SPEAKER_00: 0:25

Welcome back to the Make the Most of Your Money podcast. I'm your host, Colin Page. Here's uh my co-host, Taylor Stewart. How are you, Taylor?

SPEAKER_02: 0:33

I'm good, man. We're thawing out. Weather's getting warm again.

SPEAKER_00: 0:36

Oh my gosh. Ten days of winter. We had a full week of school closures, and so far we're three for three days this week with two hour delays. It's just un unreal. How much Central Virginia shuts down when it snows or ices uh in our case. Um But anyways, that's not what we're here to talk about. Um you had a you had a LinkedIn post go go viral uh a few weeks ago um where you brought up uh a client uh who had a concentrated stock position when they came to you and and um you gave them the standard kind of recommendation to to you know you probably should pare that down, you know, maybe sell half or something like that. They didn't take your advice and uh and proceeded to the stock proceeded to triple or quadruple or something.

SPEAKER_02: 1:29

And so actually eight uh eight, it went up eight times.

SPEAKER_00: 1:32

There you go. Yeah.

SPEAKER_02: 1:33

So it octopled or whatever. Octopled, there you go.

SPEAKER_00: 1:38

Um Yeah, so uh that that got me thinking about about concentrated positions and and um so I wanted to see if we could kind of break that down. Um break it down today. Yeah, I don't know if you want to add any more to that, what you what you had in the post.

SPEAKER_02: 1:54

Yeah, the the the post was really interesting. It's fun. Also, it's funny. It was I don't really care about virality, but like it got a ton of views, and I wrote it in about four minutes on my couch at 2.30 in the morning, which is just funny. It was just an interesting thought. So whatever. But like, yeah, the idea was individual came, very all of basically all of his net worth in a single stock. Um and I want to clarify, I did advise him to sell at least half of it. And I want to get to like why. It wasn't just because you had a concentrated stock, it was because at the end of the day, he couldn't afford for it to get cut in half. Um and I also wanted to clarify in case he ever listens, like, this is a very informed person about this company. This was not a completely stupid bet, still a gamble in a lot of sense, but there was like it was an investment, I would say. But um, yeah, he didn't follow my advice and the stock went up eight times, and he has since followed my advice, and he's in a completely different position because of it. And the conversation was cur it was was huge around like, well, that's how you build real wealth is concentrated positions. You know, Warren Buffett only owned a few names, but then all of us advisors are recommending diversify, diversify, diversify. And and um the I think why I we wanted to do an episode on this is because while maybe 8xing in a short period is not the normal. Stocks have had an unbelievable run for the last 40 years, really, with a couple of bumps in there. And we're finding both of us coming across more and more of these very large concentrated positions in portfolios. And there's um a lot of there's psychology involved, there's uh emotions involved, there, and then there's some technical stuff involved. So it's I think it's worth talking about just the all of those factors, kind of how to think about a concentrated position, the taxpayer ramifications, the investment allocation ramifications, and um there's a lot we can talk about, and it is becoming more and more common. So um how would you define a concentrated position, first of all?

SPEAKER_00: 3:40

Like Yeah, I mean the the probably the textbook definition is any any position over 10% of your net worth you know, is is a concentrated position. Um you know, but there's that that's obviously a wide range. You know, if something is 100% of your net worth, there's no question that's that's concentration risk right there. Um if something's 10% of your net worth, you know, if it goes to zero, you can probably afford that loss. And so I I would say a stock position is concentrated when if you were to experience a downturn or or a or a zero, if that position were to blow up, then that materially impacts your financial well-being. Um how do you how do you like that as a threshold?

SPEAKER_02: 4:30

I I would say uh see I think what you just said is like how I would would determine what I would do with a concentrated position. But I I 10% is interesting. Like I get why. I I think probably if you just like got into my head, what is a concentrated position, I would think more like 33, like a third or a quarter. Like 10% is still a lot in a single name, don't get me wrong. But like yeah, I I mean well, however you define it, it's a large, it's a large position. And I guess I see what you're saying though. Like it can really drive your outcome one way or another. I like that. I hadn't thought it through, that's why I asked. Would you consider it a concentrated position?

