Bad Investment Advice

The Big Cajun Man wrote about the worst financial advice he had ever given, and he challenged other bloggers to admit to bad advice they have given. I had to think about this one for a while.

The truth is that while I have opinions on just about every financial subject, I don’t advise people directly very often. For example, although I often say that trading stock options is a very bad idea for most people, it could be right for a particular person. Then again, most of the people who think it is right for them are mistaken.

There was one period of time where I suggested a way of thinking about investing that didn’t work out the way I thought it would. During the high-tech boom, I worked for a company that had given almost all employees stock options. The stock rocketed skyward making these options very valuable. Employees spent a lot of time discussing when to sell and how much.

I suggested to several coworkers that they imagine that the options were exercised and the stock sold with all the money sitting in their bank accounts. Then I asked them, would you be willing to invest all this money back into our employer’s stock? I expected the answer to be an emphatic no, and that people would decide to sell a substantial block of their holdings based on this little mind game.

But, it didn’t work out that way. To my knowledge this mental exercise caused only one of my coworkers to sell off most of his options. Other employees seemed to get a feeling of bravado and renewed confidence that our company’s stock would rise even higher. I was baffled by this reaction. My best guess is that nobody wanted to be the one who sold out and watched his friends continue to make more money.

Sadly, many employees were millionaires on paper briefly, but sold very little before the crash came. A few people never made a dime from their options. One employee who never made a dime spent wildly on a big new house and car with the plan of selling a few options each month to make the payments. Obviously, this worked out quite badly.

In retrospect it should have been obvious to people that they shouldn’t have 80% or more of their net worth tied up in a high tech start-up company. These things are much easier to see after the fact.