• I went 35 days without any alcohol. A feat significant in itself, but not as hard as I anticipated.

• I tracked all my sleep data before and after. My average sleeping heart rate decreased by more than 6 bpm, implying 76,000 less heart beats in a one month period. 

• The results were overall positive, but enough to full-stop? 

Alcohol and me

I drink almost every Friday and Saturday night and have been since I think college. Also throw in 50% of the time on any given Wednesday or Thursday, for good measure. Sunday, Monday and Tuesday are generally off limits. I’ve gone through the brewing-my-own-beer phase and I belong to a number of wine clubs. I’m 43 and as I’ve aged, the effects of alcohol are more pronounced, particularly on my sleep quality. After as little as one glass of heavy red wine, I often wake up at 3:00am; likely due to a circadian rhythm induced liver cleanse. 

Not only have I noticed that I wake in the night after drinking, but in analyzing my Oura Ring data, I’ve noticed that my sleep vitals improve significantly in the absence of alcohol, and more so after 2-3 nights drink free. So Tuesday and Wednesday nights, I sleep like a rock. 

Alcoholic? I’m going to save that discussion for a very long blog, or possibly book. I suppose the fact that I have so much to say on the subject is telling in itself. 

More Background

I’m a little bit of an optimal living eating sleeping fitness enthusiast. I try to eat healthy, and so avoid all processed foods and bad oils and when eating “meat”, only grass-fed naturally raised meats and wild caught fish. Grocery bills are ridiculous. I practice intermittent fasting (so skip breakfast). Regular cold water plunges and showers. Daily workouts, including run, bike, swim, gym and yoga. Myriad of supplements. I track my workouts on Apple Watch and Strava. I practice good sleep hygiene and I sleep with an Oura Ring that tracks my sleep vitals.  

The vices most detrimental to my overall health are likely: dessert (sugar), alcohol and caffeine consumption, the latter being the most debatable I suppose. I think sugar/dessert is likely the most offensive to my overall health. Or is it alcohol? 

The Mission

I wanted to objectively compare my sleep data to a normal month vs a month of not drinking. From a subjective standpoint, also wanted to see how it affected my relationships, feelings, performance and productivity.  

My Oura Ring tracks a lot of data including sleep duration, times, sleep cycles (REM, Light and Deep), heart rates (min, max, average), heart rate variability (a measure of the variance in time between heart beats, which is an indicator of nervous system readiness), body temperature, respiration patterns, sleep efficiency (time in bed vs actually asleep) and more. 

The Test

I stopped drinking on May 5 and didn’t drink again until June 8 (35 days). BTW, I was leading a local wine night fundraiser scheduled for June 22, so I basically had to start drinking in order to taste all the wines I was in charge of sourcing; I strive for excellence in all my endeavors.

I have a lot of data, but the most “telling” and easy to understand or relate to is heart rate.  Below is a graph showing my average heart rate for the month of April (the normal drinking month) and May (the non-drinking month).

BLUE Line: My average heart rate per night for the month of April. 

RED Line: My average heart rate per night for the month of May (and some of June). 

The straight lines are trend lines. So in each month my heart rate on average trended lower as the month progressed. 

Data Analysis

Blue Line: Just looking at the Blue Line, you can see there is a lot of variability, i.e. peaks and valleys from the straight trend line. The peaks correspond to weekends. There were a few nights where I was averaging 57 bpm during my sleep; likely nights of heavier drinking combined with less than optimal sleep times and maybe poor food selection. A few times I dipped down to red line territory and that was likely a Monday, Tuesday or Wednesday night.

Red Line: Two big observations: way less variability and significantly lower than the Blue Line. Pretty incredible that my average heart rate per night started at around 48 bpm per night and decreased ultimately to 45 bpm per night. That is 6-7 beats per minute on average less than when I was drinking. 

Doing math of 6 beats per minute X 60 minutes per hour X 7 hours per night X 30 days = 76,000 heart beats. I.e. my heart beat 76,000 fewer times during sleep in the month of May. It’s likely that if I included the few hours leading up to bed this number would increase to well over 100,000. 