SPEAKER_00: 5:07

Yeah, I mean, I think think of a portfolio if you've got 10% concentration, if you've got 10 names in it, each one of them is 10%. I mean, that's a different portfolio with a different level of risk than say portfolio that's 90% in in like a diversified stock portfolio and 10% in one name, that's somewhat less risky. Yes, you're making a bigger bet on one position. Um maybe it's an employer stock, like where you're getting RSUs through work or stock options. So of course you're gonna be a little more concentrated there. Um But yeah, I mean, uh the the what I'm interested in is what role does it play in the overall portfolio and what bet are you making knowingly or unknowingly with with that?

SPEAKER_02: 5:54

Yeah. So I think um having like some kind of loose example to work off of could help.

SPEAKER_01: 6:02

Like let's say that you like gosh, I mean there's just so many I don't know if that's actually the best way to go about this.

SPEAKER_02: 6:11

Um I lost my train of thought. Frick me, man.

SPEAKER_00: 6:16

Well let's let's talk about the let's talk about you know, first of all, where do these positions, concentrated positions, come from? I mean, you you already mentioned run-up in the market that we've seen over the last really 40 years. But um and also there are there are stocks that just become super popular, you know. Think think about everybody that's bought Apple in the last 15 years that have done really well. And so, you know, the number of portfolios I see with with one big large Apple position or one large position. Now the latest one is NVIDIA, where it's kind of become a a meme stock, not you know, not not in those, you know, not not saying anything about the company there, but it's got a it's got a cultural general awareness that that a lot of people have bought into it, whether they know you know what they they do or don't do. They hear people talking about it. It's interesting.

SPEAKER_02: 7:13

How do you get a concentrated position? Like it's like I personally wouldn't run into that problem because I don't buy individual stocks like that, except for yeah, I guess I think that's how it happens. You you buy an individual name, maybe you put a little more money in there, and it ends up painting out. That's one way to get there. Like just pure luck. Um, you could have this is very rare, although you'll hear more stories about it than it's probably reality, the thought-out investment into a certain company that ended up painting real out really well. But I think probably the most common is is former employers is those, you know, you get those benefits as an employer and then you leave and it ends up becoming a ton of money. Um, so whether it was blind luck, intentional investing, acumen, or former employer, you know, you can end up in these situations. And then just time too. Like, yeah, you like you bring up like Apple, you know, plenty of people bought Apple early 2000s, and then just it wasn't a huge number then, but when you have the return they have, you go, oh crap, that's that's a ton of money now. So um a couple of ways to to to kind of stumble into it. And I think probably um some of the stuff we'll talk about is why it becomes a concentrated position, because you can have this mentality of like, well, what if it keeps going? What if it keeps going? What if it keeps going? And it just kind of snowballs and then you end up with just a ton. But um, okay, so like let's let's imagine you're in this situation, however, you got there, you have a concentrated position. Um and let's assume it's not in a retirement account, because that's it's a little bit harder to buy in a lot of times. This happens outside of retirement accounts. Um not all the time, but like in a brokerage account where there's some different tax ramifications. Probably I think there's two reasons people don't sell a concentrated position. I think people probably understand that this is very risky. I have my whole network, a very large portion of my net worth in a single stock, but they don't sell for two reasons. One, what if it keeps going up? Yeah. And two, I'll have to pay taxes on it if I sell it. Which you want to tackle that. Which of those you want to tackle first?

SPEAKER_00: 9:11

Yeah, I mean, let's talk about FOMO first, fear of missing out. That's that's real. It's it's a big psychological component of w you know of investing. And um so yeah, I mean that that is that is one reason why people don't want to to sell out. What if I sell out right before it it doubles again? And this applies to losers too. Like you've got a stock that that's done poorly, you don't want to sell out right before it it recovers. And so like it cuts it cuts, it's not just the winners, but but I guess when a position's going down, it's becoming less and less a concentration in your portfolio. Whereas when it's appreciated, it's it's it's gaining in in in concentration. And so it it that that fear can compound.

