Transcript:
Easan Arulanantham:
“Do people ever get fearful of having such a large position in, say this one stock, because it generates wealth?” A lot of people become millionaires, because they had this one kind of homerun. But if that homerun disappears, it kind of massively affect their financial plan.
Tom Vaughan:
Yeah, that’s right. And we can stress test that. We can take their financial plan, find their probability of success in the current situation, and then we can go in the stress testing section and say, “hey, what if that one concentrated position dropped in half or disappeared?” Very unlikely in a lot of these big cases. But how much does that impact the plan? And sometimes it’s not a big deal, and sometimes it is. So when it really is, then yeah, we need to talk about kind of what we want to do with that. And it’s this balance, …I’ve had clients that had like $500,000 worth of one of the tech companies here, that’s now worth $6 million. And all the way along, advisors have been coming in, telling that person to sell, sell, sell, sell. And so, good thing they didn’t. I mean, it created a whole different scenario for them in terms of that wealth. But maybe at some point in time, you pick a point and say, “Okay, this dollar amount is enough. I still got $5 million in that case. And so I’m going to sell a piece off, and then I’m going to keep that $5 million. If it grows back to $5.5 million, I’ll take out $500,000. You know, whatever it is, right? You just kind of use that. And what I like to do, in a perfect scenario there, is to use a covered call, let’s say at 10% above the price for a monthly covered call.
So if the price goes up 10% it would sell, which we want to do anyway, because it’s extra. But I would put 5% below the price, a stop loss. So if it does fall somewhere out, you know, again, and that way, I could even keep that piece that I’m trying to sell for a while and generate income off of that covered call, until it finally jumps up and gets called away. And that’s perfect. And I’ve done that several times with different situations. And that’s one of my favorite ways of kind of selling off the fruit, so to speak, off that fruit tree; is that concept. And I think you know, because it generates an income, allows you to keep that fruit piece for even longer, and you’ve got some protection if it does fall, right? I mean, there’s a stop/loss there. So. So anyway, that’s, that’s there’s lots of different strategies for how to handle these concentrated positions. I think it’s a really important component. I personally don’t believe unless the company is falling apart, that you should be selling these off, just because some advisor tells you that it’s a good idea to diversify. Obviously, if it’s your only holding, you need to do something, but that’s not usually what I see. People usually have their company stock and maybe a 401k. So there is some other assets that we can diversify. And obviously they have a house, you know, that they’re living in here, which could be, you know, pretty valuable.