Counterpoint: Don't Insta-Sell All RSUs

Alert reader Steve Na argues for a more nuanced approach to RSUs

Insta-Sell All RSUs garnered some vociferous debate, especially off my post on LinkedIn. Steve Na in particular responded frequently with counterarguments which made me feel we were far apart in our perspectives on RSUs, so I asked him to write a follow-up article, posted here in full, as a way for readers to hear a different perspective. Funny enough, after reading his write-up below, I feel Steve and I are actually remarkably aligned — perhaps a testament to why the internet needs more long-form debate for both sides to understand we’re closer than we at first seemed in short-form comment threads.

Steve Na in full below. My notes are inline in italics.

This is a response with a different perspective to the post Insta-Sell All RSUs, Always. In that article, the guiding principle states that “you shouldn’t hold what you wouldn’t buy” and doing so is irrational. And I acknowledge that it is likely good advice for many people. But, I also argue that this is not universally good advice and it can be perfectly rational in many scenarios to hold all or part of vested RSUs.

Rational decisions take into account future emotional states

In the article, the author mentions the omission bias demonstrated by the trolley problem. People choose to not actively save lives as the action required would sacrifice a fewer number of other lives. The implication is that this is not rational. But, is it?

There is little question that a robot with no emotions should save more lives by actively intervening. That is the rational action for a robot. For an experienced triage nurse on the battlefield that makes these decisions daily, this may also be the rational choice. For everyday people, they may carefully consider and decide not to intervene, not due to emotional or rushed decision-making, but from thoughtful deliberation and knowing what that act would do in terms of burdening them with their decision. To me this is equally a rational decision. The person is taking into account the full consequence of impact from all outcomes to themselves. Professional poker players do this all the time. They may avoid situations with small positive EV, but high variance because they know that they have a tendency to go on-tilt if they lose those situation and play badly in the future. The initial decision to avoid this is not irrational.

So, while emotions are irrational by definition… making decisions emotionlessly accounting for future impact to emotional states and outcomes is absolutely not rational. In fact, it’s the opposite to attempt to optimize without considering those future emotional outcomes would be irrational.

Many parts of the insurance industry are built on protection from negative black swan events. Buying insurance is not irrational even if the expected value is negative. Now, consider if the black swan event is positive, such as your company doing really well. The insurance here from the huge regret of selling all your stock is to keep a small portion. This is also equally rational to employ such a mixed strategy.

I (Philip) love this section, which calls out an import point and a shortcoming of mine. Making decisions which account for your own anticipated future emotional response is wise and self-aware. I could use more of this perspective in my life.

“Holding RSU’s is equivalent to Buying” is a false dichotomy (and impractical)

In the investment world, there’s 3 ratings: buy, hold, sell. Buy means, if you have money, you should buy it. Sell means, if you own the stock, you should sell it. Hold means, if you own the stock, you should keep it. This last one is status quo, not enough information either way. There’s 3 ratings for a reason to avoid thrash and constant settling and buying on the slightest good or bad sentiment. In all of wall street, there is exactly 0 analysts that have 2 ratings of buy and sell.

And from a practical point of view, let’s consider a wealthy individual (>$10M net worth) and they have a quarterly vest coming of $100k. That’s a 1% change to their overall allocation. Should that trigger a re-allocation? Re-allocation is typically recommended every year. Markets fluctuate daily. There is no reason for a wealthy individual to actively sell their 1% to cash. If they did, they would need to then move that cash into another investment since cash is a depreciating asset (inflation). Also, the sell price will not exactly match the cost basis so next year’s taxes will be slightly more complicated due to the small capital gains or loss.

Also, this is not how great investors think. Warren Buffet finds the handful of investments he believes in, adds to it over time, and HOLDS. He absolutely does not wake up every morning and ask the question “Would I buy more of this?” and if the answer is no, sell off his position. If he did this “rational” approach, he would never have become who he is. To become a great investor, you need conviction and long-term thinking. Asking yourself questions like “would I buy more of this stock today and if the answer is no, I should sell it all” is the exact wrong mindset to have as a long-term investor.

I either misspoke or Steve misunderstands my position here. I’m a huge Warren Buffett fan and have owned Berkshire Hathaway shares for decades. I wouldn’t say a person should sell all their shares if they wouldn’t buy even more today — I’d instead say a person should sell all their shares if they, without those shares, wouldn’t have gone out and bought those shares with cash. And indeed, investment decisions are trimodal, with buy, sell, and hold as viable options.

I’m also agreed that there are many situations where holding makes sense when the RSUs reflect a small portion of a person’s total assets. It’s just that for many engineers, their current RSUs reflect far more than, say, 1% of their total assets. I spent much of my career with RSUs representing 25%+ of everything I owned — and holding that much of your net worth in the company that employs you represents both concentration risk as well as correlated risk (e.g. you’re likely to get laid off at the same time your company’s stock is tanking).

