International Business Machines (IBM) Entry for SHARPE INCOME?

Posted on Dec 4 2014 - 6:12pm by Sharpe Trade

The original Sharpe Income post can be found here.

So I’ve been watching IBM’s chart for the model Sharpe Income account as I mentioned in the previous entry.

We got some news that the market didn’t like around earnings report on October 20th, and the market sank more than 7%.

And then?

We’ve been moving sideways, and not moving lower, for over a month.

There is no prediction for IBM regarding the future.  Quite frankly … I simply don’t care at this point.  IBM has remained above $159.50 for the last month, but this is no sort of guarantee that IBM won’t sink lower still.  It might.  In the market, there is never a guarantee.  The future is completely unpredictable. However the market tends to ‘price in’ news over time.  So IBM is now trading at the $160 to $164 level for over a month, with the earnings information of October 20th, in hand?  For you folks who are new, we say that the earnings of October 20th is now priced in.

And the very important qualifier, is that there is yield, or a dividend paid each quarter, that we can use for income.

So at this point?  For the Sharpe Income model account I will purchase 2 shares of IBM at $165.35 stop, with an order that is Good Til’ Cancelled (GTC). So if we hit that level, I will consider the Sharpe Income model account as purchasing 2 shares.  Also, keep in mind that the Sharpe Income model account will have $25.00 deposited into it on Monday, and each and every Monday hereafter.

Now you might be wondering …

Wait a minute here Dan.  You said to keep a lot of cash in an account, and cash works as a stabilizing force to a portfolio.  Now for this purchase for the Sharpe Income account, you’re going to buy 2 shares for a $500.00 account, which means you’re going to use 68.14% of the account to buy IBM, and only leave 31.86% cash!  Aren’t you contradicting your earlier statements and everything you ever said about money management?

No.  I’m not.

Remember, the Sharpe Income model account is an account that receives $25.00 in cash, each and every week.  We obviously don’t count that cash towards our gains at all.  But it does provide future cash flow to this portfolio, as we grow it over time with patience and persistence to become a larger income producing account.

That’s $1,200 in contributions for the next year.  $2,400 for two years.  So when we consider our future capital contributions?  For the next year this only represents a 19.81% percent purchase.  For the next two years?  Only a 11.61% purchase.  And that is not counting the dividends we will be paid. Since we’re talking about growing a Fixed Income account, with future gains, and future small disposable income cash deposits?  It’s actually a small introductory purchase to this particular account.

And those numbers are based off of the account receiving a $25.00 capital contribution each week.  If we had $35.00 contributed each week, the purchase would be less of an impact.  If we had only $10.00 each week, it would be more of an impact.

My point here, is that …

A) Capital Contributions on small accounts are absolutely vital, and is part of the growth process of a self-directed account such as this.

B) Each portfolio is going to be unique, in the way it grows, according to an individual investors circumstances and the size of capital contributions, commissions, the size of the account, etc.  These are some of the variables that can affect the decision process of making a purchase

We also have the following public video on the concept of a term you may have heard of … averaging down ….

So what happens from here on out with IBM?  No idea.  No one does.  I do know that I enjoy buying assets that produce income when that asset becomes cheaper to buy, as IBM has over the course of the last two months.  

What happens if it never hits $165.35, and IBM sinks?  Then we are not filled on our order.  We have no position, and we can continue to evaluate the ever changing news that comes out, if we want to get involved down the road for an even better price.

What happens if we are filled at $165.35 and IBM sinks?  Then we are covered because we have the cash contributions coming in, and as we will mention in the future, we will use other instruments to try to keep our risk mitigated as we navigate the Capital Markets for Fixed Income.

What happens if we are filled at $165.35 and IBM rallies?  Well … thats “ok”, and we can use that to our advantage, but it’s not really the main driver of what we are trying to do here.  The main point, at least at this stage of the game, is growing income with stable fixed income assets, at the best price we feel we can get them for, given all of the data that we have on hand … today.

In the future?  In the future, we’ll have other decisions to make.

We continue with the next “Sharpe Income” entry that you can find here

Disclosure:  I do maintain long positions in IBM in my own personal Fixed Income account at a cost average of $175.70 and long in separate valuation accounts with a cost average of $185.60.  No businesses that I am associated with, to my knowledge, has any position in IBM, long or short, at this time.

2 Comments so far. Feel free to join this conversation.

  1. Investing Pursuits December 4, 2014 at 7:47 pm - Reply

    You say, “I will purchase 2 shares of IBM at $165.35 stop, with an order that is Good Til’ Cancelled (GTC).”. This must be a new type of order. A regular limit order will turn to a market order if it is below or at price immediately. So what type of order is this exactly?

    I have followed you for years, so I wondering what type of order this is exactly?

    • Dan Shy December 4, 2014 at 11:11 pm - Reply

      Heyya Mate,

      Good hearing from you!

      That would be a straight “Stop” order.

      So the actual wording would be something akin to:

      Buy 2 IBM at $165.35 STOP – GTC

      What a Stop order does, is as soon as the market hits $165.35, the order is triggered, and is filled at the market, wherever the spread is at – at the moment. It basically is good enough for the purposes of what is being done for this account.

      Regards,
      Dan

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