SPEAKER_02: 10:02

Yeah. Individual stocks are so different than like diversified portfolios. Like I'm careful to say this, because some there's some companies now that are breaking some of this, but like a company can't double forever. It kind of becomes an upper bound for the most part. Some of the tech companies have a little bit higher bound, but like if you invested in Coke, like there is an upper bound. There's a maximum of like how much Coke and how many people, how much how many people in the world, how much Coke they can drink? Like they it can't just well double last year, it's gonna double again, it's gonna double again. Like there's there's like there's yeah, there's it can kind of be an upper bound. And so I think like if you've had just an insane run looking at it and going, what are the chances it doubles again from here? And that's not necessarily the best way to think about it. It's compared to my other options. I think that that was actually the unlock, one of the unlocks that the the LinkedIn post example what changed his mind was like of everything out there, which is more likely to 5X again? Probably not this name.

unknown: 11:06

Yeah.

SPEAKER_02: 11:06

It's kind of interesting. And that's actually how you gotta ever like everything is compared to compared to what? Like what could you do with that money instead? And so it doesn't matter if the name might double again in 10 years, but there's other things that could do better. Like it that's just um I I don't know if that's making sense, but um, no, totally.

SPEAKER_00: 11:24

I mean, and then it's it's kind of a a more it's a more general observation of the markets that that when there is outperformance, what what drives market outperformance is usually concentrated in only a handful of names. And so it's it's like it's a feature of the market that that what's driving these strong SP returns is concentrated and has always been concentrated in a few names. Um and and so which go ahead. Uh yeah, I was gonna say, but the the the hard part is to know which are gonna be the names for the next decade. Exactly.

SPEAKER_02: 12:04

Because I was just saying, why do we why do we even recommend not owning, like why do people say, like, oh, you know, uh you said something like obviously you told them to or you gave them the the traditional advice of diversify the portfolio? Like we always say that. Why do we tell people to diversify? Because it's absolutely true. The the biggest fortunes are made by owning individual companies, owning or operating individual companies. And you go, well, if that's how they did it, then that that that's the way to riches. Because it's so freaking hard to guess which one it will be. And then you go like people look at the SP 500 and they're like, well, seven names are driving it. Yeah, pick the seven to do it. It's obvious, and obviously, Netflix was gonna take off. Like, no, like the the challenge is always like, tell me the next 20 years which one is it gonna be. All of a sudden it gets a little more stuttering. And so, and and this gets back to like, so why diversify then? And like, why do you sell it on a concentrated position? Because an individual stock can go, it can eight X and it can also go to zero. The broad market's not gonna go to zero. So, like, if you can't afford that drop, then you should not have that much in that like that. That sort of all comes back to like, can you afford that concentrated position to get cut in half? Yeah, one of our principles, we can all afford the upside. I'm not, I don't care if you can afford for it to 8x again. Of course you can. Can you afford to get cut in half? If you can't, probably should sell just on a pure investment strategy alone. And so, um, yeah.

SPEAKER_00: 13:25

Uh yeah, it's interesting. I mean, you you brought up uh before this, uh I was looking at the list of the top 20 US stocks uh by market cap from 20 years ago and today, so or 2005 versus today. Um, and of that list, um, only five companies appear on both. Um five companies Microsoft, Walmart, JP Morgan, Exxon, Johnson ⁇ Johnson, you know, all household names. I mean, these are all household names, you know, they're the top 20 largest companies in the world right now, as well as, you know, we all still know the ones on on the list before. But I mean, think about those that are no longer on that list. Citigroup, AIG, those are casualties of the financial crisis. GE, you know, a casualty of industrial decline and outsourcing, and the company's been broken up and um yeah, and tech disruption. I mean, Intel, you know, has dropped from from a top 10 company to to off the list as as they were replaced by NVIDIA because they missed out on the AI boom. And so, you know, the the it's it's interesting that they're they're you know, the list is also populated by new entrants that barely existed in 2005. Or didn't or didn't exist. Yeah. Amazon, Meta, Tesla, Broadcom, these companies, they either didn't exist or were very small in their infancy. And so yeah, I mean, the doing that uh analysis is is can be humbling, you know?

