How to handle good fortune?

[bwall]

I'm FI but not RE by choice, mainly because I can't quite figure out how to sell give my business to my employees.

In the past 12 months, my net worth has doubled, going from $2m to $4m, with $1m of that gain in the last two months. All of the gains have been from the stock market. I'm heavily skewed in biopharma and bio-tech and the gains are just starting. (Survivors bias--guilty as charged.)

I have no one who I can talk about this with IRL, other than my wife and I think she's sick of hearing me say 'we make another $60k today in the market, let's celebrate!') My wife helped me pick the stocks and so I'm acutely aware that none of this would be possible without her. I'm fortunate in that she doesn't want to begin lifestyle inflation, nor do I.

My question: How does one handle the emotions* involved in extreme good fortune? Has anyone else here become an "overnight success after 35 years" as the saying goes?

*I'm experiencing:
Fear ("It won't last")
Happiness ("Yay! The stocks are rising beyond my wildest dreams. How can I focus on work?")
Nervousness ("Should I do anything different?"--I've always said I wouldn't do anything different if this ever happened, and I haven't been tempted to do anything different up until now. But, at $4m.......)
Uncertainty: ("Should I give some stock to my siblings?") A small amount but, still. . . .
Dullness: ("How can I keep perspective of the value of money? Of work? Will I still be able to relate to everyone I've ever known")

Background info: I've lived frugally most of my life and got a late start earning money. I began tracking net worth in late 2013 at $450k.

Maybe other people here have hit a similar wall at a higher (or lower) net worth amount? If yes, could you share your experiences and what helped you past it?

[trollwithamustache]

Personally I would buy a better bottle of wine. And then remind myself, if I haven't sold in the market, I haven't actually made the money and paid the taxes and free and clear on it. Then I'd be depressed again and need another bottle of cheaper wine.

[StashingAway]

You haven't gained anything until you diversify. Spread that fortune around to protect it. Or keep riding it up, knowing that it could also be a bumpy ride down.

[TrMama]

And then remind myself, if I haven't sold in the market, I haven't actually made the money and paid the taxes and free and clear on it.

This. If you're feeling afraid, sell some of the stock and put the money into something stable. Bonds or a basic ETF. Yes, you'll potentially give up some gains, but you'll improve your asset allocation AND you'll sleep better at night.

You haven't gained anything until you diversify. Spread that fortune around to protect it. Or keep riding it up, knowing that it could also be a bumpy ride down.

You could donate to a good cause if that will help your conscience.

Otherwise, my experience is that the euphoria/fear takes about a year to stabilize. Don't make any crazy decisions during this period since your brain is basically drunk.

Keep breathing deeply. And hire a good accountant, the taxes are a bitch.

[Alternatepriorities]

As others have said, take a deep breath and remind yourself that what doubles in a year can also halve in a year.


Fear ("It won't last")
 - How much of that do you need to support your the most spendy version of your frugal self? I'd leave that much invested in whatever you consider a safe AA and enjoy the ride with the rest while giving some away.

Happiness ("Yay! The stocks are rising beyond my wildest dreams. How can I focus on work?")
 - Congratulations! That is truly awesome. I don't have an answer for work as I started loosing interest as soon I didn't need the money. I could still focus when I was earning money to spend 10 years into the future and could remind myself that effectively doubled my payrate. At our current spending I may never get around to spending the money I make today (FIFO) so why make it? The only solution I see is to do something I enjoy anyway that might happen to make money.

Nervousness ("Should I do anything different?"--I've always said I wouldn't do anything different if this ever happened, and I haven't been tempted to do anything different up until now. But, at $4m.......)
 - https://www.youtube.com/watch?v=eikbQPldhPY That leaves $1.5m to play with :)

Uncertainty: ("Should I give some stock to my siblings?") A small amount but, still. . . .
 - I'd say this depends a lot on your relationship with your siblings. Is X dollars going to make the same difference for each or them? If not, will it cause strife and unhappiness to give them unequal amounts? Will you feel any judgment if you think they don't use the money well? (These thoughts are just what comes to mind when I think about giving money to my own siblings)

Dullness: ("How can I keep perspective of the value of money? Of work? Will I still be able to relate to everyone I've ever known")
 - I've found it's somewhat inevitable that the value of money is skewed as my wealth increases. It seems to help some to focus on what the money can actually buy/do vs how quickly you can make or loose $60K. If you don't let the money change you, you should be able to relate to the people you know. One advantage of "selling" your business to the employees (even if you give them an amazing deal) is that provides a very plausible explanation for your wealth that probably won't breed the kind of jealousy in acquaintances that "i picked the right stocks" might. 

