31-1 concentrated single-asset positions

1 introduction

2 concentrated
single-asset
positions:
overview

3 general
principles
of managing
concentrated
single-asset
positions

objectives in
dealing with
concentrated
positions

considerations
affecting all
concentrated
positions

institutional
and
capital
market
constraints

psychological
consideratiosn

goal-based
planning in the
concenrated
-position
decision
-making
process

asset location
and wealth
transfers

concentrated welth
decision making:
a five-step process

public traded
single-stock
positons

privately
owned
businesses

investment real estate

invesment
risks of
concentrated
positions

three major types

publicly traded stock

privately owned business

commercial or investment real estate

monetize

to access its cash value without
transferring ownership

concentration poses
problems needed
to managed

present risks

presnet tax, liquidity or other considerations
make a simple sale problematic

systematic
risk

the component that cannot eliminated by holding a well-diversified portflio

identify multiple sources of systematic risk

company-
specifi
risk

non-systematic or idiosyncratic that specific to a particular company's operations reputation and business environment

positively related to volatility of returns

lessens benefits of higher expected
capital accumlation over time

property-
specific risk

non-systematic risk that specifi to owning particular piece of real estate

company stock, options or other financial instrument
as part of executive compensation

a successful long-term
buy-and-hold investing strategy

a private company go public through IPO

significant portion of private business enterprise

hold as a standalone investment

dereived from inheritance

typical
objectives

risk reviewed and appropriateness
of risk reduciton considered

to reduce risk of wealth concentration

psychological considerations to cause underestimate

cash flow should
identified

to generate liquidity to diversify and
satisfy spending needs

fulfilling legacy and charitable intentions

to optimize tax efficiency
by structuring tansactions

not trigger immediate taxable event

min the tax will incur

client objectives
and concerns

not always appropriate for owner to reduce or eliminate the concentration

tax consequences
of an outright sale

often highly appreciated vs original cost

a significant embedded capital gains tax liability

often not psychological palatable to the family

liquidity

especially for privately owned businessed and investment real eatate

no readily available market for private company shares

may place different values on that property

margin-
lending
rules

determine how much a bank or brokerage firm ccan lend against securities positions that customs own

under rule-based system depend on strict rules

under risk based - portfolio margining

prepaid variable forward - certain forms of secured lending
considered off-balance-sheet debt and not subject to margin rule

securities laws
and regulations

the governing law

contractual restrictions
and employer mandates

IPO lockups

blackout periods

a right of first refusal

capital market
limitations

the ability to borrow shares is critical

the liquidity of the stock is vital

emotional
biases

overconfidence and familiarity // status quo bias // naive extrapolation of past returns // endowment effect // loyalty effects

→to question if an equivalent sum were received in cash

cognitive
biases

conservatism // confirmation // illusion of control // anchoring and adjustment // availability heuristic

→brought to the attention of the investor,
more receptive to correcting

one way to incorporate psychlogical considerations into asset allocation and portfolio construction

expands

the personal
risk bucket

the market
risk bucket

the
aspirational
risk bucket

to protection from povety or a dramatic decrease in lifestyle

allocaitons limit loss but yiedl below-market rates of return

tom maintain current standard of living

allocations provide average
risk-adjusted market returns

to increase wealth substantially

allocation to yield above-market returns
but wiht substantial risk
allocate concentrated positions

comprises owner's primary capital

comprises owner's primary capital

comprise owner's surplus capital

the asset location decision: the choice of where to place specific assets

wealth trasfer:

planning early before concentrated position appreciated greatly

estate tax freeze - an early ownership transfer of an estate corporation, partnership or limited liability company in which transfer junior equitiy interest to the children - non-voting common stock

to min transfer taxes
after significant appreciations

to contribute concentrated position to an entity -
family limited partnership
a limited partnership interest typically valued less -
a lack of marketability / non-controlling interest

charitably inclined

1 identify and establish objectives and constraints

2 identify tools / strategies that can satisfy objectives

3 compare tax advantages and disadvantages

4 compare non-tax advantages and disadvantages

5 formulate and document an overall strategy

*the traditioanl markowitz framework of diversifying market risk by incorporating notional risk buckets