Subjective Analysis

Productivity increased and I would attribute that to having more energy and just tinkering around more in the evenings. As opposed to relaxing with a glass or two of wine on a Thursday night, I may instead find myself practicing the piano, fixing something or watching TV with my kids, which can actually be a healthy activity in moderation — for example, it creates funny memories and common points of reference. I also read more, because I had the mental energy to engage in a book; not that you can’t read after a drink or two, but I think you’re more likely to sober.

Relationships. I should have my wife chime in here, but she was a little nervous that I would be more irritable and edgy than typical. I don’t think we saw that, at least not after the first week. Overall, I feel it was a net positive on relationships because when I did spend time in the evenings with people, I was more engaged and concentrated.

Feelings. I was curious if I would have any mental ah-ha moments or visions induced by a perpetual clarity of mind. Or would I be a generally happier or unhappier person? Answer: inconclusive. Next time, I’ll probably need to go longer and actively journal more to conclude here.

Physical well-being. From a vanity stand-point, was curious “hey am I going to look better”? Less wrinkles, baggy eyes, etc..? Answer: Maybe. What about increased overall energy and feeling good in the morning? Answer: Probably? It was really hard to put my finger on this. Clearly, I felt more refreshed and looked better than on a Sunday morning after a Saturday night bender of 10 drinks, but the results were not super obvious. My overall body weight and composition didn’t change much either; implying my lack of drinking was compensated by increased eating. And I can relate to that…instead of grabbing a beer, a might instead go for chips and salsa.  

Final Thoughts 

People ask me if it was hard and how I did it. The anticipation was harder than actually doing it. Getting thru the first Friday and Saturday night was the toughest; it was a change in routine. And to that point, to make it easier: 

• I started planning things for early evenings. A common one, for example, would be a hard work-out ending around 6:00pm, so I got home and was simply starving for food, with no desire to drink. 
• I also found a buddy to stop drinking with me and found some comfort in texting with him “how we could sure use a beer right now”. 
• And finally I listened to some podcasts and read some books on not drinking, which helped provide some motivation. 

Will I do this again? Yes. The next time however, I’d like to cut out all processed sugars – so no cookies or cake – and substitute the sugar craving with fresh fruit only. And I’d love to cut out caffeine as well…but I am only human here.  

Clearly there is hard data to support that my body is more relaxed (lower heart rate) and recovers better when I’m not drinking. I do enjoy drinking though, and am not sure the benefit of not drinking outweighs the joy at this time. However, I could see this changing as I continue to age and experiment more.  

If you have any questions, shoot me an email or comment.

Until then, Cheers! 

Sean

sean@hathawayfinancial.com 

 

— Most people exercise their stock options way too early —

— You should wait as long as possible —

— Capture leverage; minimize taxes —

We’re going to attempt to answer the toughest question related to Stock Options: “When should I exercise?”

First, what is a stock option? A stock option is simply a right to buy a share of stock at an agreed upon price. The price you pay for that stock is called the exercise price, and it’s equal to the company’s stock price on the day of grant. So, if the company’s stock price doesn’t go up the option is worthless, but if the stock does go up, it can be quite valuable.

Executive Summary

THE RULE: “Hold your options until they expire”

This is the basic rule. There are nuances and exceptions, but this is the general rule. There are two reasons for this:

• Option Leverage. Options are like leverage; they provide the ability to earn money without laying down cash. But once you exercise you lose that leverage. You want to maximize your option leverage.
• Double Taxation. When you exercise you pay tax. Then you pay tax again on appreciation of the stock – or any investment – you purchase subsequent to the exercise date. This is double taxation. You want to avoid double taxation.

There are a few exceptions to The Rule, when you should perhaps exercise earlier:

1. You need the money.
2. You need to diversify your portfolio (and I mean really need).
3. You believe the company’s business is in a long-term decline. And if this is the case, you may want to look for work elsewhere.

Why I wrote this?

I spend a lot of time today and in my past corporate life explaining to people why it is beneficial for them to hold onto their stock options as long as possible. Stock options are a significant part of compensation at Netflix and other Silicon Valley companies, but there is little to no guidance explaining their value proposition. In a separate post I will explain why more companies should use options as compensation, but for now, my goal is to help those that own options understand that they need to hold on for the very long term.  

The rest of this article is detailed charts, graphs and math to help explain.

What’s a Stock Option?