Congratulations again! Enjoy the good fortune.

[yachi]

I'm FI but not RE by choice, mainly because I can't quite figure out how to sell give my business to my employees.

I'm not saying you should be ER, but you might consider starting a ESOP.  I worked for a company with an ESOP plan that was established prior to my joining.  An outside accounting group would audit the books once yearly, and set a price for the shares. Company profits were distributed to the employees as shares in the ESOP.  The ESOP can borrow money to buy your ownership of the company.  You could still keep your leadership role within the company.

https://www.nceo.org/articles/esop-employee-stock-ownership-plan

[reeshau]

I had a similar experience this year; I was laid off at the beginning of the year, but my severance took me to 95% of my FIRE number.  I thought it would be OK, but what would the markets do? 5 fortuitous events later, including 2 pharma buyouts, and I am 40% overfunded--reverse SORR!

First, it speaks well of you that two of your emotional / knee jerk responses are to give to others.  I think that's one symptom of having plenty.

In all of this, pay attention to the tax treatment, for yourself and potentially for the recipients.  You don't want to be bumped into major pain, i.e. short-term capital gains, losing ACA subsidies, etc.  You could afford those now, but don't do it accidentally / stupidly.

What to do different? Given that you have an element of fear, go ahead and beef up your emergency fund.  Sure, 6 months is recommended, but go ahead and have a year or two of cash.  Does that maximize your return?  Heck no!  Does it help you sleep better at night?  Maybe!  And so, like any luxury, it may only make sense to you, but it may be worth it.

More generally, it sounds like you enjoy the stockpicking game.  (Easy to say, as you have had a successful year) But you are also fearful, and whatever your goal was you don't need to be as aggressive now to reach it.  So, in addition to simple safety money, you could transfer a good chunk of your new wealth into index funds.  Why?  Because they are low maintenance, and you can move on to other things.  If you enjoy the hunt, you could keep it all in play, or you could still leave a chunk there, but index enough for what you "need" for FI, so that you aren't at such risk on an ongoing basis.

For giving your business to your employees:  have you done a valuation recently?  Is it structured n a format where you could easily split ownership; say, into shares or partnership units?  Do you have a succession plan in place?  And most important, do you know your employees would want to own it?  If this all looks good, I would suggest you could start an ESOP or other multi-year transfer plan, to help them manage the tax implications of this gift / illiquid income.

Have fun dreaming big dreams!

[mwulff]

Sort of the same thing has happened to me. I picked a nice portion of TSLA because I believed in the company and the transition to EVs. It used to be a fun hobby next to my index investing, but it exploded and is now huge chunk of my portfolio.

I've had every thought you describe aside from giving away my business (I don't have one).

If RE is in your plans I would diversify as fast as possible and retire tomorrow.

As for me personally I've decided to ride the TSLA tiger as far into the jungle as it can carry me.

Good luck and happy RE :)

[cool7hand]

These are very deep questions. Check this out and see if you are called to give it a try: https://www.hoffmaninstitute.org/. It's where I found answers to similar questions gnawing at me.

[bwall]

Thank you for the kind replies and links. I will review them later after .

I was very hesitant to make the post as it's the first time I've ever put numbers up here. Irrational concerns, I guess. I'm relieved to see supportive posts. Thank you all.

I do have RE, yes. House is fully paid off, as is vacation house in wife's home country. Emergency fund is funded to 18 months.

