Chapter and Lesson #7

 

If you buy things you do not need, soon you will have to sell things you need. 

Warren Buffett 

Once it became clear that Microsoft was going to win the web browser wars against Netscape, it became less and less clear what to do with all the resources and the people that had been built up to fight the war.   By 1998 the DOJ was fully engaged in trying to dismantle Microsoft’s power over the PC industry and put an end to the aggressive tactics used by Microsoft to beat down competitors like Netscape.  The browser wars were being used by the DOJ as a prime example of how Microsoft played unfairly with their market dominance of PC operating systems.   Ballmer’s famous “Ham Sandwich” quote, where he said that Janet Reno (the Attorney General in charge of the lawsuit against Microsoft) had it all wrong and that if Microsoft wanted to integrate a ham sandwich into Windows it was within their rights.   That quote highlighted the arrogance of Microsoft back in that day.  Microsoft employees were riding high, the stock was booming, lots of people were getting very rich at the company, Porsches, Ferraris, Hummers and lots of other expensive cars lined the parking lots.   

I remember one day three of the top managers of the IE Marketing team went out and bought brand new Porsche 911’s during their lunch break.   They were young guys, making a ton of money, on top of the world.  The machismo and bravado of that group in those days was unstoppable.  Looking back now, it all seems completely out of hand and foolish.    There was one guy, who for a short period was my boss, who had bought a brand new BMW in the early 90’s with his Microsoft stock options, he regretted it for many years to come, he had a spreadsheet where he would track how much the stock would have been worth had he held on to it.   At one point he was the not so proud owner of a BMW 3 series sedan that had cost him well over $1 Million in lost opportunity had he only held onto his Microsoft stock.    

In 1998, the stock was continually reaching all time new highs.  Money and stock options were flowing like water to middle managers and above.  The top brass already knew that it was the beginning of the end of the “best of times”.  Mike Maples the head of HR and Steve Ballmer had already started cutting back on the big elaborate parties– in an effort many folks internally coined the “Shrimp to Weenies” set of cutbacks.  Made famous by the infamous Mike Maples memo sent to employees back in 1993.

Unfortunately, most of the rank and file were blinded by their fast made money, and many thought the party would never end.  In reality, the company was getting too big to have all the lavish benefits and elaborate parties that could include all the new employees.  Microsoft was famous for their massively extreme Holiday parties.   These parties were blow your mind type events, where they had real A list rock bands, mountains of fresh shrimp, open bars, magicians & entertainers, chocolate fountains and anything you can think of that would make for the most insane party you had ever witnessed.   It was a sign of the times, and all that exuberance led many people to think the party would never end.  It did.  

It was hard to predict back in the mid-1990’s, that at the end of the decade  Microsoft would hit an all-time high — closing at 58.71 on December 23rd, 1999. (Split adjusted- I think there may have actually been a daytime high of near 120, but can’t recall exactly.  The next decade would prove to be much more difficult for Microsoft and the stock.

 

The beginning of the new century was not great time for Microsoft.  The stock plummeted off the high it had hit in 1999, by the end of 2000 Microsoft had lost more than half of its value.  The .com bubble had burst, and a big tech slowdown was on underway.  Microsoft had benefited both from a  PC purchasing cycle that was completed for the big Y2K computer glitch scare and booming sales of PC’s from the big dot-com boom.  The potential Y2K glitch had many companies scared to death that their systems and software would not be able to handle the year 2000 with their various business software programs.  For some reason, when many of these systems were built in the late 1900’s the engineers did not look out far enough and plan for the flip of the date to the new century.  Going from 1999 to the year 2000 would break many different programs, some of this was because many of the systems relied only on the last 2 digits of the year.  Going from 99 to 00 as the year could cause a lot of potential problems.  Because of this, many companies decided that not only would they need to make sure they fixed these software problems, they would also take the opportunity to upgrade a lot of their aging infrastructure.  This pushed a lot of tech spending forward, and helped to contribute to the overall bubble in the tech space.    