A stock option is a contract between you and the company that gives you the right to buy a share of stock in the future, but at an agreed upon price today. That agreed upon price you pay is called the exercise price and its equal to the stock price on the day the option is granted to you. Like Restricted Stock Units (RSU’s), stock options often have a vesting period, like 1 or 2 years and they usually expire in 10 years. So if your company’s stock is currently worth $8, your employer may grant you some options that have an “exercise price” of $8, which is the price you would pay to acquire a share of the company’s stock at any time over the next 10 years. So if the stock goes up to $20, you will pay $8 for a share of stock worth $20, thus earning $12.

A key difference between Stock Options and RSU’s are that options are worth nothing unless the stock price increases; the stock needs to appreciate higher than the exercise price. But RSU’s are always worth the value of the stock; so there is less downside with an RSU, as they always have some value.

Option Leverage

This is a tough concept to wrap your head around, so bear with me.  

Every stock option you own increases in value as the underlying stock of the company increases. So if you own 10 options and the stock price goes up $10, then you just made $100. When you receive a stock option from your company, no money has come out of your pocket. But once you exercise that option you are laying down money to receive stock. And invariably THE NUMBER OF SHARES YOU RECEIVE IS ALWAYS GOING TO BE LESS THAN THE NUMBER OF OPTIONS YOU USED TO OWN.

Example: Assume you have 10 options with an exercise price of $8. And you decide to exercise those options when the stock is at $10. So you pay $80 to exercise those 10 options and receive stock worth $100, for a net gain of $20. Usually people will choose to “net settle” this transaction and simply receive $20.  

To illustrate my point on Option Leverage, we’re going to assume you actually receive 2 shares of stock, which are worth $20. This helps us compare our old “option position” to our new “stock position”.

Here is Key Point: BEFORE the option exercise your investment position reflected 10 shares of stock vis-a-vis 10 stock options, but AFTER the option exercise your investment position only reflects 2 shares of stock. So now if the stock price goes up $1, what used to be a $10 gain for you is now only a $2 gain.  

In short, the higher the stock price is relative to the exercise price the more value you can derive from your options. I’ve shown this concept graphically below. As a point of comparison, let’s consider you can either (a) hold the options (blue line) or (b) exercise them and trade them for shares of stock (red line and yellow lines).

The blue line in the graph shows the value of your options given a particular stock price. And the red line shows the value of those shares – given a particular stock price – if you had exercised your options at $10. The yellow line shows the value of the shares if you exercised at $20.

The blue line is higher than both lines, reflecting that the value of options is higher than both scenarios as long as the stock continues to appreciate. Below are the numbers reflected in the graph above.

So, if the stock appreciates to $50, your options would be worth $420 (blue line), but if you exercised at $10, and held onto those shares, then your shares and total return are only worth $100 (red line).

In summary, as long as you believe the stock is going to continue to appreciate, you should exercise your options as late as possible to maximize leverage.

Double Taxation(1)

I left taxes out of the examples above, because they complicate things and don’t add any value to illustrating the point. However, now we have to talk about taxes because they are the point.

Double taxation is the concept of being taxed at two points in time or twice. If you exercise stock you are taxed at ordinary income tax rate. And subsequently any appreciation in stock you may acquire is taxed at capital gains.

Tax event #1: Exercise options and pay tax on gain at ordinary income rate of 50%.

Tax event #2: Stock appreciates. Sell stock and pay taxes at capital gains of 30%.

You are better waiting to exercise the stock and only paying tax once at 50%.

Example: Imagine you have an investment worth $100 (i.e. your stock options). In Scenario 1, you sell it, pay tax of 50% and immediately reinvest (i.e. in stock). Then the investment doubles. You sell it and pay capital gains tax of 30%. OR, what if in Scenario 2, you hold it until it reaches $200 and sell it only once?  

This is illustrated and perhaps more easily relatable when thinking about 401(k) plans. The value of a 401k is that it avoids double taxation. You pay taxes on earnings, invest the money and the appreciation of that investment does not get taxed.

The key point here, is that to avoid or minimize double taxation, you should hold your options as long as possible.  

Option Leverage and Double Taxation

In the graph below we have combined the concepts of Option Leverage and Double Taxation, using the same example from above of 10 options with an exercise price of $8.

