Summary Many employers offer stock option programs or 401k discounts on their own stock. While you want to stay diversified, contributing a little to your employer’s stock can be a good thing. Many people say investing in your own company is a grave mistake. Avoiding this option altogether, we believe is foolish. By Parke Shall The case against holding your own company’s stock in your 401k or IRA has been “common sense” in the financial world, thanks to commentators like Suze Orman who continually say it’s a terrible idea. Other financial pundits have also said the same thing. Recently, Jim Cramer from CNBC reiterated these comments, telling investors to avoid owning their own company in an article linked below on CNBC.com. Once again we’ve found a small instance where we fail to agree with stock guru Jim Cramer’s call on something. If you recall, we’ve had respectful disagreements with Mr. Cramer, namely over the Home Depot (NYSE: HD ) data breach, where he assured people it wasn’t likely to be a big deal before we knew exactly how bad the situation was. Later, it would be revealed that it was a bit bigger of a deal than Home Depot, or its shareholders, had anticipated. Mr. Cramer is no doubt very in tune with how the financial markets work, but we disagree with him here. This article in question goes on to talk about Cramer’s suggestion not to load the boat with stock of the company you work with. Of course, I know many people that have made exorbitant sums to retire with by doing just that – after all, who would tell someone in the 80s not to invest in their own company if they were working at places like Apple (NASDAQ: AAPL ), Google (NASDAQ: GOOG ), Microsoft (NASDAQ: MSFT ), or 3M (NYSE: MMM ). This recent article follows numerous articles like this one , which also claim owning your company’s stock in your 401k could be a “big mistake.” Let us also not forget that Mr. Cramer has made large sums himself, while investing in his own companies, like TheStreet (NASDAQ: TST ) and then selling their stock. Most of his money came from options, but it’s worth nothing. It’s also worth nothing that Mr. Cramer made a significant investment in TheStreet upon its launch. So, is this a case of “do as I say and not as I do?” Not really. We’re sure Mr. Cramer has the best intentions in trying to get his message across, but simply saying “don’t put all your eggs in one basket” would certainly be enough. We think there’s a good argument for investing a reasonably small amount in the company you work for. The PROs of investing in where you work: you can usually get stock at a discount (previous employers of ours have offered stock at the lowest point in the quarter at the end of each quarter, generally giving you immediate upside) keeps you engaged and working toward something makes work meaningful builds corporate culture allows you to share in your personal success and your team’s success helps you take interest in your company from an executive lens The CONs of investing in where you work: putting all of your eggs in one basket potentially blinding yourself and ignoring an objective analysis of a company and its financials The CNBC article goes on to say: What if you worked for a company like Enron and invested all of your retirement into their stock? Your retirement probably would have gone down the tubes along with the company. “You probably feel like you understand the company that you work for, and the excuse is that you’re investing in what you know. I’m telling you, that excuse doesn’t cut it,” Cramer added. Let’s face it, an Enron style company comes around once in every 10-20 years. The chances that your everyday job that you go to is the next Enron or Worlcom are very slim. That’s not to say there aren’t specific companies out there that we wouldn’t invest in right now, because there are. Having said that, there is some due diligence that you should be required to do before even investing in your own company’s stock. A 401(k) investment in a staple company like Johnson & Johnson (NYSE: JNJ ) would certainly be a different risk than investing in a speculative startup or a company with a high valuation. So, invest, yes; but do your research first. Some companies place restrictions on when you can buy and sell the stock you’ve earned from them. 401(k) plans usually have reallocation periods every other quarter or every quarter where you can rearrange your contribution percentages. As long as you’re actively managing your portfolio and paying attention to the publicly available information on your company as it’s made available in the market, it’s no different than going out an investing in other companies. After all, when you go out and load up on dividend stocks to make a portfolio, don’t you want the people at those companies to be owners of their own companies stock? I do. While we’re not saying you should go out and load 100% of your portfolio in your company’s business, we don’t think it should be something avoided altogether. Do your research; investing in your company and inadvertently, in yourself, can be a good thing. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
