Who Do You Blame When You Lose $6 Million Overnight?
The New York Post presented an article about David Shorr, a shareholder of Lehman Brothers, who lost $6 million as the company filed for bankruptcy. David spent many years as an employee of Lehman Brothers, building up compensation in the form of stocks which are now worthless.
“What the hell was he thinking?” asked Shorr, who placed much of the blame on the hard-charging executive who has been one of the country’s highest-paid CEOs. When asked if he had any hopes of recovering his nest egg, Shorr just shook his head and waved his hand. “It’s gone,” he said with a sigh.
David Schorr is now a wealth adviser at Morgan Stanley. As a wealth adviser, you would think that he were familiar with the concept of diversification. While the CEO of Lehman Brothers may not have guided the company through the financial mess, as an investor, David has a responsibility to his future self to maintain an asset allocation that isn’t exposed to any one company.
It’s a lesson that many former Enron shareholders may have learned.
Diversification isn’t a guarantee; for example, if American International Group (AIG) had been allowed to fail, the global markets could have tanked, destroying even better-diversified accounts. But diversification limits your exposure to any one company, so it is less likely to lose your entire life savings due to a singular event.
In my 401(k), my employer matches a portion of my contributions, and a portion of that match is in the form of company stock. Every once in a while, I sell that stock and rebalance the allocation among mutual funds to limit my exposure to my company’s performance. Since my salary and benefits are also tied to my company, the less company stock I rely on, the better.
I will admit that I haven’t limited my company stock as much as I should. The last time I diversified out of company stock was over a year ago when the stock was at its highest point; its value, like that of other financial companies but to a smaller extent, has dropped since then.
I Lost $6M Overnight!, Braden Keil, New York Post, September 16, 2008
Everyone here would like to consider themselves experts on ‘diversification’, but there are other factors to consider.
Already mentioned is the vesting period. Although he could have sold out at least a portion of his stock, he was probably still heavilyvested with the company.
That being said, he probably felt loyalty and a sort of ‘invincibility’ within the company as has already been stated. On the outside this seems stupid, but when it’s happening to you and you’re watching your stock options soaring, it becomes extremely difficult to sell.
Finally, and most importantly, what about the greatest investor on the planet? How did he make his money? By NOT diversifying. He invested over half of his partnerships’ money in one company at one point. He did this repeatedly. His whole philosophy is to bet big when the getting is good.
Of course not everyone can follow in Buffet’s foot steps, but obviously being in the industry gives one a feeling that they know what they are doing.
Anyways, just my two cents.
I work in the industry (on the buy side) and have tons of friends and colleagues at Lehman (or were at Lehman). Lehman was notorious in the industry for not only paying a higher percentage of bonus in stock than other banks but also having longer vesting periods. Typically 3 years for very junior people and 5 years for mid/senior level people. Though I’m sure the very senior guys had even longer. So you can assume his vesting period was 5 years. Of course he should have diversified whatever he could have, that was just idiotic not to but I bet a big chunk of his stock was restricted anyway. Lehman paid pretty good bonuses over the last few years, one of my closest friends was a 2nd year associates just 2 years out of business school and got over $500k in bonus (on top of a salary of around $150k) last year. His bonus from last year was 40% in stock which is now all worthless. Right now they haven’t heard final decisions on who Barclays is going to keep but Barclays will still be making good on people’s 2008 bonuses apparantly. I know that is going to get a lot of people pissed off considering how much money Lehman lost.
I should have also said, my little loss was really, really minor – there were company men with 30 years’ seniority who lost hundreds of thousands, even million(s) and had to continue working past their anticipated retirement to rebuild their nest eggs.
I learned this lesson as a fresh-from-college 22 year old, and while I’m still BAD at money, I don’t invest but 5% of my holdings in my company. My first ‘real’ job was with a Fortune 500 defense company that changed their company-match portion of 401k contributions to a fund of company stock, with a 12 month minimum holding AND you had to have fully-vested $1000 in that fund before transfers (even after the 12 mo. holding period). If you hadn’t guessed, they were cash poor trying to pay down debt acquired via a huge merger – and the 401k match was too much $$ going out every month. So when their debt payback continued to falter and efficiencies anticipated in the merger didn’t materialize, Wall Street took note – the stock tumbled from a high in 1997 of $75/share to $12/share. and we employees? All screwed! I only had $5K total in the 401k – but 1/2 of it was the company match – stock and I lost 50% of my retirement. But as I said – I was 22 and have sufficiently recovered and haven’t invested significantly in my employers since then. But we shareholders did win a class-action over corporate mismanagement that netted me back about $250 in 2006 – WOOT!