 

• The yellow and red areas represent “value lost” from option leverage and double taxation due to exercising too early.
• The blue line and area represents the value you realize if you exercise and hold the investment. The later you delay exercising, the more value you capture.  

* If you exercise at $20, you receive $60 [((10 options * $20 stock price) – (10 options * $8 exercise price)) * (1 – 50% tax rate)]. Then your $60 is reinvested in 3 shares of stock ($60 / $20 per share), which grows to $50 per share. That investment is then worth $150 ($50 * 3), but the $90 of growth ($150 – $60) is taxed at capital gains of 30% or $27. So your net proceeds are $127 ($150 – $27).  

Question: Why do we keep talking about exercise AND reinvest or hold?  

Answer: In order to illustrate the value of holding an option over time, we have to compare it to something. An apples-to-apples comparison is a reinvestment in the same underlying stock.

Question:  Shouldn’t I exercise and sell my options/stock and diversify or reinvest in a broader portfolio, say the S&P 500.

Answer: Perhaps. But consider that if you believe the underlying stock, i.e. your company’s stock, is going to perform similar to a broader market index like the S&P 500, then you are better off holding your options so you can capture Option Leverage and minimize Double Taxation.

Footnote: 

(1) All the tax examples are super-simplified tax rates. The goal is to illustrate the concept so we assume a 50% combined federal and state tax rate for ordinary income and we assume investment income qualifies for capital gains treatment and that rate is assumed to be 30%. Both rates could be higher or lower based on individual circumstances.

 

$500,000 to send my 2 children to college. I’m talking about a 4 year state school…not Harvard.

It’s that time of year: Facebook feeds with college visitation photos and selection decisions…not as much on how they intend to pay for it though (67% of high-school graduates go to college if you were curious).

As a financial advisor, it shocks me how few of my client-parents have established 529 College Savings Plans.

I’m from Oregon and graduated from the University of Oregon (Ducks). We now live in California and I just checked here, and to send one of my non-resident children to Oregon is going to cost well over $200,000! But it will be even more as tuition increases outpace inflation. I think Oregon is a fine school, but seriously!?

The cost of a 4 year education, including tuition, room and board may range from around $85,000 for in-state 4-year public university to north of $200,000 for out of state or public schools. This is 2-5 years of TOTAL income for the average US household. Per child! Virtually impossible that the average American can save this. And not even an easy task for the affluent.

Scholarship?

The Wall Street Journal recently reported “Parents’ Can Invest for Years in Kids Sports, but Scholarships are Elusive”. Only 2% of high-school athletes will receive a scholarship in their sport. That is roughly 1 in 50 varsity students. Makes you think differently about spending your hot summer weekend at the ball tournament in Fresno. Family day at the beach perhaps?

It may not be that bad though, as some estimates show that about 2⁄3’s of students receive some aid in the form of scholarship, grant or loan. Most parents have the attitude “we’ll figure it out” and that actually tends to work, but not without pain. Probably good to “figure it out” in a way that minimizes the pain. Hence the 529 Plan.  

The 529 College Savings Plan

You contribute after-tax money to a 529 Investment Plan and that money grows tax free until used for qualified education. So for example, you are super disciplined and save $250/month (keeping your older car and cutting back on Starbucks). Assume you earn a conservative average of 5% on that money, then after 18 years you will have invested about $54,000 and earned about $30,000, bringing your total balance to $85,000, which you can now use directly for education expenses. If you save this money outside of a 529 Plan you will pay taxes on the $30,000.

Here are the benefits in a nutshell:

• Money grows free from Federal and State income taxes.
• Qualified education expenses are broad and can include,  K-12 tuition, 2 and 4 year colleges, post graduation and vocational schools. Spending can be on tuition, room, board, books, supplies, etc…
• If your children don’t end up going to college of any kind (unlikely), you can change the beneficiary to any close family member: a grandchild, cousin, niece, nephew, etc…
• Here’s more FAQ straight from the IRS.

In my opinion, the best way to get started is to work with your financial advisor or brokerage to set up a 529 plan and then have the contributions automatically deducted from your paycheck. That way you never see the money and don’t miss it. Then try to raise those contributions a little bit each year (after your raise presumably).

If you have children and have not yet done this, get on it today. It’s one of the best tax-advantaged benefits offered in the US. 

sean@hathawayfinancial.com

www.hathawayfinancial.com