Additionally, In the few years leading up to year 2000 there was a general euphoria around almost every new .com company.   Dubbed the Dot-com bubble, Silicon Valley was funding startups based only on an idea and a name.  You didn’t even need customers and revenue was an afterthought.   It was a moronic time, and everyone thought their idea was going to work, no matter how stupid it was.    

As the bubble burst, employees across the tech sector lost millions in “paper” wealth, watching their stock options evaporate into being worthless paper and never returning.    

Stock options – are a right to buy a specific number of shares of your company’s stock during a time and at a price that your employer specifies.  If that stock is going up fast, you can make a TON of money very quickly with Stock Options.  Options were the crack that fed Microsoft employees for many years.  When the bubble burst, it was devastating to many at the company, and it started to change the culture of the company dramatically.   

From Microsoft’s IPO in March of 1986 all the way up to the year 2000 all of the employees were being lifted by the rising tide of the stock price.  It was not at all uncommon for secretaries or administrative assistants to become overnight millionaires.  People did not have to knock themselves out, or others at the company to make great money.   Making the stock go up was a unifying mission that everyone was benefiting from, the lowest level mailroom employee to those in the C level suite were in on the game.   Unfortunately, when the stock run ran out of steam, intense infighting for the fewer available rewards started to set in.  It was a long dark decade in the halls of Microsoft.  

For me personally, I went from being a paper millionaire to much less than that in a very short time span.   It was personally painful to see options on paper that were once going to be worth a lot of money turn into worthless numbers on a spreadsheet.    

I still felt very fortunate, however.  First of all, I was lucky to keep my job in the tech industry at that time.  When the bubble crashed and many Dot-com companies went bankrupt, a lot of people lost their jobs entirely.   I still had a good job and was still moving up the ladder, so I was thankful for that. 

I also had a lot of friends at Microsoft who had implemented a “buy and hold” exercise on their stock options.   This was a way to leverage options where you could essentially take a margin loan when you exercised your options and “hold” the stock you had that was previously just an option to buy it.  This was an extremely risky thing to do, think about taking out a huge loan to buy shares in a single tech company – hoping that the stock will continue to rise.  What many employees did not understand was using loan debt for leverage works aggressively both on the up and downside for stock gains and LOSSES!

If the stock goes up, doing this type of strategy is very rewarding.  However, if the stock goes down, you can lose a lot of money very quickly.   Without getting too technical, a very bad thing can happen when you buy and hold stock utilizing loaned money from your stockbroker.  If the stock goes down dramatically, you can receive what is called a “margin call” from your stockbroker.  Basically when you receive a “margin call” it means that the broker who loaned you money to buy shares of the stock is now forcing you to either sell your remaining shares to cover your losses in the stock or put in more cash to hold the borrowed shares you have in your account.  The broker does this because they have certain requirements for the dollar amount of stock you must have as collateral for the loan they have given you to “buy and hold” your stock.  This can result in forcing you to sell your shares at a very low price, just to pay off the loan you had for the stock.   The result for many people who did this at Microsoft was that they went from being paper millionaires to being totally broke.   

For many people, they were even worse than broke, they were in debt because of this strategy.  Not only did they lose all the value of their stock holdings, they also ended up with big income tax bills on the income realized from their exercised options that were used to “buy and hold” their stock using those margin loans.  Unfortunately, to the IRS, it didn’t matter if you suffered big losses on your stock after it was purchased on a margin loan.  As far as they were concerned, when you exercised your stock options, that was a taxable event.  They still wanted to be paid on the gain of the stock option.  So a lot of people suffered a double whammy when they had margin loans called from their broker, causing them to lose most or all of their stock money, and they still would have a big tax bill, with no money left to pay it.

I knew quite a few people who went from being paper millionaires to bankruptcy in a matter of only months.  Merrill Lynch ended up getting sued for the practice of recommending the strategy.    It was heartbreaking to see friends and colleagues lose all their wealth in such a short timeframe, all while betting on the company that had brought them so much wealth and security over the years.  It shook many people to the core.  