[freeat57]

This may sound flippant, but it works for me every time.  Just look at real estate for sale in Honolulu or Santa Barbara or Beacon Hill, Boston and your sense of wealth will deflate pretty quickly.

[John Galt incarnate!]

My question: How does one handle the emotions* involved in extreme good fortune?

1. Now is the time to savor your  happy feelings of  good fortune and commit them to your memory.

2. As your future unfolds you my endure misfortune. If that happens recall your happy feelings of good fortune so they may buoy you in times of difficulty.

[Fishindude]

This may sound flippant, but it works for me every time.  Just look at real estate for sale in Honolulu or Santa Barbara or Beacon Hill, Boston and your sense of wealth will deflate pretty quickly.

This is a valid point.
$4 Mil is more than most will ever have but it's not all that much if you need to make it carry you at your present lifestyle for 30-40 years.
At the 4% withdrawal rate that's $160k, which is nice money in the midwest but chump change in NYC or San Fran.

We've got a net worth significantly more than that and live in a rather low cost area.   Being retired with no more employment income I certainly don't feel like we are extremely wealthy, and recognize that we need to be careful in order to make it last our lifetimes.

Congratulations !    Put some of it away somewhere safe for a rainy day.

[lutorm]

4 Mil is more than most will ever have but it's not all that much if you need to make it carry you at your present lifestyle for 30-40 years.
At the 4% withdrawal rate that's $160k, which is nice money in the midwest but chump change in NYC or San Fran.

I dunno about that. According to random site on the internet:

San Francisco: Median household income $96,265

You're not going to hanging with the rich, but calling having higher income than perhaps 70% of the population "chump change" seems a bit out of touch.

[bwall]

It's been almost two weeks since first posted. Again, thank you to everyone who posted. In the meantime, the market has dropped and I'm down about $200k but I feel better/more secure/more confident than when I first posted.

I've read all the comments and had a chance to ruminate.

The two comments that stick out the most:

"The euphoria..... Your brain is still drunk, will take a year to re-calibrate" my paraphrase. I remember hearing that if one won the lottery, or one's spouse passed away suddenly, then one shouldn't make any drastic decisions for at least a year (quitting a job, selling the house, moving, etc). I guess it's all for the same reason. It never occurred to me that it was the euphoria driving my emotions, but I clearly see the connection now.

"Commit these moments to memory. They will sustain you in case of future hardship." This reminded me that people who endure very difficult circumstances (captivity, bankruptcy, disease/injury, bitter, 'war of the roses' divorces, etc.) the ones who emerge generally have had many positive memories to sustain them. It never occurred to me that I was building such a bank of memories for the future.

And, as a side note; I grew up in a rural part of the country. My mother was a teacher in a county where the largest employer was the school system. My step-dad worked construction. As a teenager I never did dream of having nice cars, or a big house, or overseas vacations. I was afraid of the disappointment later in life, so I never dreamed. Thus, I've easily surpassed my wildest dream(s).

A billionaire worth $1.00 billion, using the 4% rule, could withdraw just under $4m a month, sustainably, forever. And the USA has hundreds of billionaires, a few hundred of which are worth well over $1.0 billion. Google tells me there are 34,507 households worth $100 million or more (https://dqydj.com/how-many-millionaires-decamillionaires-america/)
So each of these households could have annual SWR of $4m.

[bwall]

I also forgot to mention: I had a great conversation last week with our top employee about her transitioning into an ownership role.

I will look into the ESOP as a way to formalize the transition process. Thank you for these suggestions also.

[skiersailor]

I have looked into an ESOP for ownership transition of a privately held business.  Here are some of the things I've learned:

1. There is an industry of ESOP advisors.  Much like investment advisors, they often put their own interests ahead of yours.  It's very likely that they will recommend an ESOP to you whether or not it is a good fit because it benefits them through advisory fees, audit fees and trustee fees.

2. ESOPs are expensive to administer.  The employee owners must be represented by an independent trustee.  That costs money, and annual valuations may be more formal and more expensive than you're used to.

3. Your business should be consistently profitable and cash flow positive or it won't be a good fit for an ESOP.  The more profitable it is, the bigger the tax savings derived from the ESOP structure.

