SHARPE INCOME …. Mr. Market

Posted on Dec 15 2014 - 7:45am by Sharpe Trade

The original Sharpe Income post can be found here.

We continue the “Shape Income” discussion from the last entry.

Remember that $25.00 has been added to the Sharpe Income, Fixed Income account this week, per the rules of this account as mentioned in the original post.  You will also be able to note this on the PDF at the bottom of this post.

Our first order of business, is that I had stated in the last entry that I had an order to buy 2 shares of IBM at $165.35.  That order can now be viewed as cancelled.  This should be easy to understand since IBM just fell through support on Friday like butta’

International Business Machines (IBM)

IBM Falls Through December Support

If IBM is going to fall?  Let it fall lower!  There’s no reason to buy something that continues to get cheaper by the day.  We had placed our buy stop above $165.35, to confirm the market was going to bounce off of that support.  Which it did not do, it did the opposite.  So we can now cancel that order, and continue to observe IBM.

Now, let’s move onto the next question.

Does this drop in IBM concern me?

Not in the slightest.

Obviously I wish that I had waited on some of my accounts that already own IBM, but I have yield in the form of the dividends, and I understand, to the best of my knowledge, the company.

Which makes this a perfect opportunity to review an old addage of Mr. Benjamin Graham.  For those who have some “time in”, with the markets, this will be familiar to you.  But keep in mind that we are attempting to appeal and reach out to those who are new.

One of Benjamin Graham’s greatest insights, his best metaphor and descriptions … some have referred to it as “The Theory of General Relativity for Investing” … is a parable.  A parable that teaches us how to think of the stock market, or an individual stock.  A story about a man named:

Mr. Market.  

It goes a little something like this.

You own a company with a gentleman named:  Mr. Market.  Mr. Market is your business partner.  Mr Market will appear at your doorstep, each and every day, to quote you a price at which he would value the business.  And if you wish, you can take Mr. Market up on his offer to buy some of his stake in the company.  

Your company is running smoothly.  Soundly.  Of course you have some rough spots like any company, but you get through those as you are a sound and intelligent businessman.   The company is making money and profits.  Paying out dividends.

Now Mr. Market, he is a bit … unstable.  We don’t have to feel too bad for him however, because he’s not a real person as this is only a parable.  Regardless, over time you notice that Mr. Market’s quotations are based entirely on his own unstable emotions.

At times he is happy, and then ecstatic.  Mr. Market only sees the company through rose-colored glasses.  During such times, he will name a very high sell price for his shares of the company.  Ridiculously high.  Too high. He fears that you will come in and steal his share of the company, so he only quotes you a ridiculously high price.

Other times, he is merose.  Impossible to console.  He is so depressed that he can only focus on what is wrong, and problems for you and the company.  During such occasions, he will name a very, very low price, as he is petrified for his future.

The point here, is that Mr. Market allows his emotions to guide his decisions for quoting you a price.  And Graham’s argument, is that this is how we should really view stocks, and the market overall.  It’s Mr. Market quoting us a price, that is based on emotion, rather than reason.  And that if we were intelligent investors, we would take advantage of Mr. Market, and only buy from him during his depressive moods, and take advantage of his mania’s, and sell our shares at such times.

Returning to our discussion for this entry, I prefer to look at IBM’s profit margins.  Their current strategy to switch to higher profit margin aspects of their business.   Their intrinsic valuations. Their aggressive share buyback program, and what this does for me over the long-haul.  Their dividend history and payout ratios.

If Mr. Market wants to throw a hissy fit over IBM?  I will take advantage of him down the road.

The Share Income breakdown for week 3 can be found here.

We continue the “Sharpe Income” discussion in the next 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.

1 Comment so far. Feel free to join this conversation.

  1. Al March 3, 2015 at 8:21 am - Reply

    I love your style of writing.

    You know what you are talking about.

    IBM is a full 5 points higher than when you wrote this

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