Fortune Favors The Brave... Until it Doesn't

I was reading When Fortune Doesn’t Favor the Bold about single-stock concentration risk. And it reminded me of the incredibly cringe Matt Damon “fortune favors the brave” Super Bowl commercial (since removed from the internet?) and I couldn’t resist lampooning it.

Investors usually accrue concentrated positions through their work or inheritance. They hold concentrated positions for many reasons, including emotional (e.g., HODL, remembrance), practical (e.g., executive comp), and, of course, tax.

I highly recommend Kochis’ Managing Concentrated Stock Wealth: An Advisor's Guide to Building Customized Solutions for a deep dive into why people hold and what advisers can do about it.

One possible solution

I co-authored a post with Srikanth Narayan, the founder of Cache, which offers a modern iteration on one possible solution to managing a concentrated stock position, the exchange fund (shout out to Meg at Flow for an impartial explainer).

Read my co-authored post on Cache's website

Recently, I hosted Meb Faber for a LinkedIn Live event about seeding an ETF in-kind using a 351 conversion. I wrote a lengthy 351 explainer here.

Over and over and over, people kept comparing the 351 to an exchange fund.

This surprised me. The 351 and the exchange fund are totally different tools.

The easiest way to understand the difference is this illustration.

An exchange fund diversifies a concentrated position. A 351 conversion takes a diversified portfolio and puts it in the ETF wrapper (an already-diversified portfolio) for operational efficiency. Illustration courtesy of Cache.

I have to give credit to

Mike Allison

, who casually mentioned this succinct contrast between the exchange fund and 351 conversion to me a little over a year ago, and I’ve been deploying it and sounding smart ever since. Thanks Mike!

I posted a point-by-point comparison of the 351 conversion and exchange fund a month ago, but still had some lingering questions. I’m pleased to say the next version of the comparison table fills in those gaps. Here it is.

Version 3 of the exchange fund versus 351 conversion comparison table.

Is this table missing anything? Let me know, and I’ll find the answer.

Here’s another link to the full-length post on Cache's website

What’s coming up next?

Thanks to everyone who filled out the poll last weekend. This is what I’m working on…

Curious about something NOT mentioned above? Lemme know and I’ll see what I can do.

Have a great weekend.

Disclaimer: The information provided in this post is for general education and journalistic purposes and does not constitute investment, tax, or legal advice. This content focuses specifically on the taxation of investment products but is not a recommendation to buy or sell any investment product. Brent Sullivan is not an investment advisor, CPA, or tax professional and is not authorized to practice before the IRS. For personalized advice, consult a licensed professional. Laws may change, so verify with a credentialed expert.