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Stock Change - The highs and lows of KuteLuvr — LiveJournal

About Stock Change

Previous Entry Stock Change Jul. 14th, 2005 @ 10:47 am Next Entry
I'm not usually one to play TOO much with my stock purchases. In truth, the only thing I really invest in is through my 401K and the HP stock purchase plan. For quite a while, I've had my ESPP deductions set at 1% (the lowest I can go without actually withdrawing). The idea was a fairly low faith in the stock over time, and a feeling that I could better use the money immediately elsewhere... but I wanted the option of increasing it if my faith in the stock increased and/or the purchase price vs. stock price was just too good to pass up... hence the 1% instead of withdrawl.

Well, the time has come to do something about it. The stock is hovering at some of the highest prices it's seen in almost 4 years... and I have faith it's going to go higher. I'm not an "inside trader"... I have no information that isn't available to the public... but I see what the stock is doing... what announcements the company has made... the people that the new CEO is pulling in and organizational changes being made... the upgrades we're getting from analysis companies... the "feeling" inside the company (which granted, most people wouldn't really know about, per se... but is still a personal evaluation, and not something that is performance-based in the company).

So... stock purchase is now back up to 10%... my hope is that it will be an easy double-my-money investment. The adjustment in pay isn't going to feel good... but I can't pass up what basically amounts to free money.

...now lets hope the SEC doesn't come after me for this post. :P
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Date:July 14th, 2005 10:01 pm (UTC)
Um, I hate to say this, but I think you've missed the point behind an ESPP.

If the program at HP is anything like the one I had available to me at Apple, you sign up, some percentage of your salary goes into an account, and at the end of the ESPP period (typically one or two quarters of a year), the stock is purchased with your total contribution at 15% below the lowest price of the stock during the period.

So, you now own an appreciated asset worth at least 15% more than you paid for it. Possibly more, if the stock price increased over the period. The right thing to do is to sell it immediately to lock in your gain, and then reinvest the proceeds (after taxes) in a diversified portfolio (e.g. a mutual fund or three, or five). Lather, rinse, repeat, every period. Main point: it doesn't matter one whit how well or poorly the company's stock is doing: you still get your 15%, at minimum.

Just to give you an idea of what a fantastic deal this is, let's compare and contrast for a second:

If you didn't sign up for the ESPP and stuck that 1% of your salary in a savings account, you earn, what 2%? 3%? and that would be over the year, not the half year or quarter year. You can do better in Treasury bills or Certificates of Deposit (CDs, about 3.47%), but again, over a year's time.

Taking that 1% and putting it mutual fund would do much better, depending on its composition; perhaps 10%, year over year, though you wouldn't be up all years. Long term, it's a pretty sure bet, but guaranteed it's not.

And yet the ESPP is still giving you 15% every three to six months!

The key concept is very simple: have your "spare" or "investable" money in the investments that are likely to return the most over the time the money is invested. The other thing is to control for risk: having all your money in one stock is asking for a world of hurt - it's better spread around.

An ESPP is not an instrument for investing in your company's stock. If you want to do that, buy the stock back again at market rates, after you've taken your (minimum) 15% gain from the ESPP.
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Date:July 14th, 2005 11:57 pm (UTC)
I get what you're saying, but I look at it from a different perspective...

HP's stock is the only thing I track regularly, and have any faith in understanding is going to go up or down... it's something that I've watched so much over time (it helps that it's on the front page of our intranet homepage) that I think I "get". Because of that, I use it as a money-making tool when I think it's going to be effective. When I feel the stock is riding high, it might still make sense for me to have a high investment in the ESPP, since, regardless of the move, I'm going to make 15% off the top... but I don't babysit it so close that the minute the plan purchase happens I can resell it.

The way our plan works, you get the lowest of either the price at the beginning or end of the period, and 15% off of that. Either way, I make money... but if the price is $18 at the beginning of the period, and $25 at the end, I can make more money by investing when I believe the price at the day of purchase will be significantly more than the lowest of the two prices. I find that I'm much more interested in investing in the stock when I feel it's more likely to make me double the money than I am when it's only going to make me 15% (assuming it doesn't go down between the purchase and the execution of my sale request). In the meantime, if I have things that are costing me money in the meantime, I'd rather reduce debt (which I understand it isn't cost effective to rack up anyway) than to hold the money elsewhere with the understanding that it's going to make 15%.

This really boils down to different ways of managing personal finances. It's easy to see that there's a right way and a wrong way, but even people that do it "the right way" lose money... so it's a gamble either way. This way, I feel I'm making an educated decision... it makes me feel more in control, and provides a more immediate ROI.

For long term investments... things that I'm just not looking to make a buck... retirement... I have my 401K, which I invest heavily in, and manage based on my perception of markets and recent and sense of possible fund performance. That has a fairly balanced view, and I've done pretty well at not losing a ton of money (I lost almost nothing at the bust, for example, because I felt the economy was riding high, and I moved everything into mutual funds and bonds).

I see the ESPP as a way to make some quick cash with a fairly guaranteed return... but I don't feel it's worth it unless the return is going to be significant. If it's not going to be a really good return, it's worth taking my paycheck and enjoying it or paying things off, rather than wait for 15%. It may not result in more money, but it provides me with a stronger sense of personal value in my paycheck... and that is a very individual thing.

(We may be saying similar things, and/or come to the same conclusions, even if our perspectives in the process of getting there are different though :))
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