Companies like Uber, Lyft, Beyond Meat, Peloton, Slack, Zoom and Pinterest made their public market debut in 2019, creating wealth and liquidity for many of the founders of the IPO 2019 class.
This year, shareholders witnessed anxiety-inducing volatility in their holdings, leading many to realize that they need to rethink their approach to their concentrated post-IPO position.
In this guide, I will objectively illustrate a framework on how to think about post-IPO or concentrated actions. While this is written specifically for public company shares, many of the same fundamental concepts apply to private shares and the decision as to whether or not to sell. Some risks should be understood if one relies on a stock to achieve all its financial goals as this implies that you have "too many eggs in one basket". Many shareholders of the 2019 IPO class have experienced this risk in recent months and are reassessing their situations.
However, following my advice can be challenging since we have all heard of someone who has grown up rocking fences. The key lies in understanding the true success rate and the risks associated with this approach; It is all too common to hear others share their extraordinary victories, while more common failures are rarely mentioned.
What am I doing now?
Usually, I ask to reduce the positions concentrated in the IPO actions on expiry of the block or through planned sales for more significant positions; however, for those who have not sold, it is clear that the unexpected macroeconomic downturn has materially increased the volatility of some share prices of high value companies. If you are in this position, here are some things to consider:
- What is your time horizon? Are your investments intended for long or short term?
- What are your liquidity needs? Do you need to collect cash to pay for upcoming taxes or fees? Do you need cash in the next 1-2 years?
- What other goods do you have?
- What impact does this have on your financial plan? Can you tolerate possible further drops?
It is not comfortable to be in this position and decisions right now can be critical to achieving long-term goals. I suggest you find a consultant to talk to if you're not sure which is the best choice. Below we review some considerations that can help you build confidence in your decisions.
What's the plan?
The decision on what to do with your stock should start at a higher level. Where does this title fit into your investment strategy and where does your investment strategy fit in achieving your long-term goals?
Your goals should guide your investment strategy and your investment strategy should guide decisions regarding your stock, not vice versa. With the correct goals set, you can use the company's investment portfolio and shares within it as tools to achieve your goals.
For example, a goal could be to work another ten years, then partially retire and do some advice. Goal setting allows you to make objective decisions about how to best manage concentrated positions of securities. There is a compromise between maximizing potential return in the investment portfolio, maximizing risk with concentrated portfolios and minimizing the risk of a catastrophic loss, with a well diversified portfolio. This decision is unique for each individual. The best way to maximize your chances of reaching your goals is different from the best way to maximize your portfolio's return chances.
FOMO
In these discussions, there is always an immense fear of getting lost. What if this stock becomes a multibagger over time? It is easy to look at the Zuckerbergs and Bezos of the world, who have accumulated great wealth by holding concentrated shares and think that holding long-term concentrated shares is the way to go.
There is also no doubt that some government bonds have been running financially domestic, such as investing in Apple or Amazon. If you had invested in such securities from the start, you could have earned a 40,000% or 100,000% return. However, an evidence-based rational decision-making process presents a very different picture. A statistical analysis of how IPOs and concentrated portfolios have behaved in the past is covered in the second part of this three part series.
Concentration carries risks that you may not have considered. In the second part, I will guide you through critical considerations to maintain a high concentration of business actions and things to consider from a general perspective. I also immerse myself in the advantages of diversification, taking it beyond the basics to show you the advantages of having a more balanced portfolio.