Updated: Nov 15, 2019
Imagine you are on the inside at Exxon. You see the mega billion-dollar deals, you see the cash on the balance sheet, and you see how your corporate giant employer can gobble up competition at any time an economic threat is perceived. You know from working on the inside that you are at one of the largest, safest, most profitable and innovative companies on planet earth. If you are like most of your peers at Exxon, you accumulated a sizable portion of your retirement assets in Exxon stock. Everything couldn’t be better, right? Wrong!
Exxon/Mobil stock has been in the doldrums for the past decade with share prices at the publishing of this article about eighty-two dollars a share; slightly less than the share price in December of 2007. If half of your “nest egg” was in Exxon/Mobil stock you are facing the stark reality that besides a modest dividend, your wealth has done absolutely nothing for over a decade to galvanize your retirement plan and to grow your wealth. You might even compare your shares to your spouse’s moderately diversified 401K which likely more than doubled during this same period and wonder to yourself “why did I let this happen”? Early retirement may now be out of reach as you come face to face with the reality that there are no “do-overs” at this point.
It’s been said before that “you don’t know what you don’t know”. If this is you, you likely heard about this kind of risk but never thought it could happen to you and Exxon, or you never even knew it was such a risky thing to do with your money; or you took this risk on and thought that you would be rewarded in greater proportion to the risk you were taking. Regardless, there is not a financial planner worth his or her salt that would sign off or approve of this kind of imprudent risk with your hard-earned capital.
I want to tell you right here and now that not all risk is proportional to reward. I can go out on the golf course in a thunder and lightning storm with my 9 iron in my hand, and we would all agree that I am taking on a big risk. But, is there any such reward for my imprudent risk? I think not. In investing I can push lots of the chips in on a single stock, but my outcome is so potentially vast that I am no longer investing; I am now speculating, which has a cousin named gambling. Single stocks can make you rich and they can make you broke and that’s a fact Jack. When you are speculating and gambling with single stocks you are no longer investing. It worth repeating, and was stated by Nobel Prize winner in economics Merton Miller, “diversification is your buddy”.
Is something wrong at Exxon/Mobil? I don’t think so. Exxon is in my mind still one of the greatest, wealthiest and most innovative companies in the world that employs over 70 thousand of the world’s sharpest human beings. Exxon/Mobil has competitive positions and technology all over the world in just about every facet of the energy business including mid-stream, down-stream, up-stream, retail and refinement. However, at the end of the day, energy is a cyclical business, and so far, no one on the planet has been able to predict these market cycles and hence stock share prices with any useful degree of reliability. Wall Street graveyards are full of stock picking Guru’s who assisted good American’s in frittering away their wealth.
Bethlehem Steel, Enron, P&G, World Com. Circuit City, Compaq, Lehman Brothers, Pan AM Airways, Woolworth, Washington Mutual, Merrill Lynch, Texaco, K-Mart, Bear Sterns, AIG, Dynegy and Polaroid are just a few of the MANY companies where your retirement wealth could have disappeared or languished for years and years had you owned substantial amounts of single company stock.
My advice to you today is to be an investor and not a gambler. Own a globally diversified and risk adjusted portfolio that is tuned to your personal risk and return preferences. Forget romantic single stocks. Rebalance regularly and make sure that your asset categories move in dissimilarly so that you don’t have everything going up and then down together. In the fixed income portion of your portfolio own high quality short term income issues. Avoid stock picking all together by owning all the stocks in a certain category. Know exactly how much your portfolio can go up and down with market cycles and then stay disciplined when all your instincts and emptions will compel you to do all the wrong things, at the wrong times, and for the wrong reasons. Tilt your portfolio to small and value stock categories as they have well documented premiums associated with owning these issues, and lastly have a financial plan. My observation over the last 25 years is that those who take the time to develop a wise plan and strategy will consistently have better outcomes than those who are “winging it”.