Oops, I meant not to deduct it from taxes, but deduct it from his income — when he has it.
Having a large chunk of my money in the employer (ibm) stock myself, I kind of can see him. Not 6 million, I am not that rich, and not everything I have. Probably a little more than 1/3 of my non-retirement savings and nothing in retirement savings except for as part of index funds. Still too much, and I plan to gradually reduce the exposure – sold a little last year, will likely sell a little this year – missed the high a month ago, will wait for another good moment.
Does the article say what percentage this is from his total assets?
I can see what he was thinking because I am guilty of the same type of thinking myself. It is just basic greed. When your stock is doing well, you think “oh, I probably should sell, but if I sell it, I’ll have to pay taxes on all these gains”. As my co-worker told me when I used a similar line “oh yes, sure, just wait a little, then you’ll have capital loss and will be able to take it off taxes, but not all at once. So I guess now he has a huge capital loss and can continue to deduct it from taxes – $3000 at a time unless he has gains – for the rest of his life.
Meg: The guy in this article is not Bill Gates or any other CEO; he’s an ordinary guy who doesn’t have the luxury to invest his entire retirement portfolio in a company over which he has no personal control. He’s not an entrepreneur.
Bill Gates has quite a bit of Microsoft stock, obviously, but he is well diversified beyond that according to public information easily accessible via Google. If Microsoft tanked like Lehman, that would be bad news, surely, but Gates would still be able to retire in a style many people could only dream about.
Plus, I’ve heard he’s even got a commercial acting gig now. 🙂
Wow, that SUCKS. I feel sorry for the guy; diversification is easier said than done, and lots of people (including all entrepreneurs) make their fortunes by focusing in one specific company or industry before diversifying later in life to protect the wealth they’ve grown.
I mean look at Bill Gates or Steve Jobs – do you really think anybody is telling them “Gah, you’re such an idiot! You should have sold your company stock early on instead of making hundreds of millions by investing all your money in your one company.” It’s hard to cut the cord on a company that’s made you rich and paid you dividends (literally and figuratively) for years.
It may be true that his stock hadn’t vested yet or he hadn’t finished a required holding period — but still, according to the quote in the article, this was his full “nest egg.” Imagine your whole retirement savings in unvested company stock… Plus, I find it unlikely that he was an upper-level executive at Lehman as it is a wealth adviser at Morgan Stanley, but that’s just conjecture.
Like other specific individuals I’ve singled out on Consumerism Commentary before, he may actually find this article at some point and shed some light on his decisions.
Plonkee: It’s easy to believe the company you work for is immune. Constant positive communication from upper level executives encourages employees to ignore the media when it the news is bad, and you feel like you have “insider” information…
Its not clear here…but many times stocks granted as a part of compensation take a looooong time to fully vest. He may not have had the option of selling and rebalancing. Like I said, you can’t tell from the information given in this article, but that is a possibility.
I guess that he wasn’t thinking properly. You know a lot of people think that the company they work for (or used to work for) is immune from market falls. Yeah. That’s not really true though. When I acquired some company stock I sold it as quickly as possible – partly because it constituted about 2/3 of my total net worth at the time.
It’s amazing how a company whose business is in money and who has so much of it can go bankrupt. It’s simply greed mixed with stupidity.
“What the hell was he thinking?” asked Shorr…
Uh…yeah. What the hell was Shorr thinking? He’s in finance and he left himself exposed to that kind of risk? I guess it’s not all that surprising that financial institutions are failing left and right if this is the sort of in-house expertise they’ve been relying on.
Sorry…no sympathy here.
A lot of financial companies require that you hold the stock for a number of years. He probably could have sold some of his stocks but probably not all. (These companies don’t like their officers selling the company stock. It looks bad.)
I agree… LEH enjoyed a 300% return since 2000, which is much more than most other banks, so I see why he was not diversifying, but let’s be serious… it’s always the people who think they are invinicible who crash and burn.
You should have diversified there pal!