SPEAKER_02: 14:59

Oh, totally. And it like that's where like it's an impossible thing. But like I wish people would could write down their predictions every year and look back and see how wrong they were, because m a lot of people, whether we're I think it's it's gotta be a subconscious thing. We would go, well, yeah, I mean, I mean, you know, obviously Citigroup was gonna fail and JP Morgan was gonna succeed. Like, we just will think it's more obvious because of that you can attribute a narrative to history and make it make sense in your own mind. But like, yeah, it's always like, what are the next ones gonna be? And also, so actually, really when you say there's five names still on there, that doesn't mean that those have been the best names. Like, just because they've stayed big doesn't mean they've necessarily been the best best performers. So the question is like, what shive me the uh give me five names that aren't on the list that will be in 20 years.

SPEAKER_00: 15:43

Yeah. Um, yeah, I mean, so I I think we we've kind of talked about the the the FOMO and and maybe dispelled the um you know, the the the or at least taking our ability uh seriously, taking our our our how likely it is that we'll be able to pick the next winners. But what about taxes? I mean, you talked about fear of paying taxes as being another limiter um to people diversifying.

SPEAKER_02: 16:14

Yes, because like let's say that it is in a yeah, you're gonna, okay, I bought it for$100 and now it's worth a thousand dollars. I've got to pay tax on this$900 gain, you know, and multiply that how much you want. Like, I can't do that. I think there's a couple things. Like, one, just the psychology of like you kind of anchor on, let's say what it's a hundred grand is now a million, you're like, I got a million, but it's like, actually, then a tax you have eight hundred thousand or whatever the number is. Like, that can just be hard to just just pure. I mean, people do that, but we deal with that with paychecks and everything. Like, we just anchor on the pre-tax number. That's not the totally real number, so I think that's a hard part. Um people just have a thing about not wanting to pay taxes. Let's just put it that way. Uh I don't want to give my money to the government. That can be driven by a lot of things. And okay. Um, I just come back to all the time, for the most part, if you're paying taxes, you made money. Congrats. You know, like we can try to minimize you can't generally avoid taxes completely legally. At least you can't. You can that man we might talk about that. Like, you can die and pass money on and avoid taxes that way. But like, generally speaking, you, the person, cannot grow a get a ton of new money and not pay taxes on it. So I think sometimes like it's just part of it. You just gotta know, but yeah, shave 20% off of that for taxes or whatever the number is.

SPEAKER_00: 17:36

Yeah, I I think it it we would all be so much better served if people instead of anchoring on the the total, anchor on the net number, you know, focus on after tax wealth and maximizing that rather than maximizing the the total, you know, because you you don't you don't actually have access to that money until you sell it, um you know, for the most part. You you can't you can't go out and buy a house with app appreciated apple stock unless you sell it.

SPEAKER_02: 18:07

Um we might talk about one way you can get around that. But but like but like but yeah, I I a hundred percent agree with that. Like let's use that example. Bought it for$100,000, it's now worth a million, but you'd have to pay$200,000 of taxes. So it's you really only have$800,000 of your money in there. You bought it for$100,000 and you now have$800. That's still freaking amazing. But if you anchor on the it's it's it's all a psychology thing at that point. And it would be, I understand why we can't do that because there's so much other stuff that goes into it. But like if you checked your brokerage account and it showed the taxes, like the tax that would be due if you sold today, that would be so nice. Just uh it is purely, I I think a lot of it just anchoring in psychology there because taxes are not fun. Doesn't think you're getting much for it. Um and I think so. Another mindset thing on that is people will say, well, like I don't want to sell it because I'll pay tax. Let's say it's you know, I'll have to lose you know, lose 20%. But that's where it's like, okay. But that stock itself could go down 50%. So like I don't want to take on this 20% loss, but I'm gonna or like for sure, it's not even a loss. But I'm gonna risk a much bigger loss because I don't want to pay taxes. Um sorry if I sound condescending right now, but it I just think it's just not super I don't know, just that that thing is.