Be sure to speak with other owners of similar businesses who have implemented ESOPs (and not just those referred by your ESOP advisor) to better determine if it's appropriate for your situation.

There are other ways of transferring ownership that allow you more control and are less expensive to administer.  Here is one:

A. In lieu of a cash bonus, pay a small group of key employees in company stock for a few years.  This lets you determine who the future owners will be and doesn't dilute ownership among all employees.  A Buy/Sell agreement will prevent them from selling stock to outsiders and govern the terms of redemption if they leave the company.

B. Pay regular shareholder distributions to cover the tax liabilities of yourself and the key employee owners.

C. When enough shares have been transferred, have the company redeem all of your shares - paying cash and/or issuing a note payable.  If you're holding a note, then secure it with a mortgage on the property and have the new owners sign debt covenants to protect your interests as long as the note is outstanding.

One of the problems with “giving” the company to employees rather than selling it to someone with deeper pockets is how they will obtain credit from a bank after you leave and are bought out. At that point the value of their equity may not be enough to avoid a personal guarantee. You won’t want to guarantee the company’s debt if you no longer have a controlling interest, and they may not have enough personal assets to satisfy a bank.

If you work with an accounting firm, you might want to discuss ownership transition options with them to determine what is the best fit for your situation.

[MustacheAndaHalf]

@bwall - I think we're the only two on the forums who have disclosed we doubled our net worth in one year.  Well, actually I only disclosed it now.  So when I mention investing to friends, I don't mention amounts.

My index funds had a good year.  My leveraged ETFs at IBKR had a stunning year - amazing in their own right.  But my Covid investments... hard to find words, but it gained +400% since the start of 2020.  Quintupled?  Maybe you've had the experience of looking at your spreadsheet and thinking there's too much money, and must be an error - and then login to your brokerage account and it's real.  It's kind of stunning, sometimes.

The day the first vaccine was announced as 90-95% effective, the stocks I held rebounded like crazy.  I remember CCL going up and up, to +40% in one day.  But what I'll never forget is watching the call options I held go up +110% in a day... it's just insane to see something like that.

I don't know your exit strategy for biotech stocks - do you have stop loss orders?  For me, when my stock picks recover, I sell the investment.  From a market timing perspective, that makes it easier than figuring out when a trend has run it's course.

[bwall]

@MustacheAndaHalf ;

Congrats on your accomplishments as well. It's no small feat and one that I doubt I'll ever repeat.

In my spreadsheet I'd tried to project when I'd hit these numbers. Part of savoring the accomplishment for me meant that every time I hit a milestone I'd try and project when I'd hit the next one. And then the milestones occurred waaaaayyyyy too quickly, too close together on the calendar, which is kinda what prompted this post.

My exit strategy is also my dilemma, or the next high quality problem that I have to solve. These aren't stocks that are recovering--they're exploding higher. They've been on the 52week high list for most of 2020, so there's no need to sell them, really. It's like asking 'when was the best time to sell AAPL, GOOG or AMZN in the last 20 years?' when the best answer is 'never'.

My two largest holdings are Twist bioscience and crispr therapeutics, two very small, very young companies. I got in two years ago when both had market caps under $2 billion. I've mentioned them from time to time on these boards, mainly so I could learn about what they do and get feedback from those who know more about the technology. No-one seemed to be really awestruck, which was ok with me. I listen to all their conference calls and read the statements issued by the companies. I guess I was following the advice "put all your eggs in one basket and then watch that basket very closely.'

I'd never heard of Cathy Wood or ARK etfs until Dec, 2020, when the two market caps were around $12-$15 billion. Turns out, these were two of her largest holdings in the etfs. I think these two companies can both be $100+ billion market cap companies with 5 years. Should I place a marker here and re-visit when one gets to $100b ? 

[bwall]

Thank you, @skiersailor , for the break-down on ESOPs.

How do you have so much info on this? Have you sold a company via ESOP?
Or were you one of the employee's who benefitted from an ESOP?

