Part One of a four part series on how a Blue Chip Partners can help you navigate selling holdings in company stock.
Consider the legal, regulatory and ethical constraints imposed on top executives. These executives are, by definition, company insiders. They are privy to material nonpublic information about their company that has the potential to impact the performance of publicly traded company stock. That is why they must abide by strict guidelines before buying or selling company stock.
Legal departments routinely enforce trading preclearance and blackout periods leading up to key corporate events, such as company earnings reports, mergers and acquisitions, and leadership changes. Given the dynamic nature of most businesses, these restrictions could keep insiders from trading company stock for half or more of a given trading year.
Stock trading constraints also exist within executives themselves. After all, executives are just as human as the rest of us, subject to their emotions and unexamined beliefs and biases that can influence investment decision making. This is especially true when individuals’ investments are heavily concentrated in company stock.
The best way to manage these personal constraints is to be aware of them. For example, individuals tend to place higher value on things they already own - known as the endowment effect. Top executives may not clearly judge when it is time to sell some or all of their company stock, whether that is to cut losses or lock in gains. As a result, these executives continue to hold shares when greater diversification would better serve their needs.
Fear of missing out (aka FOMO) and avoiding losses are two other key roadblocks to clear investment decision making. Executives may worry about missing out on future gains, while also feeling losses in stock value more acutely than commensurate gains.
Their own belief in the future performance and success of their company can also play a role. While confidence in themselves and the continued success of the enterprise is essential to success, overconfidence can result in undisciplined trading behavior and irresponsible levels of concentration in a single stock.
Finally, executives, like many other investors, can become fixated on a particular price level for a stock. This is often a previous high-water mark for a stock, a break-even point or even the 12-month target price offered by one of Wall Street’s sell-side research analysts. This is why key price levels often come back into play, primarily driven by the emotions of investors. The market has memory.
The best investors are aware of their strengths and weaknesses. This level of self-awareness keeps these investors from overestimating their trading knowledge and skill, thereby avoiding action based on overconfidence, bravado or revenge trading.
Executives should complement their own set of fundamental knowledge of the company with an objective party’s technical expertise in the financial markets. Our recommendation would be for executives to partner with a technical analyst.
According to Investopedia:
A technical analyst, also known as a chartist or market technician, is a securities researcher or trader who analyzes investments based on past market prices and technical indicators. Technicians believe that short-term price movements are the result of supply and demand forces in the market for a given security. Thus, for technicians, the fundamentals of the security are less relevant than the current balance of buyers and sellers. Based on the careful interpretation of past trading patterns, technical analysts try to discern this balance with the aim of predicting future price movements.
Like an airline pilot using a pre-flight checklist to ensure a safe flight, working with a technical analyst allows executives to enhance the risk management component of their investment process. While the stakes are lower in investing than when flying, executives with highly concentrated or leveraged positions in a single stock also need to minimize the potential for regrettable mistakes.
Using a disciplined process for executing predetermined stock sales, market technicians can work with corporate insiders to identify how many shares to buy and sell, at what price and according to what criteria. Tools like a 10b5-1 trading plan or limit orders can help support a disciplined approach that helps executives avoid the ramifications of spur of the moment decisions.
In Part Two, we discuss exactly how a technical analyst can help lead executives to stronger wealth management.
Multiple advisors at Blue Chip Partners hold the Chartered Market Technician (CMT) designation – a credential held by few in the private wealth management community. This allows our team to provide individual stock analysis, which can be particularly valuable when an insider is considering selling a portion of their concentrated position. Potential transactions can include trading directly held shares, or equity compensation in the form of vested Restricted Stock Units (RSUs), Performance Share Units (PSUs) and stock options.
Expressions of opinion are as of this date and are subject to change without notice. The information provided does not constitute tax, legal, accounting, or other professional advice and is without warranty as to the accuracy or completeness of the information. Any information provided is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation to buy, hold or sell any security. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There are limitations associated with the use of any method of securities analysis. Indices are included for informational purposes only; investors cannot invest directly in any index. Every investor's situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Past performance does not guarantee future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct.