My First Individual Stock – The White Coat Investor – Investing & Personal Finance for Doctors

I have long railed against the buying and selling of individual stocks. Here are some examples just from the blog. The ones I didn’t write in 2019 were republished in 2019 as part of our Tuesday Classics Series.

Individual stocks add an unnecessary risk to a portfolio, an uncompensated risk called individual company or individual security risk which can easily be diversified away. Since it can be diversified away, there is no reason an investor should earn a premium for taking it. The publicly traded stock market may not be perfectly efficient, but it is efficient enough that acting as if it were perfectly efficient is generally the right move, even for a fairly experienced and sophisticated investor.

So how is it that I came to own an individual stock? I didn’t buy an individual stock, nor was I gifted one. One of the private real estate companies I owned went public.

Broadmark Private Company

Long term readers may recall that my portfolio is 60% stocks, 20% bonds, and 20% real estate. Of that real estate portion, 5% is publicly-traded REITs, 10% is private equity real estate (funds and syndications) and 5% is private debt real estate, primarily funds. One of those funds, and in fact my favorite private real estate fund, was Broadmark Fund III. This fund made loans to developers and house flippers in Utah and Colorado. It paid me 10-11% like clockwork and simply reinvested the money every time it was paid. My only regret with the fund was that I bought it in a taxable account (this asset class is terribly tax-inefficient).

I put $75,000 into it on 11/6/2017. By the end of 2018, it was worth $83,404.31, a 2018 return of 10.28%, at least pre-tax. By mid 2019, I was ready to double or even triple my investment. Then the changes began.

First, it became a REIT instead of a private fund. This was presumably in response to the 2018 TCJA. REITs were now eligible for the 20% 199A deduction, so instead of paying taxes at my ordinary income tax rates on the entire return of this fund each year, I would only pay tax on 80% of the total return. That’s a good thing for me.

However,  a couple of months later they started talking about it going public. They started sending lots of paperwork about how this was going to be great for investors and great for managers and even great for the business. I wasn’t entirely convinced, so when it came time to vote my shares, I actually voted “no.” The main reason was that I was perfectly content with the way this REIT was performing. Stock returns but no apparent correlation with the stock market. It seemed to be well-run and admired by its peers. What’s not to like?

For better or for worse, I was outvoted, and the stock went public on 11/15/2019, almost exactly 2 years after I bought into the company. The value of my investment at the time was $93,698.75. In exchange I was given 8,964 shares. That works out to a price of $10.45 per share.

To be fair, there was plenty of notice about this. I could have sold before it went public. I could even have bought more. I chose not to buy more because it simply felt too speculative to me. It felt like I was buying an individual stock for the short term. But at the same time, I suppose NOT selling the shares before it went public was also a speculative move. Every investor had to decide how they felt about this. Another experienced long-term investor (that also voted “no”) I know chose a different route than I did, he sold half his shares and held on to the rest.

One nice thing about voting “no” was that because the company was based in Washington, we could take advantage of a Washington State law that allowed us to “put” the shares back to the company at our basis until December 20th. When I saw that, I figured, “Hey, no reason to sell before then, let’s see what happens in the first month.”

Broadmark Stock

By the end of the day on November 15th, Broadmark shares were trading at $10.95 a share. By the end of the month, they were trading at $11.16 a share. I was getting rich! Of course, I was mad I hadn’t bought more, but I was also glad that I had not sold before it went public.

In the meantime, I started looking into how to sell my shares. They were being held by a “stock transfer company.” I logged into my account there and it didn’t look anything like my Vanguard, Fidelity, or Schwab brokerage accounts, so I called them up. They confirmed for me that they could sell my shares for me, but that the commission would be close to $800-900. They also noted that they don’t necessarily get the best price since they aren’t really a brokerage.

I asked how I could transfer the shares over to my Vanguard brokerage account and they told me how to do that and that it wouldn’t actually cost me a thing to do so. So I initiated that process. The only hiccup was that the brokerage account was in both of our names and this stock transfer account was only in mine. So I had to open another Vanguard brokerage account only in my name to transfer the stock into. Another phone call to Vanguard and within a week or two, the shares were there, waiting to be sold. The 20th came and went, and the stock kept going up (along with the overall market.)

To be fair, I had a pretty good idea this stock was going to go up significantly after the IPO. It was a good company and a good fund. Plus, its yield was way higher than those of its peers in the eShares Mortgage REIT ETF REM. But at the end of the day, it is an individual stock. Katie and I talked about whether we were comfortable holding an individual stock as part of our 5% debt real estate allocation, and we really weren’t. So with a bit of reluctance, I put the sell order in on Christmas Eve from Costa Rica. I sold the shares at $12.5411 per share, leaving me $112,416.09. I earned 33.67% on it in 2019 for an annualized return over the two years I owned it of 20.91%, pre-tax. Not a bad little investment, especially since I was expecting 10-11% out of it.

Speaking of taxes, I was a little hesitant to sell so quickly and owe short term capital gains taxes on the sale (although most of my gains would be long-term since only the reinvested dividends for the last 10-11 distributions are actually still short term). Luckily, in December 2018 we did a bunch of tax-loss harvesting. We still had $70-80K in tax losses we could use up, so the actual sale won’t cost us a thing in taxes. In fact, selling it for short-term capital gains was the most tax-efficient return I ever got out of it! Much smarter tax-wise than waiting until it paid its 12% dividend out in December!

The money was moved back into the rest of my asset allocation (we were actually a little heavy on real estate debt, so it’s going into real estate equity, REITs, and the overall market) and we move forward following our written investment plan. Overall, it was a fun experience to own something before it went public. Obviously we made out well (although by the time this runs in a few months we’ll know if I missed a huge run-up after selling). I was surprised how much harder it was to sell a winner I knew I needed to sell when I owned it versus when someone else (like my parents) owned it. It is much harder to be logical and rational with your own money it turns out.

[Update just prior to publication: If you’re interested in the rest of the story, the stock peaked at $12.73 on February 21st, dropped as low as $5.82 per share (54% drop) and is now trading at $9.65 per share (66% gain). Overall, I’m pretty happy with my timing!]

What do you think? Have you ever owned a company before an IPO? What was your experience like? Did you own Broadmark? What did you do with it- sell before the IPO, sell after, or hold on to it? Comment below!