[MustacheAndaHalf]

It looks like ARKG (Genomic Revolution) has TWST as it's #3 holding (4.54%) and CRSP as it's #13 holding (2.69%).  Is that what you meant by largest holdings?  Overall, Tesla is her #1 holding in two different ETFs (10% in each).

In favor of keeping TWST and CRSP, is how they moved up after vaccines were discovered.  I can't explain how they moved up so sharply in 2020, and then moved up sharply when vaccines were discovered.  Maybe all pharma stocks are doing that?  Hmm.

Against keeping them is how their performance spiked in 2020.  Crispr went from about +19%/year to +156% in one year.  It looks like CRSP and TWST are strongly tied to the pandemic, which should end this year.

I've been tracking stocks like Macy's and Carnival Cruises, which are up +19% and +18% in the past month.  Meanwhile CRSP -25% and TWST -27%... is that foreshadowing?  As some stocks recover, are others going to drop sharply?  I haven't looked at that, because I'm focused on the stocks I own.

My largest holding is call options on Occidental Petroleum (OXY), which is about 7% of my total NW now.  It didn't start that way, but has gone up over +400% since I purchased the call options.  If it recovers to it's April 2019 level, the stock will double from here - and that was at a historic low point for oil.  I really like having two ways to win: Covid recovery, or oil reverting to the mean.

In my IBKR account, I have a large investment in DPST, which is 3x regional banks.  I know 3x ETFs aren't meant to be held long-term, but I'm up over +250% riding the banking recovery.  It's underlying index (KRE) is up +17% in the past 12 months, so as I sell recovery stocks I'll probably start selling DPST (I've already started, actually).

In your situation, I'd probably ride my luck too long and stick with biotech.  But it sure looks like it's dropping as the recovery nears, so be careful.




(*) 2.256x is equal to 1.36/yr spread over 3 years.. so the 3yr +55% performance is +36% from 2020 and +19% without it.

[bwall]

It looks like ARKG (Genomic Revolution) has TWST as it's #3 holding (4.54%) and CRSP as it's #13 holding (2.69%).  Is that what you meant by largest holdings?  Overall, Tesla is her #1 holding in two different ETFs (10% in each).

In favor of keeping TWST and CRSP, is how they moved up after vaccines were discovered.  I can't explain how they moved up so sharply in 2020, and then moved up sharply when vaccines were discovered.  Maybe all pharma stocks are doing that?  Hmm.

Against keeping them is how their performance spiked in 2020.  Crispr went from about +19%/year to +156% in one year.  It looks like CRSP and TWST are strongly tied to the pandemic, which should end this year.

I've been tracking stocks like Macy's and Carnival Cruises, which are up +19% and +18% in the past month.  Meanwhile CRSP -25% and TWST -27%... is that foreshadowing?  As some stocks recover, are others going to drop sharply?  I haven't looked at that, because I'm focused on the stocks I own.

My largest holding is call options on Occidental Petroleum (OXY), which is about 7% of my total NW now.  It didn't start that way, but has gone up over +400% since I purchased the call options.  If it recovers to it's April 2019 level, the stock will double from here - and that was at a historic low point for oil.  I really like having two ways to win: Covid recovery, or oil reverting to the mean.

In my IBKR account, I have a large investment in DPST, which is 3x regional banks.  I know 3x ETFs aren't meant to be held long-term, but I'm up over +250% riding the banking recovery.  It's underlying index (KRE) is up +17% in the past 12 months, so as I sell recovery stocks I'll probably start selling DPST (I've already started, actually).

In your situation, I'd probably ride my luck too long and stick with biotech.  But it sure looks like it's dropping as the recovery nears, so be careful.




(*) 2.256x is equal to 1.36/yr spread over 3 years.. so the 3yr +55% performance is +36% from 2020 and +19% without it.

I think that ARK owns almost 10% of both CRSP and TWST. They have regulatory hurdles to overcome before investing over 10%, or else it makes up 10% of one of their funds. In either case, it's a large position.

