The Investment Scientist

When I was in California last week, I met with a prospective client and did a  second-opinion financial review of his situation. He has $5mm in his company’s ESPP (employee stock purchase plan.) I can’t help but feel a bit dizzy, that feeling you get when you’re standing on the edge of a tall building without any protection.

I have a friend who was a senior engineer at MCI Worldcom. He also participated in this company’s ESPP.  In only a few years, Worldcom went from being a no-name, little known company to acquiring the second largest telecom at the time – MCI, and its stock price went up tenfold.  The value of my friend’s ESPP account went from $300k to over $3mm and he looked extremely smart by not diversifying at all.

The rest of the story you all know. MCI Worldcom filed for chapter 11 in 2002 due largely  to corporate fraud committed by their executives. Its stock price plummeted  to zero and my friend lost every dime in his ESPP.

So what exactly is an ESPP?

An ESPP enables a company employee to purchase company stock through payroll deduction.These  kind of plans are very popular among high-tech companies because they are considered a very effective way to align the interests of the employees and the firm. Read the rest of this entry »