Hedge What You Can't Sell

What to do with the stock you can't sell yet.

"You can't always sell a concentrated stock position, but you can almost always put a floor under it."

Meet Ron. He sold his company in 1999 and walked away with $45 million of the acquirer's stock, with one caveat: the stock was restricted, so he couldn't sell any of the shares for the next 12 months.

After we sold the company, my entire windfall sat in one stock I wasn't allowed to touch. No problem, since everyone around me believed the stock was only going up. At the Christmas party, the buyer's VP of acquisitions knelt down between my wife and me and said, you guys are sitting on the nose cone of a rocket, you have no idea how much this is going to be worth. He wasn't blowing smoke up our asses. He believed it too.

Less than a year later, the company that acquired mine imploded and the stock went to zero. All $45 million of it.

Here's the part that still stings. Somebody handed me the answer that would have saved us. One of the wealth managers courting me after the sale said I should bracket the stock. A bracket is a hedge. You buy puts, sell some calls, and the net effect is that your stock can never fall below a price you choose. The downside is you give up some of the upside, and at the time, it seemed insane to give up the upside on a rocket, so I passed on the hedge.

We ran the numbers later. With the bracket on, I would have kept at least $10 million. Without it, I walked away with zero.

Next time I find myself highly concentrated in a single public stock, I'm hedging it with a bracket.

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