A key caveat in my original post was, “The next time you vest RSUs, ask yourself whether you’d buy those same number of shares even if you didn’t work at the company. If not, you need to sell immediately.” In cases where your investment strategy includes wanting to own shares in your company, it’s rational to hold the percentage of vested RSUs which fit that strategy.

Diversification is over-valued. Concentration is fine depending on the goal.

The article argues that concentration in a single stock is risky without explicitly calling out what would be done with the cash if the RSU’s were sold. The assumption is that an S&P500 index would be a safer / more rational choice (given that cash is a quickly depreciating asset). Diversification is ok but it’s not a holy grail. The benefits of diversification is for market risks, not non-market systemic risks. And the benefits of that diversification quickly drop after 10 or more stocks. So, the rationale for choosing a 500+ stock index is less about diversification / reducing risk and more about lack of financial understanding of where to put the money.

For someone that is very young, if they have only a few thousand to invest, their “net worth” is tied to their own earning power. They are highly concentrated in their net present value of their future earnings and their stock portfolio is a tiny portion of their net worth. Debating for that individual whether a stock portfolio of 5 or 500 is better at managing risk is inconsequential as their risk profile does not change at all. The same argument applies to business owners or home owners or anyone else that already has all their eggs in one basket (which is a lot of people). For these people, an overly-diversified portfolio with 500 stocks does not meaningfully reduce risk. On the other hand, it does provide a crutch for them to not learn about the stock market. I would advise someone just starting out not to invest in the S&P 500 and do research and learn stocks and industries by researching and doing. In the long-run, that learning and experience will help with better investment returns.

Lastly, concentration in 5-10 stocks is fine. That is what all the great investors have done. They do their research and homework and invest in a small number of stocks to beat the market. The market is highly inefficient. There are many opportunities to beat the market with some hard work. If the goal is not to beat the market and you are happy with market returns and have no interest in putting in the work, then yes instantly removing concentration and having maximum diversification is probably fine.

This is a point of significant disagreement between Steve and me. It’s true that great investors beat the market, consistently so, because the market is inefficient. At the same time, the majority of professional fund managers lag the market. I doubt the typical engineer can beat the typical full-time fund manager by spending nights and weekends investigating individual stocks. If you could, you shouldn’t be working as an engineer — you should be full-time investing.

Don’t be the hyper-rational, wet towel at the party

Have you ever been at a craps table where everyone is happy and cheering for each other? Everyone has their fortunes tied together and there’s good vibes. Everyone is betting on the “pass” line and wishing good thoughts for each other. Then, a single solitary person comes in and bets on “don’t pass”. For those uninitiated to craps, the house edge on pass is 1.4% and the house edge on don’t pass is 1.36%. So theoretically “don’t pass” is a better bet and more rational, but you are essentially betting against everyone else. Or, have you been at a sports watching party and everyone is rooting for and cheering for the same hometown team? But, there’s one guy that grew up in the same hometown as everyone else but still bet against them because the odds were better the other way? There’s countless other examples of these where people are wet towels to the party and choose to actively de-couple their fortunes from the rest of the group for the sake of being rational. If you are insta-selling all your company stock every single time and own no shares, this is essentially being that wet towel to the party. Many of your co-workers want to be there, they believe in the vision, and see a bright future. They have conviction in what they are doing together and want to have their financial outcomes tied to you and each other. This is not a strong argument from a dollars and cents point of view and more about being a part of something together and not being happy when others are sad and sad when others are happy. And its very easy to do so by just keeping a very small portion of company stock. There is nothing wrong with a hybrid approach of selling most and keeping some.

Finally, investing is never one-size-fits-all. I’m skeptical whenever I hear advice that is. Everyone is different w/ different goals, responsibilities, risk tolerances. I have owned a significant amount of S&P500 index and I have insta-sold vested RSU’s many times. So I myself have taken the advice from the article many times. But, to say it’s always correct and deviating is always irrational is a bridge way too far.

Reading this gave me a pang of sobering recognition about a character flaw of mine: I am indeed often the guy pointing out some party-pooping fact. There is a lot of wisdom in Steve’s headline which I need to endeavor to put into practice.

I don’t think insta-selling RSUs is tantamount to betting against your coworkers. After all, you’ve invested your most precious asset — your time — in working alongside them every day. Your unvested RSUs also represent your continued “long” position on your company’s stock, which you are definitely cheering for.

On Steve’s concluding sentence: I suspect Steve and I are vigorously agreeing, though circling around each other due to nuance and particulars. I fully agree that owning some shares of your company’s stock could conceivably be a rational part of a portfolio strategy. But I believe most people who do so are dangerously and unwisely overweighted on their company, thus my recommendation you sell all RSUs unless you would have bought the same amount on the open market with cash.

I’d like to thank Steve for his willingness to share his counterpoints via a thoughtful long-form essay. I hope you, too, find value in comparing our perspectives.