, but through hard work and determination. Preserving the financial benefits of one’s sweat equity is just as important as building the career that set the path.
It’s normal for investors to have some trepidation during periods when there are shifts in the economic landscape. However, it is often the case that individuals with significant employee stock might feel impervious to outside factors. This feeling of impenetrability can lead to what can be referred to as the Fortuitously Aligned Misconception Error (FAME), a principle seen in those who lack the recognition that their company stock is indeed a risk asset and their key retirement nest egg, which is not immune to a fall from grace (i.e. a windfall that can change with the wind).
Company stock is a critical component of a compensation package designed to “make one whole” in a competitive environment. As stock vests and the choice is made not to reduce exposure, you become a speculator, betting that the micro conditions (your company’s fundamentals) will align with the macro environment (the economic cycle) to keep you whole. In a bull market, many do not hear the call to lower exposure to their company stock in anticipation that it will continue to gain value. However, history reminds us that even the best performing sectors in the markets have finite outperformance periods as money will rotate in and out to seek opportunity.
Why reallocate money out of a high-flying stock into a diversified investment portfolio which might not keep pace? A gambler often has a similar feeling of comfort when they are winning, that they are playing with “house money” hence an easy come, easy go philosophy. Casinos benefit from this complacency as most of those players stay at the table too long, often giving back all their winnings. Unlike a gambler, an employee can monitor the environment, allowing them the opportunity to thoughtfully manage their assets. In addition, whereas a gambler might bust out of a card game, many employees continue to gain exposure if allocated stock as a part of an employment package.
Chances are that few gamblers divert their table winnings into a portfolio, but an individual with vested employee stock has the means to do just that. Just as the prepared mind helps one build a career, a path should be set to build an investment portfolio to support future needs. For those with large “single stock” exposure but lack a pool of financial assets, that employee stock is the feedstock to help build the base. Just as one should maximize their 401(k) contribution via an allocation from each paycheck, one might consider a parallel exercise with their company stock, periodically trimming during open trading windows. Certainly, it makes sense to keep some exposure to stock in your company, which may continue to be your largest asset for some time. However, don’t let FAME get in your way. Appreciate the inherent risk and volatility in a concentrated stock holding versus a goal of building a diversified investment portfolio that might better withstand the test of time. For those who lack time and expertise, teaming up with an advisor like Sand Hill Global Advisors to help manage the complexity around employee stock packages can be a productive path.
Articles and Commentary
Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
Video Presentations
All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
Other Posts By This Author
- – Can the Bull Market Continue to Run?
- – When Macro Overwhelms the Micro
- – Weight a Minute: Will GenAI Transform Your Figure?
- – Welcome Back to an Economic Cycle
Related Posts
Recent Posts