SPEAKER_00: 19:27

Yeah, it's not it's not logically consistent. If you you, you know, you you don't you're afraid of paying a$200,000 tax, but you're more afraid of that than you are of of losing$500,000 if the position gets cut in half, you know. And so yeah, there's there's definitely that's that's a not only is that psychologically uh inconsistent, but it like mathematically it just doesn't make sense um if you're exposing yourself to that risk. And so like by not making a decision, by not selling, you are making a decision to to expose yourself to to the risk of a far greater loss um than if you had bitten the bullet and diversified. Um yeah.

SPEAKER_02: 20:10

So I think like step one is just you've got to anchor on the right number. Like that that million is not yours. It's just not yours. There's no way for you to have it really. Um you can donate. Well, again, we'll talk about some of the other things. There are ways to get the money, but you're not gonna benefit from it. And so that's number one, anchor on the right number. Uh, number two, it's like, I made a bunch of money, so I'm gonna pay some taxes. Good for me. Uh and then number three is like, what's the actual risk you're taking on? And like, can you afford a 50% drop in the name? Nope. Then you're gonna probably have to sell it and pay some tax. Yeah.

SPEAKER_00: 20:44

Yeah. All right. Well, let's let's get into what are what are some of the levers you can pull to reduce the pain of of the tax or the fear of the tax. Um, you know, because this isn't, isn't, you know, it can be an all or nothing. You know, you go sell the whole position, or it could be something that you implement over time, or and there's some other strategies that we can talk about for okay, if you've decided you want to diversify, what what's the best way to do it?

SPEAKER_02: 21:16

Um so like mechanically, like how how should we get money out of there?

SPEAKER_00: 21:21

Or yeah. I mean, I I think the first the first thing the one of the ways that that I think eases people into it is is an idea of like diversifying it over time. Yeah. And so like make a plan to make gradual sales over a fixed time period. Yeah. Um and and maybe you use like certain tax brackets as a guide for you know that. You know, say, say we don't want to go into the 20% capital gains bracket. We want to stay in the 15% capital gains bracket. And so they may that may limit how much we decide to sell. But just spreading it out over multiple years takes away some of that FOMO. Um I still I'm not sure.

SPEAKER_02: 22:06

Like I understand behaviorally, I understand that. Yeah. But like I think if you were unemotional about it and purely logic-driven, that probably doesn't make sense. If the investment allocation decision calls for a different portfolio because you can't afford the risk, then don't be like, well, I want to avoid 5% taxes. So I'm going to spread this out and carry on that volatility risk. Risk just because of that. So like Yeah, that's I get it, but it doesn't like just call it what it is. And this is like it's the opposite. Like, let's say you have a million dollars to invest, the other way around. Like it feels really risky to like just dump it all in there today. Because what if it goes down tomorrow? And so a lot of times people will kind of dollar cost average or buy over time. Like I I think what I tell people is like historically the most the highest probability, the best outcome is generally to just lump sum it. Um, but I fully understand if that's just too much to stomach and so average into it or buy over time, that's fine. Same thing on diversifying a concentrated position. Like probably if you just remove the emotion, again, if like you can't afford the drop and you need to make the decision, make change the allocation, do it. Rip the button. But I also understand, like, if you're not going to do it, then you if the options are not diversifying or doing it over time, then do it over time.

SPEAKER_00: 23:18

Yeah. Yeah, I I would I would probably agree with that. But even for it makes people feel better if we're doing it gradually.

SPEAKER_02: 23:25

You know, I think there's a lot of things that make us feel better that aren't good for us. Yeah. You know, yeah. Like I'm just calling it out. Like, like that's part of our role. It's like I get like we're more emotionally detached. Like I under I empathize with the emotions people are going through, but like part of it is like I'm not tied to this. I see it for what it is. You never had a million. I don't have this emotional drop. So like here's what you should do. So maybe it's not a good thing.

SPEAKER_00: 23:47

Well, and you're and you're better about that because I have the same, like, even as the advisor, I'm like, well, shoot, what if I tell them to sell and it doubles tomorrow? You know what I mean?

SPEAKER_02: 23:57

But that but what no, no, no. No, that's the perfect thing to talk about. Yeah. That if that happens, that doesn't determine whether your advice or their decision was good or bad. That a good decision and good advice is determined today, before not based on the outcome. If you cannot afford for a stock to get cut in half, then who gives a crap if it doubles tomorrow? We can all afford for that to happen.

