It Was the Best of Times, It Was the Worst of Times

Last Updated Oct 15, 2010 4:06 PM EDT

The following is the first part of chapter 14 from Larry Swedroe's new book Wise Investing Made Simpler. For the second part, see "It Was the Best of Times, It Was the Worst of Times (Part II)"
It was year-end 1999. Matt was looking at the letter announcing his promotion to senior vice president of sales. He reflected back to 20 years earlier when he had just graduated from college and had accepted a position as a pharmaceutical sales rep for Merck. It was to be the only company for which he would ever work. He was very proud of both his own accomplishments as well as the fact that he worked for one of the most respected companies in the United States, if not the entire world. He called his wife to tell her the good news about the promotion and told her to make reservations for dinner that night at their favorite restaurant to celebrate. After dessert the conversation went as follows:

Matt: You know I have talked before about retiring early. Well, I think in about five years we will be able to do just that. When I joined Merck, the stock price was the equivalent of just $1.90. It just hit an all-time high of over $90, or about 45 times the price it was when I joined. My 22,000 shares are now worth just about $2 million. I just received 10,000 more stock options. I now have 30,000 options with strike prices as low as $40 a share. Those options are worth another $1 million. Between the options and the stock, we have about $3 million. With what I think we can save over the next five years, we should be able to retire and move to Florida.

Jennifer: That is wonderful. But aren't you concerned that with the exception of our home, almost all of our net worth is in Merck's stock?

Matt: I don't think we have anything to worry about. Merck is one of the greatest companies in the world. It has a strong balance sheet and the earnings outlook is great. People will always need pharmaceuticals. And with the aging of the baby boomer generation, the demand for our products is going to rise rapidly. And besides, we just introduced this great new product, Vioxx, which will surely be a blockbuster drug, generating billions in profits for the company.

Jennifer: I know that Merck is a great company and you are proud of working there. However, bad things can happen to even great companies. My friend Molly's dad worked for Polaroid and once had a fortune in stock and options. They eventually became worthless. Don't you think we should sell some of our Merck stock and diversify?

Matt: This is different. Merck is not Polaroid. And even if something were to go wrong, as a senior officer I will know about it well enough in advance to do something. Don't worry. The stock has gone almost straight up since I began working and I don't see anything that would cause that to change.

Jennifer was still nervous, but she had always left the financial decisions to her husband. And Matt was just not going to sell his stock.

Tomorrow, we'll look at what happened to Matt and Jennifer.

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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.