The Fortuitously Aligned Misconception Error (FAME) Principle

The Fortuitously Aligned Misconception Error (FAME) Principle

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.


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