Resilience, My Friends

By John Owens, CFP®, EA, ECA

My inbox is a popular place these days. While I haven’t been bombarded with inflation concerns or fear of World War III about to break out in Europe, I have heard frequently from our clients with equity compensation. With annual earnings calls wrapping up this month, and many companies well off their all-time highs, there is true hesitance to hit the sell button this trading window. 

I don’t blame our clients for this - it’s behavioral finance 101. There’s this concept of “Anchoring bias” - which basically means you get used to the idea of something at a certain price. This causes many of us to rely heavily on a piece of information when interpreting new information - and it’s easy to anchor to the all-time-highs of a stock price that we saw as recently as a few months ago. It’s fun to think they’ll return soon - perhaps they flew south for the winter. 

It was not long ago that Asana, a company that went public in fall 2020, had seen its price sky-rocket nearly 450% in its first 14 months of trading. Nor was it long ago that SPACs like Barkbox were trading at nearly $19/sh several months before the de-SPAC that would essentially price it at $10/sh. We’ve seen Peloton go from its all-time pandemic high of 141.67 to trading at just above $20.00. 

Remember #gamestop? Just over a year ago, a crowd of Redditors nearly bankrupted a hedge fund or two in an effort to take on upper echelons of wealth - and preserve the life of AMC and Game Stop. But this particular era of easy money may be over, and the path forward is far from clear. 

While 2021 brought historic numbers of IPOs and SPACs, 2022 has to-date brought a dose of reality. A rotation to more value-oriented stocks, concerns about inflation and rising interest rates, and a rude awakening for many folks with concentrated equity positions. It would be fun to pretend none of this is happening, but unfortunately, this dose of reality can be magnified significantly if you have the vast majority of your net worth tied up in one company’s stock - either directly through shares you own, or unvested or unexercised equity that provide synthetic exposure to these price fluctuations. 

But all is not lost. The mere fact that we can’t predict what will happen next offers a clear explanation of what we should do next. Because when the rainstorm comes, we don’t chase the clouds away, we simply reach for our umbrellas. Our tools to provide resilience and refuge amid the lightning and thunder of market volatility. 

If history is any guide, the thunderstorms that are market sell-offs - especially in the tech space, show that they can be truly unpredictable. For context, an investment in QQQ - the ETF that tracks the Nasdaq 100 Index on March 15th, 2001, would have lost you 33% over the ensuing 8-year period until March 15th, 2009. And it would have been underwater from the summer of 2001 until late 2006. This is not the sad story of one measly tech stock ripped from a finance textbook, but rather that of a diversified index fund with dozens of companies. There are other, sadder stories we can tell from this era, but we’ll refrain, you get the point. 

The fact is that price swings are unpredictable. Even at your company, that you know so well. Macroeconomic factors - far beyond our control, can have huge impacts in stock price. The Federal Reserves pending rate hikes may have little direct impact on Palantir’s ability to secure future government contracts, or Spotify’s membership numbers, but that’s not to say the price won’t be impacted - Joe Rogan’s commentary is much more likely to sway listeners - if not artists (who would have thought that Joe Rogan would be the one to get Crosby, Stills, Nash, and Young to agree on something again?). Fundamentally, there are so many factors that impact stock price - many far from what any of us can even imagine. 

So, if this brief history lesson is any guide, how can we approach this period of market volatility - when our gut instincts tell us to avoid selling, and minds automatically anchor to better days. 

We should start off with a new anchor. Anchoring to a price we didn’t sell at - or can’t sell at anymore, is the key to disappointment. That’s like me saying I wish I was in better shape for the Brooklyn FI photoshoot last summer - tough luck - but that doesn’t stop me from working out and eating healthier today. 

A better anchoring point could be your strike price on your equity. If you were early on at a start-up, your company’s stock could still be trading at a nice multiple of that price today - even while being well off all-time-highs. Now this is not much consolation to folks with underwater equity at the moment, but despite recent sell-offs, I’ve seldom encountered folks with all their equity underwater. 

Beyond this, we should also frame our anchor through a different lens. Someone who invested in QQQ a year ago would be up about 3% over the past 12-months. If you were told that a year ago without much context, you’d likely be mildly disappointed, but not devastated. It simply feels worse because you know what you could have had. I get it, but again, the thunderstorm is here now - so what do we do. 

Fundamentally, our umbrella is a plan. A plan to strategically unwind concentrated stock positions over time regardless of the price - because this is truly the only way to reduce risk. 

And, I know what you’re thinking - why would I want to sell now - my company is going to rally. And if that’s the case, I have good news. In most cases, we can keep exposure to your company - we don’t need to sell it all now. That’s why Brooklyn FI creates a trading plan for all of our clients with equity. It’s a roadmap that we give our clients to help them weather storms like this one. If there are a million shares to sell, let’s unwind them slowly and sell them in nice little tranches over the next 12 quarters while keeping some of them as a legacy position. 

But by selling some now we can also minimize the opportunity cost that comes with a concentrated stock position. For example, over that same period - March 15th, 2001 - March 15th, 2009, the MSCI All Country World Index (ACWI) - essentially the global stock market, was down 14%. While those numbers sound bleak, the broader, more diversified global stock market outperformed tech by over 18%. 

Now I don’t know if we’re knocking on the door of crazy, unrelenting inflation, World War III commencing in Europe, or a tech sell-off and lost decade like the early 2000s - and any fear-mongering investment advisor who says they do is full of it. But I do know this, if you unwind your concentrated equity over time and according to a structured and measured trading plan, you’ll never get the best price, and you’ll never get the worst price. And that if we shed the anchors that bias our decision-making and accept that the only tool we have in this thunderstorm is our umbrella - and not the powers of the gods to chase the storm away, we’ll have more peace of mind than if we focus on what is outside our control. 

If you’re looking for some resilience, if you don’t know what you make of this, that’s ok. We’re here, and we have stocked up on metaphorical umbrellas for however long this storm lasts. It’s what we do.