SHARPE INCOME … Initial Position Sizing

Posted on Feb 23 2015 - 10:00am by Sharpe Trade

The original Sharpe Income post can be found here.

The Sharpe Income category be be found by clicking on that red ‘Sharpe Income’ tag next to this post title, or by clicking here.

We continue the discussion from the last entry.  


At this point in the game, with the state of the markets … I would love to pick up some American Express (AXP) for the Sharpe Income project.

Because I like to pick up assets when they are cheap, not when they are expensive …

Chart of American Express

American Express (AXP) has moved sharply to the downside in recent weeks, while only sporting an approximate 18% dividend payout ratio.  For a credit card company, they keep their clientele and financial leverage on the conservative side … which I like.  Their income is up, year over year, as are their revenues.  As well, their operating margins have been growing well since 2012.

But I’m not going to buy any.  At least not right now.

Why not?

The principle of proper position sizing on a small account.  We have to examine the available cash while aiming to keep a consistent position size at the outset of the project.

If you note the PDF that is attached at the bottom of this entry, the Sharpe Income project currently has $188.30 in available cash after this weeks capital contribution.  

And we spent $331.72 when we bought International Business Machines (IBM).

In the beginning of this project, I would like to keep initial position sizing at about that level, or in the $330.00 area.  Which means we need at least five more capital contributions before I am able to consider an equity purchase.

So why do I want to keep the initial position sizing equal?

For the sake of diversification.

Many may think they understand this concept to mean that an investor possesses companies in different sectors (such as a company in Technology and another in the Energy sector) so that they are not exposed to the risk of a downturn in one particular sector.

That’s part of it.

But what is the point of diversifying into different sectors, if you hold $3,000,000 of an Energy company, and $300.00 of a Technology company?

In such a case an investor is not diversified at all, because their position weighting is skewed massively into Energy.  If the Energy sector falls, then the entire portfolio will fall lower, as this investor only has $300.00, a small position weight in their portfolio, towards Technology.  This is a concept I see overlooked time and time again in financial circles.

Not only must an investor care about what company he is buying.  Not only must an investor know things like the dividend yield, payout ratios and operating margins.  Not only must he or she decide how much of the instrument they will buy.  But they also must decide how large this position will be in relation to other positions in their portfolio.

This is especially important in the beginning stages of a portfolio, and why at this stage of the game … I would like to have an initial position weighting for each stock holding of approximately $330.00.  At least to start.

Actionable View of Markets for ‘Sharpe Income’

IBM has gone ‘ex-dividend‘, meaning that since we have held IBM during this time, we are entitled to the next dividend paid on March 10, 2015. And at the beginning of each month, JNK will begin to pay us dividends as well.

We put in the time, persist, and let let these capital contributions pile up.  As you will note within the attached PDF, we only have $188.30 in the project account at this time. So we persist, and wait while the capital contributions increase the size of the account.  We have about 5 weeks before we can make another purchase.  Plenty of time, and we can impart a few lessons in the meantime.

The link to the Google Drive Spreadsheet that you can view, that we will edit, build upon and refer to over time can be found at this link.

We continue the Sharpe Income project with this next entry.

The Sharpe Income PDF breakdown for week 13 can be found here …

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