Diversification is the basic principle of portfolio management, and most of all of retirement planning. You’re trying to limit your risk; anything else is betting the rent money.
Owning stock in the company you work for is the opposite of diversification. It means that if you lose your paycheck you will also take a hit on the stock at the same time. Companies encourage employees to own stock in the hopes that ownership will improve loyalty; that makes sense for the company, but it’s rotten investment management. The guys at the top of Bear Stearns could mostly afford it, but ordinary folks really need to have their investments in other people’s employers.
The investment principle for retirees is the same. If the pension plan goes belly-up, the last thing you want is to take another loss in your private portfolio. For retirees, even the morale argument goes away, and of course they need to be especially risk averse since they can’t make up for investment losses by increasing their labor income. Pension funds should never be invested in the employer’s stock, and of course pensioners shouldn’t put their own money into it either.
So WTF is GM doing offering its retirees a piece of the IPO?
For all I know, GM at the $27-$29 IPO price may be a bargain. But GM retirees shouldn’t own it. If the offering is so under-priced that it’s going to jump the first day, I guess I don’t see a problem in giving retirees a chance to profit from a quick trade, by allowing them to buy at the offering price, though of course the better solution would be to price the offering higher. But someone should tell them that they should buy the stock, if they buy it, only for quick flip. They shouldn’t hold it.
But the NYT story suggests that some GM retirees are planning to buy and hold GM stock. And the reporters, busy writing about how some of them got badly burned in the bankruptcy, pass up the opportunity to explain the basics of retirement financial management. Is it possible that they actually don’t know about diversification?
"So WTF is GM doing offering its retirees a piece of the IPO?"
Exactly the same thing they did, when they converted the pension plan from fully funded, to 'self insured' way back when? Using their retirees as a ready pool of easily screwed over capital? After all, they got away with it once before, and that was before they were really "government motors"; They've got every reason to suppose that they can get away with worse now, having just been permitted by the government to cheat their creditors.
Every time the government backs a company up when they cheat somebody, that company gets more inclined to cheat somebody else.
The last comment is silly. The IPO is massively oversubscribed; they don't need retirees to buy it. They are trying to do them a favor (by giving them access to an underpriced IPO that they wouldn't otherwise have) but as Mark says, it is not something they should hold, and most retirees are probably not flippers.
I don't think its at all uncommon for employees to hold at least some of their company's stock in their 401K so I think the WTF? extends well beyond GM
I suppose it's easy to criticize GM here, on the other hand, it never ceases to amaze me how many people still wildly overestimate the likelihood that they can make a profit from investing in individual stocks. And if the IPO is truly undervalued, so that retirees could make a fast buck, then GM is rewarding the initial investor class at the expense of the company (and subsequent stock purchasers), which it ought not to be doing. All I can say is, I wouldn't buy it if I were a retiree, at least not because I feel soft about GM.
I can't speak firsthand for any others, but my own employer offers a tempting discount on company stock. It's easy money even if the portfolio risk doesn't go away. And there's an easy way to manage that risk — sell some of the stock periodically.
It should be shouted from the rooftops that Erskine "Let Them Eat Catfood" Bowles is a member of the GM board.
If Bowles really cared about financially safe and secure retirements of America's workers, he should have argued against this.
On the other hand, if Bowles really cared about the fiscal and financial health of the US, he would have used his
Catfood Commission bully pulpit to propose a small tax on securities transactions.
Oh, I'm sorry, I forgot that Bowles also earns $335,000 a year as a member of Morgan Stanley's board.
There's little to add to Barbara's comment about GM, but I will say this about the financial press and IPO's:
Diversification is not the only thing they don't know about.
For as long as I can remember IPO's that have shot up on the first day have been hailed in the press as "successful." In fact, they are not successful from the companies' point of view, since the underpricing leaves money on the table. Of course, this is a huge success for the underwriters and their friends, who get to flip the stock for a quick profit. (In some cases this is de facto bribery. The corporate CFO and CEO who will be picking their company's next underwriter are given a piece of the hot IPO.)
Yet the press seems oblivious to the whole thing. If a reporter sold his house and the buyer turned around and sold it the next day for a 25% profit would the reporter think his sale had been "successful?" Of course not. Yet the same reporter ignores common sense when writing about IPO's.
As an academic, I don't get options on the U's stock — it doesn't have any. But I have lots of friends who do work in industry and company shares are a tempting buy, because they usually get them at a significant discount from market. The really fortunate get options and can still use company matches to their retirement accounts.
But holding that stock is really risky. If they don't pay attention to their portfolio, they end up with retirement accounts dominated by their employer, with all the risks that Mark notes.
What I've wondered since the Enron affair is why someone hasn't (or can't) set up an exchange specifically to swap these stocks among IRAs/401Ks, etc.
For sure retirees should diversify, but GM is doing its retirees a favor by giving them a chance at getting in on the ground floor. And don't be completely blaming GM for the stock price. It's hard to get the investment banks to price IPOs correctly; they always want to go low. Look at Google's IPO: Larry and Sergei worked hard to get a fair price and it still ended up way way low.
@ Cardinal Fang.
In other words, the investment banks have some interest in shafting their clients?
If Bernard is correct (and I think he is) that an underpriced IPO benefits the investment bankers and their cronies at the expense of the company and its eventual shareholders (those owning stock when the IPO musical chairs game ends), isn't this a failure in their fiduciary responsibility?
I understand that attempting to value something that has never been sold before isn't easy. But if you look at lowballing IPOs through this lens, it borders on theft/insider trading/SEC violations, doesn't it?
"In other words, the investment banks have some interest in shafting their clients?"
No other words, those are the words.
"Is it possible that they actually don’t know about diversification?"
It's possible. I recall that back when Bush was trying to privatize Social Security, Greg Mankiw couldn't understand why having both a 401(k) and Social Security is preferable to putting everything into a 401(k). I'm not sure the typical business reporter is more likely than the typical economist to understand the benefits of diversification.
@ Kenneth
Are you suggesting that Mankiw is a typical economist? (/snark)