SPEAKER_01: 24:23

Yeah.

SPEAKER_02: 24:23

That's not what we're optimizing. That's not what's more important. And so, like, oh well. Like if it doubles tomorrow, well, guess what? You still own half of it. Now you're back to where you were. You know, like if you see like so it's like that you that thinking is exactly the trap that gets people there.

SPEAKER_00: 24:37

Yeah. And it gets, it gets, it picks up advisors too, and that same that same thinking, just in a different way. Um okay. So yeah, I mean, whether you do it all at once, you know, probably, you know, you should. Um, but if you can't stomach that, or if it's if it's easier to do it over time, at least you've got a plan to do that.

SPEAKER_02: 24:57

Yeah, and I I would say like, let's like to be a little more precise, like it depends the the the fame what does it depend on then? Like if you are if you can spread it out over two years and stay in the 0% long-term capital gains bracket instead of the 15, like that could possibly try to quantify it as much as possible. Like if it's like if you're talking in December or November, maybe we're talking about two or three months, like there can be times where it can make sense to draw it out. Like I I do under, I don't want to overminimize, like, just do it all at once. Don't give a crap about taxes, just pay it. Like there is a little bit more to it. Like if you are closer to those thresholds, but for some folks, like they're just in the 20%, they're gonna pay 20% capital gains on it, maybe 23.8 with net and everything. Like, just do it. Like it if there's not a difference from year to year.

SPEAKER_00: 25:50

Um Yeah, let's talk about um some other ways. I mean, uh uh people talk about tax loss harvesting as a way to offset some of those gains. So using losses elsewhere in your portfolio to fund that diversification. Here again, I would say like we don't want to let the tax tail wag the dog. We don't want to wait till we have losses somewhere else. Um but if you've already got some losses there, like that can also act as a pressure relief valve for it can.

SPEAKER_02: 26:25

I also think in a true like concentrated position scenario, depending on how concentrated it is, whatever losses you have aren't gonna be very material with a huge, huge concept, you know. True. So like if 80% of your portfolio is in one stock, like it but yes, that's that is one option for sure. Um something I want to talk about is like I I kind of hinted at a few times. Um there are ways to avoid taxes. But you probably aren't gonna be the one benefiting from it. So could should we talk about that real quick at all? Yeah, just go for it. Um so if you do find yourself with a large concentrated position, again, you're like you, Colin, are not gonna be able to probably sell and enjoy that money. But you can give it away. Yeah, and that full value will get passed on. So you could attribute contributing or donating appreciated stock is one of the best tax moves out there if you're if you're going to give either way. So um any do you want to I think we've talked about this in the past, but would you say anything about that?

SPEAKER_00: 27:25

Yeah, I mean we have we we've got a whole episode on on charitable giving strategies um using donor-advised funds or or um donating stock directly to a charity. But yeah, I mean that eliminates capital gains. You don't pay capital gains on on that growth. The charity doesn't pay tax on that growth because they're a charitable organization. Um and so yeah, you could you can you can pass on that those funds with without anybody paying tax on it. Yeah.

SPEAKER_02: 27:56

So so that's one way to the full value can get passed on. The other one is to die and pass on the money that way. Um with what's called step up and basis. So using our example, if you buy it at$100,000 and sell it for a million, there's your your basis, what you bought it for is$100,000, there's nine hundred thousand of gain. If you die, you can pass that money on and you get a step up and basis. So the person who receives it, their basis is now a million. If they sold it for if they sold it, there wouldn't be any gain. So very common. Um but again, you're not benefiting from it. But that is one way.

SPEAKER_00: 28:26

You're not you're not benefiting from it. Um and I think that's that's one where it can it can make sense if we're talking about planning late in life. Yeah. Um but the number of people I see who are entering retirement and their plan is to just hold that Apple stock till the end, which might be 30 years from now.

SPEAKER_02: 28:49

Exactly.

