Net Worth Report - End of 03/07I took very little investment action this month, preferring not to get involved in the volatility around last month's market downturn. My only noteworthy change in investments was to sell a batch of ESPP shares that had reached their age of tax advantage (two years from the grant date). At a St. Patrick's Day dinner I heard some interesting comments from another employee about Intel stock performance and why they sell their ESPP shares immediately. It is good advice, of course, to have a diversified portfolio and to avoid investing too much in your employer. The secondary argument is that Intel stock has performed poorly over the past seven years, so it's been a poor idea to hold on to ESPP shares. Sure, past performance does not predict future performance, but he has other reasons for being pessimistic. I decided not to change my ESPP strategy. I don't think I'm too heavily invested in my employer — even including unvested stock options, my exposure is less than 6% of my net worth. And I'm not so downbeat on the company's future that I want to give up the tax advantage of holding the shares for the uncertain possibility of doing better elsewhere.
With the ESPP sale and a large expected tax refund (included in the above, although I haven't received it yet) I'm getting a bit cash-heavy. I'm going to get another lump of cash when some RSUs vest in a couple weeks and I sell them. (There's no tax advantage in holding them.) At that point I'm going to make some new investments, and I plan to write about my decisions.
Little new here. I may drop this section in the future because I clearly don't need to take any special action to meet my medium-term financial goals. Alternatively, I might expand this section by breaking out investment performance separately from income, so I could better see if any investments are underperforming but "look okay" due to salary income hiding their sins.
I screwed up this month. A very dumb error; I made a credit card payment late this month — by two business days, I think — and that canceled my 0% introductory rate so I had to pay off the card in full. Fortunately, it was on a card that had only a few 0% months remaining anyway. Now I only have one credit card with a 0% rate, but it's good for another whole year. (I continue to see 0% offers but they've all had something wrong in the fine print; usually high balance transfer fees.) You can keep track of other personal finance bloggers at NetWorthIQ. I've updated my entry there.
© Kyle Markley
— Posted 2007-04-01 05:26:53 UTC —
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Comments: 3
Are you really sure that your net worth exposure to Intel is less than 6%?
I bet it's not. In fact, I *know* it's not.
You're a homeowner, and Intel is by far the largest employer in your area. You have substantial exposure to Intel through your home's value.
I suspect you are only counting the current value of your unvested stock options in your net worth. That's the wrong calculation. Even underwater options have value, sometimes substantial value. In fact, you can even cash in on the value of unvested options, if you're clever.
Do you own any index funds? Those have a reasonable exposure to INTC as well.
And all that still doesn't include one of the most important components of your worth, your earning power. Intel pays your salary.
So while on a first order, you may consider yourself only 6% invested in Intel, in reality you are far more heavily invested than that. Let's look at a hypothetical situation that could happen.
The CPU designers in Oregon design a processor that underwhelms. It's happened before. Meanwhile, those pesky overseas designers continue to hit home runs. The CEO gets fed up, and starts scaling back hiring and employment in Oregon. A lot of highly paid people start selling their houses. Housing prices decline further. You lose your job as part of the shuffle. The stock drops to $12. You lose your options.
Still think your exposure was only 6%? As Intel employees, we are *all* very heavily invested in Intel. Far more than anyone could responsibly recommend. If anything, we should be shorting the stock and using the proceeds to diversify.
I don't know how to quantify the Intel impact on my home's value. I don't know how to disentangle the effect of Intel from that of the other large current and potential employers in the area, or from other general housing market conditions. Besides, it would take an extremely unlikely event -- large layoffs in Oregon -- to affect my home's value. And since I know a lot about our (Oregon's) upcoming processor, I'm not so worried.
You're correct that underwater options have value, but I can't quantify that either -- there is no market for employee stock options. Please tell me how I can "cash in" on the unvested options in a way that's +EV, and I'll do it. (Buying puts is 0EV if the market is efficient...)
I don't own any index funds directly, but Intel's profit sharing plan is an S&P 500 lookalike. The most recent figure I could quickly find (July 2004) pegs Intel at 1.7% of the S&P 500. I'm sure my various mutual funds have Intel exposure too -- okay, I probably have about $4,000 more exposure through these sources. So you've got me; I'll revise to 6.2%. But I'll be back under 6% when I sell my RSUs.
As employees we're not allowed to be (net) short Intel.
While it's true there's not a market for employee stock options, there needn't be. There need only be a market for an equivalent instrument.
Of course you'd be correct to note that there is no market for an equivalent instrument (which is a great example of a market inefficiency).
There are, however, reasonably similar analogs. You can short LEAPs with a strike price near your options' strike price (you almost certainly won't be able to hit the price exactly).
A January 09 $25 call currently sells for around $123 per contract. If you've got a few thousand of those, that's several thousand dollars or not too far from 1% of your net worth. If you've got options priced below $20, the market values those much higher still.
And that's the value the market places on those options with a January 09 expiration. If your options expire beyond that (and they probably do), the time value is even higher (though it is harder to capitalize on this).
Even if you choose not to realize this value, the value is there, and it is as real as the value of any shares you may own. The market is just nice enough to tell you how much (approximately) those options are worth. Presumably if you choose not to lock in the premium on your options, you believe them to be worth even more than the market does, underscoring their impact on your net worth.
I'm a pretty low-level grunt, and my options are nearly all underwater. Even ignoring the time value of these options, the market places nearly a $13000 value on them.
You're correct that we should not be net short INTC, I used that facetious statement merely to illustrate that we should definitely not be long INTC.
But I think the most salient point is that ultimately "net worth" is a relatively meaningless number. Your biggest "investment" in your employer is your job. In my opinion, that is the biggest reason not to be long one's employer anymore than absolutely necessary.
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