I'd considered both of these stocks to be "Covid revenue neutral"; CRSP is working on curing sickle cell disease, juvenile diabetes and cancer (!!). In a phase 1/2 study they dosed a 72 year old patient with stage 4 cancer who'd tried four or five other therapies with no response. He got a full dosage and showed a complete response (in layman's terms: he was cured). Phenomenal results. Read about it here:
https://crisprtx.gcs-web.com/static-files/0f2af10a-c827-45c5-a048-00ec9b93b074

CRSP is dropping now b/c another company in the race to cure sickle cell disease, Bluebird, had to put their studies on hold by the FDA. So, risk averse people are selling CRSP anticipating similar difficulties. I say it'll be a bigger market for CRSP to enjoy when they get FDA approval.

Of course, it's going to take time to conduct the studies and interpret the results of all the studies. But, they're building out a complete pipeline necessary to be worth $100 billion (or more) in a few years. The studies will happen with or without a recession. I'm happy to wait.

I'd chalked up the gains to the election, since these aren't COVID (or vaccine) plays. We saw the same thing in 2016; huge run-up from Nov. to inauguration day. Then the market was flat for the rest of the year. Might be the same now. Dunno.

Congrats on your aggressive options plays working out. Mine never did! :) Be sure and put the profits in less-risky assets once you cash out. 

[skiersailor]

Thank you, @skiersailor , for the break-down on ESOPs.

How do you have so much info on this? Have you sold a company via ESOP?
Or were you one of the employee's who benefitted from an ESOP?

I own an S-Corp and considered exiting via an ESOP but rejected that option for the reasons I cited and because the ESOP tax benefits aren't compelling for my situation.  I am considering an ownership transfer to a small group of existing employees as I outlined or perhaps selling to a competitor. 

[MustacheAndaHalf]

bwall - Wow, that performance in 2020 without Covid?  That is surprising, but that's what I see comparing CRSP to AMZN, both looking and using Portfolio Visualizer.  Those gains while Covid neutral is even more impressive.

I normally consider the market efficient, and would like to return to index funds when my investments finish their recovery.  I attribute part of my success to the election year, as well: people in Congress can spend government money to save jobs, or face millions of unemployed blaming them during their re-election.

With my call options, I was just predicting a recovery of at least half the stocks.  It's easier to predict "stocks recover" than figure out the future in other circumstances.

[bwall]

Thank you, @skiersailor , for the break-down on ESOPs.

How do you have so much info on this? Have you sold a company via ESOP?
Or were you one of the employee's who benefitted from an ESOP?

I own an S-Corp and considered exiting via an ESOP but rejected that option for the reasons I cited and because the ESOP tax benefits aren't compelling for my situation.  I am considering an ownership transfer to a small group of existing employees as I outlined or perhaps selling to a competitor.

Hmmm........  Thank you. It's always good to get information from someone who has walked the path before you.

[bwall]

bwall - Wow, that performance in 2020 without Covid?  That is surprising, but that's what I see comparing CRSP to AMZN, both looking and using Portfolio Visualizer.  Those gains while Covid neutral is even more impressive.

I normally consider the market efficient, and would like to return to index funds when my investments finish their recovery.  I attribute part of my success to the election year, as well: people in Congress can spend government money to save jobs, or face millions of unemployed blaming them during their re-election.

With my call options, I was just predicting a recovery of at least half the stocks.  It's easier to predict "stocks recover" than figure out the future in other circumstances.

It's better to be lucky than good, is what I like to say. My wife knows and understands the technology, I know more how markets function. We're a good yin/yang, for now at least. We think that it's only just begun as genomics is the future. ARKG was the first to have a high profile ETF, but with time we'll see more.

Congrats again on your stock picks and results. It'll turbo charge your FI/RE results in a crazy way. I never dreamed of joining the 8 figure club . . . . . . but now just that has entered the realm of possibility a few short years hence.

[MustacheAndaHalf]

On that topic of business problem solving, do you ever read Harvard Business Review?  It's available at any library, and often has some interesting case studies.  It might be a product decision, a merger decision, or a personal challenge.  It's not guaranteed you can find your predicament analyzed by Harvard... but it could be high quality free advice.