SPEAKER_00: 28:50

Um and to go back to our our you know, earlier discussion of what what companies were in the top 20 20 years ago versus versus now, like you're taking a big bet that that you know that that's still gonna be there uh 30, 20, 30 years from now. Yeah. Um and so yeah, I I see it as a but yeah, it's it's sure. If we're talking about somebody who's who's elderly already, um maybe that that holding on to that is for that step up and basis drives more of the decision making. But if you're in your 60s, gosh, that's a long you're likely gonna be waiting a long time.

SPEAKER_02: 29:28

Yeah, I 100% agree. And this is it's funny, like we're basically dancing around uh my own grandmother's example. She had bought some of that apple back in like 2001. It became a very uh, you know, relatively large position. And towards the end of her life, they were figuring out what mu where to pull from to pay for some stuff. And my dad, the advisor, is like, don't touch the apple stock because they're not gonna be paid taxes on that when she dies. But yeah, she was like 92 at the time and died like a year later. So, like that makes sense. 60-year-old wanting to not touch it, that's where you gotta go back to. Like, first of all, it made sense for her to hold on to that apple position because she could afford for it to go to zero at that stage of her life. And so um, yeah, that the that's always I want to always come back to you. Like, the tax tail does not wag the dog. Taxes are not the first thing that should be driving this, but can you like does the allocation make sense? Can you afford for that drop in value during the time horizon you're planning to hold the stock? That should drive everything, number one. And then taxes are kind of a tiebreaker in timing mechanism, I would say.

SPEAKER_00: 30:26

Yeah.

SPEAKER_02: 30:27

Um okay. So we talked about the other ways to get like full value out. Uh, you can die, you can donate. Another one that you can if you're if you're worried about liquidity, so if you want to use that, like let's say you've got the 100,000 that grew to a million, you're like, I need to go renovate my house or something. How do I get some money out of this? Um, you could sell it and then you're gonna pay taxes and everything. There is another way to kind of use that portfolio for liquidity. You can you can take loans against portfolios, um, securitized lending, collateralized loans, different things. Like, yeah, you can you can borrow against the value of the portfolio. Um that works, but that is an option to where like let's you could probably get a loan for up to, I think it's like 35% of a concentrated position. So you could have access to it, you could borrow against it. It's a loan, you're paying interest and everything like that, but it is a way to at least get some liquidity without having to actually sell and liquidate the position, which this would make sense if the investment allocation decision actually makes sense in the first place. But that is something I've seen and actually executed with clients before of like, how do I, if I want to go, I've got all this money, I need some, yeah, that's just an option there.

SPEAKER_00: 31:36

So yeah, and and I would say that's a that's even that's becomes more attractive or more of an opportunity if the need is is shorter term. Yes. You know, because as you said, like you're gonna be paying interest on this. Yeah. Um, and so say you're you're buying a new house and you want to have money for a down payment before you sell your old house. And so sure, tap tap that um portfolio for you know the six months or whatever alone for six months to bridge what that house purchase. It's probably not the best long-term strategy, you know, to borrow against it indefinitely. I mean, you hear about, you know, constant billionaires and you know, Elon Musk borrowing against the value of his company's stock. Well, then think about why is he doing that? He's not just doing it for tax reasons, he's doing it for control reasons. He's, you know, it and so this is another one of those where people can get tripped up. Well, oh, the wealthy are doing this um to fund their lifestyle, borrowing against their portfolio. So maybe I should too.

SPEAKER_02: 32:36

Um Yeah, that's I think the key is they're not funding like like generally not you consuming that money that they're borrowing. It could be like, I'm going to borrow against my portfolio to fund the expansion of a business or something like that. That could because it's it got you're 100% right. It needs to be a shorter term, or there needs to be a payback period on it. You don't just like take loans out to go out to dinner and let it compound forever. You're gonna have to pay it back at some point. But it's like, but it is a great a good option. Um I think I mean that that was one of the examples was wanted to start a business, didn't want to sell part of this position. I was like, well, we could take a loan against it and um use it that way, or yeah, like to bridge in between buying a home. That's a great that's even probably the most applicable one that I uh that I've seen with like clients my own age of um and you can do this this borrowing against not just a a concentrated position, but yeah, like uh short-term cash. Yeah, you totally.

