Thursday, April 15, 2010

Selling Stock Post-IPO

Google was unusual in that it had 3 lock up periods: a 30 day lockup, a 90 day lockup, and the 180 day lockup. The idea was to let pre-IPO stock (and option) holders sell 5% of their holdings after 30 days, an additional 10% after 90 days and any amount after 180 days. The other company I heard of which got an exemption from the usual 180 day lockup rule was Netscape. In my book I discussed some of the pitfalls behind early selling, but here I want to talk a bit about selling strategy.

The first thing I observed was that the float at the time was tiny. This meant that it was conceivable for Google employees who are divesting to move the stock. I also observed that employees (especially employees with large stock holdings) were mostly housed in Mountain View. Many of the large stock holders were engineers, and were Owls, rather than Larks. Since I was effectively locked out of the 30 day lockup due to my vesting date, I got to observe market movements.

Indeed, what I saw was that the highest prices of the day tended to come before 10am PST, and the stock would take a consistent drop after that and stay low for the rest of the day, before another morning spike the next day. I saw this repeated day after day, week after week, and that convinced me that my theory was right.

Obviously, for me to take advantage of the idea, I had to ensure that I was the only person who would execute on it. Otherwise, everyone else would pile on and I would lost my chance to capture the morning spikes. So I deliberately unsubscribed myself from the internal financial-planning discussion mailing lists, and deliberately kept myself from blogging during that period, internally or externally. And yes, I did capture the morning spike when I finally did sell (I'm a lark by nature, so getting up at 6:30am PDT/PST to trade wasn't a problem).

Note that this only occurred at the 30 day and 60 day lockups. At the 180 day lockup periods, institutional investors/venture fund holders could sell, and those guys could move huge chunks of stock in a day, and employee movement would be lost in that noise.

In late 2007, I did the inverse. I took an informal poll of relatively naive employees, and asked if they were going to sell at the all-time high of $700+/share. When everyone else told me that they were holding on for more capital gains, I remembered Warren Buffett's adage: "Be fearful when everyone else is being greedy, and be greedy when everyone else is fearful", and sold until my hands shook from pushing the "sell" button. It was one of the hardest things I ever did, but was also incredibly lucrative. My only regret was not selling even more than I did.

I am not normally a market timer: those of you who've read my financial posts over the years have probably noticed that I have no faith in anybody's ability to time the markets, including my own, and I follow a rough asset-allocation model. But as William Bernstein said during his visit to Google on one of my birthdays: Just because you believe in the efficient market does not absolve you of the responsibility to do the math and look at what makes sense.

An investor always has the responsibility to check current conditions against common sense. As the above two examples illustrate, common sense means that when you know the market is wrong, acting on your beliefs quickly and decisive.
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