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Concentrated Stock Positions

June 5, 2012

People I know with concentrated stock positions simply  “ll oo vv ee”  those stocks and by extension the companies.  It is irrational, purely emotional and one sided – I happen to know that the companies do not respond much to the emotion felt by its shareowners.


Emotions should be reserved for people, certain events and achievement, activities and prayers.  They do not belong in investing decisions.  But they are there.  Notice the large number of stockholders in Starbucks from Seattle, Coca Cola from Atlanta, Kodak from Rochester, and in most any other company of its current and former employees.  Emotions figure greatly into stock ownership, yet they shouldn’t.


Disproportionate holdings in individual stocks threaten the financial security of its owners. High concentration lacks diversification, objectivity in asset allocation, stock selection and cash flow objectives. Skewed ownership creates unhealthy euphoria or melancholy as those stocks’ values inevitably rise and fall.


2012 might present the last opportunity to reduce disproportionate positions at a reasonable cost.  The federal capital gains rate is 15% and with some state income taxes, the maximum tax rate is about 20%.  Paying 20% of the hoarded gains is a high amount, but maybe not so high if some unforeseen event causes a drastic downturn in the fortunes of the loved company’s stock.  We have seen unbelievable (until they occurred) losses in venerable stocks – AT&T, GE, Citigroup, Hewlett Packard, Merck, Pfizer and Cisco to name a few – so we can assume no company is immune to sharp and sudden losses.


I suggest looking at the 20% tax as a one time, up-front “insurance” payment that better secures your financial future.  If you want, you can imagine that you are paying about 2% a year for the next dozen or so years to insure against catastrophe.  At the same time, with careful diversified stock selection you can maintain your market position and possibly earn half or more of that back with higher dividends on the replacement securities.


Investing is a serious endeavor and directly relates to you and your family’s future financial security.  Don’t be stubborn or emotional.  Don’t be stupid!

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