So while I saw much of my paper wealth disappear in that terrible bubble bursting year of 2000, I never spent any of the money, I dreamed of what it would be like, but I never actually had the chance!  Very lucky for me, my career was moving forward pretty well at that time, and there was always at least the hope of a stock rebound.  Which finally after many dark years seems to be taking place!      

Not long after this time, Microsoft abandoned stock options altogether and replaced them with stock awards.   Stock awards are essentially a form restricted stock in the company, they work exactly like regular stock, but you are restricted on when you can sell them – they vest over a period of 4 years where you can sell them as they vest, they were much better suited for a slower growing company than stock options. Microsoft was becoming more like IBM, a solid company with no debt, an increasingly diversified revenue stream, much of it coming from enterprise customers on multiyear agreements.

The executives knew that the days of rapidly increasing stock price were over. They still wanted employees invested in the company, but they saw the damaging whipsaw effects stock options could cause, and the tax consequences of stock options were also starting to become an issue for the company.  So a move to giving employees smaller, yet significant grants of restricted stock took over.   Restricted shares work out better for the employees as the stock does not need to move up at all and they still retain their value.   And even if the stock drifts lower, they are still at least worth something, whereas stock options are worthless if the price goes below your buying strike price.  I ended up with 10’s of thousands of shares of worthless underwater stock options.  That was always a big bummer to look at on the employee stock page!   

Thankfully, I was rewarded later on in my career with restricted stock that did very well.  I have no complaints about how my situation turned out with the company.  It took longer than I was hoping to cash in on my tech career and retire early, the learning was valuable, and I enjoyed a lot of interesting things on the journey! 

 

Lesson #7  If you are lucky enough to score some big money from your job Save That Money Like CRAZY!!  It likely will not happen again!

If you get rich in your job at a high tech growth company, or any company for that matter, the likelihood is you got lucky to be at the right place at the right time. No REALLY!, you probably were not that great or instrumental to the company’s success.  Because you were lucky enough to score some money at the right company, you might get a big ego, and think “I was instrumental in making this all happen, I could repeat this again with the formula I have now!”  The reality is that is not at all likely – lightning will probably not strike twice…   Save that money like crazy! 

Don’t buy stupid shit like cars, boats, vacation houses, etc.. and don’t make a bunch of risky investments.  I made that mistake , and I estimate I wasted at least a half a million dollars on stupid trophy purchases and bad business investments.  It was idiotic.  I bought luxury cars, boats, invested in businesses I knew nothing about.  Almost all of it ended up doing little other than burning through a chunk of my savings.  

All that stuff will bring you very little happiness, and potentially a LOT of aggravation.  Be smart and conservative with your nest egg.  The smartest thing you can do is diversify your money, put it into a few different asset classes of low cost Vanguard Index funds, and forget about it, keep working and make more money as long as you enjoy it. 

This is not an investing book, of which there are many good ones and bad ones out there.  If you have already made your small fortune, go read up on Warren Buffet’s advice on how an individual investor should invest.  If you are lucky enough to win the life lotto more than once – say jumping from one hot tech company to another, good for you!  For most us, getting that kind of lucky, it is a one-time event!   And most never get that lucky!  Remind yourself, you are NOT Bill Gates, Elon Musk, or Mark Zuckerberg – get over your bad self.  Save your money and don’t be foolish with it!    Finally here is some data to prove my point.  

Nobody stays in the Top 1% long.  From a report on the Top 1% of earners.

The Top 1% is often considered an exclusive, monolithic group, but folks actually rise up into it and fall out of it quite often. That’s because their incomes can vary widely year to year.

Some 11% of Americans will join the Top 1% for at least one year during their prime working lives (age 25 to 60), according to research done by Thomas Hirschl, a sociology professor at Cornell University. But only 5.8% will be in it for two years or more.

As for holding onto this status for at least 10 years? Only a miniscule 1.1% of Americans are this fortunate.