ESOP ALL EGGS IN ONE BASKET

We have a client who works for a large IT company. Predictably, a good amount of their investments are in the form of their own company's stock options. They are now coming to grips with the possibility that if the rupee keeps gaining strength, employment growth in the IT industry could slow down and perhaps even sharply reverse. That's a double problem. Realisation dawns that the permanently bright future that their industry was supposed to have may not exist. And, at the same time, their investments in their own employer have declined to less than half in about an year's time. Like many IT stocks, their employers' stock too hardly rose when the markets were rising but fell with great speed when the markets fell.

Another client works with a banking firm with subprime crisis the stock has been hammered by the markets. The point we are making is one which has been told by financial gurus since the inception of finance itself.”DON’T PUT ALL YOUR EGGS IN ONE BASKET”.We don’t deny that ESOP are wealth creators our contention is that once the wealth is created it has to be managed as well so one is suppose to spread one’s investments spread across different sectors and industry so that bad times in one may be offset by another. However, today when Employee Stock Options are a big part of some people's exposure to the stock markets, diversification must start with diversifying one's life, not just one's investments. Your career is tied up with a particular industry, so your stock investments must necessarily be as far diversified from that industry as possible.

However, for a variety of reasons, the reverse seems to be true. The biggest reason seems to be that many of the employees of who receive ESOPs are otherwise not stock investors. They never buy any other stock or mutual fund and thus have 100 per cent of their investments in their own company. What's worse, we hear that some companies have a culture of bias against selling ESOPs and employees face a subtle pressure against selling. Even worse, talking to some ESOP-holders about their investments, we’ve realised that even when they diversify, they have a tendency to buy the stock of other companies in the same industry, probably because they feel they understand the industry or they admire another company in the same industry. This is illusory diversification. Maruti employees buying Tata Motors stock or Satyam employees buying Infosys stock may feel like they are diversifying but they are not.

The point I am making should be obvious by now. Diversification is supposed to be the most important part of any investment strategy.

So what should you do with your ESOPs? Whether you otherwise invest in stocks or funds or not, the logic of diversification is very clear. You must sell your ESOPs as soon as you think the time is right There's a huge range of alternative investments that you can choose from. Tying up both your career and your savings to the well-being of the same company (or the same industry) is clearly a case of putting all your eggs in one basket. And that's never a good idea.

Inspiration : Mr.Sharad Desai,Our Clients

Reference : http://www.valueresarchonline.com