SPEAKER_00: 33:29

And in fact, you can probably borrow more against a diversified portfolio than than you can against a single position. Yeah. Um one other strategy, I mean, this this dips back into charitable strategies, you know. If you do still need income um or or um from a a concentrated position, I mean there are ways to to either set up a trust or um or donate uh an appreciated position into a structure that will pay you basically an annuity for your lifetime. And so there are charitable remainder trusts where the the you can donate the position into a trust that will pay you uh either a defined percentage or a defined dollar amount for your lifetime, and then the remainder goes to charity when you die, and you get you get a a certain amount of that as a deduction up front when you make that that donation. And so I mean yeah, th these are more advanced, I would say, planning um strategies that that you can do. Um but again, I think the the the need has to drive the the use of these, not the other way around.

SPEAKER_02: 34:42

Yeah. Yeah. Uh one thing we talked about before, I can't remember the name of them, but there's some like you can pool investments in the UK. Yeah, there's a what are they called?

SPEAKER_00: 34:52

Unit trusts or um where you could you know, uh with other people that have concentrated positions, basically pool them into a trust vehicle um and that has to be held. And so you you get some diversification benefits of holding that now trust vehicle that you've contributed your stock to um for a defined amount of time. So that gets you diversification right away. It doesn't take care of the tax picture. I mean you would still when you when you get out of that, you still owe the tax on the gains. Um but at least gets you some diversification without having to recognize the gain.

SPEAKER_02: 35:32

Yeah. That's great, that's a good list. Yeah, and the um the trust option is one. That's a that's a a very good one as well. So um yeah. So how do we tie tie this up? Investment allocation decision comes first. Does it make sense? Can you afford the the drop in value? Um I guess something we didn't talk about is like if you just really do believe in the company and you just know it deeply and think it makes sense, um that's kind of its own thing.

SPEAKER_00: 36:00

But um Yeah. And and I and I try to be the devil's advocate in in that when dealing with a client like that. Because I do talk to folks who are insiders and and you know, think they know and and in many cases they do know. You know, they they're the ones that know what's coming out and and see the the vision, but you also have to to know that like, hey, you you are on the inside, you've probably drunk the Kool-Aid a little bit, and um you know, you may not be the most objective evaluator of this. Um plus then the concentration risk is is doublefold because not only do you're also an employee, so your income is tied to that employer doing well, so it's an even bigger bet. So I try to play that that role. I mean, uh that doesn't mean you know, like your example with with the client, you know, you you gave them what was good advice to to diversify. Um and then the client gets to choose whether they follow that or not. Yeah, yeah.

SPEAKER_02: 36:59

Um yeah, uh maybe I'll link, I don't know if I'll link to that or here. I think the one other the last thing I would want to add is just beware of survivorship bias in these stories, because here's a story of it working out. And you'll you'll hear it's like casinos. Everybody's heard the story of somebody winning. Nobody talks about the ones they lost. Like I don't know what a thousand times for every one winner, there's a thousand or ten thousand people who lost their shirt doing this. So like just keep that in mind, you know.

SPEAKER_00: 37:30

Um concentration is what gets you wealthy.

SPEAKER_02: 37:37

Um, but it it doesn't necessarily it builds and destroys fortunes as is as many fortunes. Diversification, you're guaranteed not to be the best, you're also guaranteed not to be the worst.

SPEAKER_01: 37:47

Yeah.

SPEAKER_02: 37:48

Just the trade-offs you make. And so, like, yeah, if if you can't afford for the concentrated position to get cut in half or go to zero, then there's your answer. Uh it doesn't matter if we can 10x. Um and yeah, taxes generally mean you're making money. Right. Yeah. Well, all right, off the soapbox, good stuff. Um if you're out there and you have a concentrated position, congratulations. Yeah, you don't be able to do that. No, seriously, it's a good problem to have. High quality problem. Yeah, absolutely. Absolutely. Oh, that's a whole nother thing. If you like it becomes a burden, though. That single stock consumed this person every day, multiple times a day. So that's a whole nother thing. But um awesome, man. Well, I appreciate it.

SPEAKER_00: 38:35

Great conversation. I'll see you next time.

SPEAKER_02: 38:38

See you next time.