"You never know who's swimming naked until the tide goes out" - Warren Buffett
The above is a great quote from Warren Buffett. Right now, the tide is rushing out and what concerns me is that this market is exposing a lot of naked executives. A lot of folks that shouldn't be getting exposed the way they are. Let me explain...
One of the best tools for executives and employees to build wealth is stock compensation. But what can build wealth so wonderfully can evaporate in the blink of an eye and this market is exposing that fact. I believe that the fantastic market returns of the recent past lulled executives into a false sense of security, as they delayed exercising stock options for a fear of missing out on potential additional profits. Now they're left exposed, wondering whether the tide will come back in time to hide their transgressions or if they are doomed with a long walk of shame.
There's a lot of ways we deal with this issue but a simple concept we share with Spurstone clients is the 3 Year Rule. Stock options have expiration dates (typically 10 years from grant date), which is one of the features that makes them more risky. Our 3 Year Rule is simple: If your grant is expiring within 3 years, you need to consider liquidating due to the risks of a market pullback like we are seeing now. When you're within that three year window, you run the very real risk of a stock price drop without the time to recover. It's this exact situation that a lot of executives at wonderful companies now face as their employer stock has dropped over 50% in just a few short weeks.
Here's your action for today: Review all your stock compensation by grant. Take a look at your potential values, strike/exercise prices, tax considerations and expiration dates. Review these with your advisor in relation to your goals and the entirety of your financial landscape. If your advisor doesn't have a high level of skill managing stock compensation, contact one who does. Then develop a plan to manage your stock compensation over time. It's a wonderfully fickle asset, don't let it slip.
Now get your bathing suit on and come back tomorrow for more!
-Tim Golas, Partner @ Spurstone - Architects of Executive Wealth