In April 1980, two men from Northrop went to visit Jack Northrop. He was 85, in a wheelchair, and in poor health. They had been cleared to show him something secret.
It was a model of a new flying wing. Its wingspan was 172 feet, the same as the YB-49, the experimental bomber Northrop had built more than 30 years earlier.
According to accounts of the meeting, he studied the model and wrote a short note on a pad of paper:
“Now I know why God has kept me alive for 25 years.”
He died less than a year later. The aircraft behind that model became the B-2 Spirit, which first flew in 1989.
His idea had survived. What changed was the technology around it, and the biggest piece was the flight-control system.
A flying wing has no traditional tail. That makes it very efficient, but it also makes it harder to keep steady. The YB-49 had small fins to help, but pilots still struggled to hold it level during bombing runs. It took much longer than other bombers to settle down enough to aim accurately. The plane needed constant small corrections, faster than any human pilot could make.
That wasn’t the only reason the program was cancelled. Range, payload, cost, and politics all played a part. But the missing piece that finally made the flying wing work was a modern flight-control system.
A modern flight-control system can constantly make small corrections instead of waiting for a pilot to recognize every deviation and respond manually. The aircraft does not have to become naturally stable first. The control system helps manage that instability.
That distinction is what I find interesting.
The same pattern shows up in financial planning
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A single stock position behaves a lot like an aircraft without a flight-control system. The flying wing would not hold a steady course on its own. It keeps drifting, and every drift needs a correction. A single stock position works the same way. It does not stay put. The stock price moves, new shares vest, and the position keeps drifting away from where you want it to be.
Without a control system, every one of those corrections falls on you, the pilot. You have to notice the drift, decide what to do, and act, all while the stock is moving and your emotions are pulling you in different directions.
The YB-49’s pilots knew exactly where they wanted the plane to go. The problem was keeping up. Most people with company stock know where they want to go too. They just can’t make the right correction every time the situation changes.
The answer is not to become a better pilot. It is to build a better control system.
Building the control system
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This is where a Rule 10b5-1 trading plan becomes interesting.
The comparison to fly-by-wire obviously is not perfect, but I think the basic idea is similar. Instead of repeatedly deciding whether today is the right day to sell, you establish the framework ahead of time.
A 10b5-1 plan is adopted when the person is not aware of material nonpublic information and subject to the company’s trading-policy requirements. It can specify how many shares will be sold, on what dates, at what prices, or according to a predetermined formula.
After the applicable cooling-off period, trades can then occur according to the plan without requiring the investor to make the decision again in the moment.
The plan does not make the concentration risk disappear. What it does is put a predetermined process between what is happening in the market and your response to it.
That is where I think the actual financial planning starts.
- How quickly should the position be reduced?
- What percentage of the portfolio are you ultimately comfortable having in one company?
- Should sales be spread across multiple tax years?
- Should the plan include price conditions?
And if you do set a price condition, is it actually part of the risk-management strategy, or is it just another way of saying, “I’ll sell once the stock gets to the price I want”?
Those decisions are easier to think through when the stock is not moving 10% in either direction and you are not staring at a potential tax bill.
Without a target concentration, “I should diversify” is still just an intention. With a target and a process for getting there, you actually have something you can implement.
Where the comparison ends
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There are obviously limits to the analogy.
A flight-control computer responds to what an aircraft is doing in real time. A trading plan does not. It follows instructions that were established ahead of time and is intentionally difficult to change casually.
That rigidity can be useful, but it also means the assumptions going into the plan matter. A plan built around poor assumptions can continue operating on those assumptions.
A 10b5-1 plan also does not eliminate the need to monitor the overall portfolio. There is no warning light that comes on when company stock grows back above the level you are comfortable holding. Someone still needs to look.
And there are plenty of other considerations. Taxes matter. So do cash-flow needs, charitable goals, vesting schedules, option expiration dates, blackout periods, and everything else happening in the financial plan.
Those factors can all affect how quickly it makes sense to diversify.
The lesson
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What I like about the Jack Northrop story is that the flying-wing concept did not eventually work because all of its challenges disappeared. Engineers got better at building systems that could manage those challenges.
I think there is a useful lesson there for someone with a large position in company stock.
Most people in that situation already know concentration creates risk. The missing piece is often not knowing what to do. It is actually following through.
If the decision has to be made again every time the stock moves, there will always be a reason to reconsider it.
A predetermined process changes that.
Figure out the rules while you are thinking clearly, then give the system a chance to do its job.