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Comment by harryh | Hacker News Reader

A good mental game to play to counteract the endowment effect[1] if one ever ends up holding $[some_large_number] of [tech_stock] is to ask yourself "If I had $[some_large_number] in cash, what % of it would I spend investing it in [tech_stock]?"

Very very rarely will you find yourself saying 100%. Act accordingly.

1. https://en.wikipedia.org/wiki/Endowment_effect

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Bird in the hand is worth two in the bush.

I know that in the fog of war, it's easy to get fixated on what could be vs. what you actually have NOW.

About 3 years ago I was holding a very large amount of stock in a startup. The primary investor and ceo offered to do some of the early employees a solid by allowing the primary investor to purchase some shares directly from the employees.

I decided to sell about 10% which gave me a nice payday, but I decided to hold onto the remainder because 'it could be worth so much more.'

Needless to say I'm sitting on some stock that is virtually worthless. While the company in question is still active and doing ok, the real value has dropped, there is no IPO in sight, no secondary market sales opportunity, and the long term prognosis isn't great.

If I'd only had asked myself that question then, I would have sold at least 60% or more.

This is a fun game in many domains. I have friends in Vancouver who have benefited greatly from the housing boom there. I encourage them to answer the question, "If I had 1.5 million dollars, would I spend every penny of it on a 1000 sq/ft house in Vancouver?"

Probably not; yet, they hang on.

This is not the same - if you sell your house you have to buy a new one or rent, and unless you're willing to move, you will be paying just as exorbitantly as the person who bought from you. Most people aren't willing to uproot their entire lives just to make a buck on their inflated house price.

No, this is not a good comparison. The price rental calculators tend to show renting is the correct option in Vancouver.

If it's paid off, it's perhaps fine. But many people owe mortgages on those houses. They will be in for a world of hurt if house prices drop. I.e. The exact scenario we are discussing here.

Rental can be a good move, but as a rational decision it should include the possibility of future price increases. Buying does this, you have covered yourself against all future increases, and accepted the risk of all future decreases. That is smart if you are committed to a location for non rational reasons like your kids are happy at school or you like it.

Agree that holding mortgages that expose you to negative equity risk is a big gamble. Like stocks (real stocks, not options or non-listed equity) it's actually a good gamble if you will be able to cover a 5 year price dip. If you are likely to have to do a distressed sale at a stress point you are setting up a big loss - smart to take the risk if you are in your early 20's (the upside is great, you'll be ok if you bust) but dumb if you are >45.

>Most people aren't willing to uproot their entire lives just to make a buck on their inflated house price.

What I'm suggesting is that that's the irrational part. They should be thinking about this decision as though it's an offer of a million dollars to move to Austin, TX (because it is).

Interesting! But it isn't obviously irrational to decide to turn down an offer to move for a million dollars. If your stated priorities are to accumulate as much wealth as possible, then it might be irrational to not move, but there are other sets of priorities for which that is not the case. I would definitely take a $1M offer to move to Austin right now, but I also wouldn't want to indefinitely run my life based on real estate arbitrage opportunities, and that isn't irrational, it's just prioritizing some things above wealth.

In California there is also the reset in your tax base. So if you sell your house and buy a new one[1] it resets your tax base to the new price. Now renting out your house and buying a new one is a different strategy entirely.

[1] Yes some counties will allow you to "keep" your prop 13 tax rate one time.

True but you lose your Sec 121 exclusion for the years you rent it out.

It's interesting to use this reasoning in the context of tax-avoidance that the parent mentioned. Would you rather have $[some_large_number] of cash, or $[some_large_number + some_large_numer*(tax rate)] in [tech stock]?

Indeed. I don't think that the question I posed is the only question worth considering. Taxes matter and should be paid attention to.

Really, stepping up to an even higher level of abstraction I think the most important advice is to pay attention and think about your options. I think that far to many people fall prey to inaction and sticking with the status quo simply because it is easier.

Exactly.

It's far from obvious whether it's better to be 25% poorer with diversification.

But you're not 25% poorer, because your basis is now stepped up. In order to access the value of your current shares, you're going to pay the taxes. You either have $100 on paper and owe $25 on it, or you have $75 on paper and owe $0 tax on it.

Unless you think the tax rate is going to be lower in the future, once you've hit the long-term capital gains threshold, I don't see a reason to believe that paying taxes now and switching investments is worse than holding investments and paying all the taxes later.

The longer you can put off paying taxes the longer you can keep that portion of the money and earn a return on it.

There's also an annual allowance (in the UK anyway), so you can sell enough to make 11k (approx.) profit a year before capital gains tax kicks in.

Yes and no. If you hold a stock you avoid paying taxes on it and if that exact stock goes up, you "win" because you get more for it later. However there is no way to get a "return" on the capital that is tied up in the stock in some other way without some shenanigans. One dubious way was taking a loan out at the full value of the stock (stock is collateral) and then using the proceeds from the loan to invest in other funds. Back when day trading was "the thing to do" I met a guy who was full of these schemes and like the mortgage crisis later, when the crash came I'm not sure how they unwound, even if they did.

Sorry for being pedantic, but wouldn't that be $[some_large_number + some_large_numer*(1 - tax rate)]? :)

I think this is actually a very real problem. What would happen if I could sell one investment and immediately buy another investment vehicle and not have to pay taxes till I transform it to something that's obviously not an investment. If done right this should just make the market more efficient because it prevents lock in.

This is possible in some circumstances with real estate - it's called a 1031 exchange, and you can sell one piece/set of real property, roll the profits directly into purchasing another piece/set of real property, and not owe capital gains taxes on the profits from the first sale, although they will be owed if you eventually sell the second set of properties for cash.

In California, and across some counties, you can also move your lower property tax assessment thanks to prop 60/90[1]

[1] http://www.boe.ca.gov/proptaxes/faqs/propositions60_90.htm#1

This is the most succinct phrasing of the best advice on "How much to value stock [options]" that I've ever read. Thank you.

... since I don't poop where I eat, that percentage is always 0 for me.

I don't think I'm cut out for the startup world.

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