Why am I so happy when IBM plunges?

IBM plunged 6% (about $12) Thu after reporting “disappointing earnings. People were flying away from it by dumping its stocks but I’m thrilled about the plummeting share price. To me this is BUY, BUY, BUY opportunity! Am I losing my mind? Well, if you read my blog about how Buffett would like IBM stock to behavior or my yesterday’s blog on Schloss’ philosophy on value investment, then you should not be surprised about this reaction of mine. IBM is a great company, which you can hold forever for your retirement. But a great company does not mean it will not encounter hiccups from time to time. Just like a strong man who may also suffer from illness, any great companies may also suffer from temporary setbacks. However, as long as fundamentally they are sound, no worry whatsoever should a value investor have. Rather, such panic days should be the fantastic time for the value investors to buy. I won’t be surprised if Buffett is buying more of the IBM shares these days. My initial cost basis for IBM was $199 and it appears I’m losing money on paper. But I can tell you I have made much more money with my IBM positions in the past few months than the amount of the seemingly loss. I’m making money via 3 ways: IBM pays me an annual 2% dividend on a quarterly basis; I sell covered calls against my position every 2-3 months to earn more income; and I sell naked puts to make more income from it or buy cheaper stocks for more dividends. I’m simply happy and I think IBM is one of very few best value stocks out there at the moment, which are super discounted.

By the way, you may have known that 3 economists won this year’s Nobel Prize for economics. One of them is Prof Eugene Fama from Chicago University. His famous theory is the so-called Efficient Market Hypothesis (EMH). According to this theory, the stock market is highly efficient and the price of each stock should immediately reflect the fundamentals of the company. In other words, what you pay for a stock is what the stock is worth. Really? If this is true, then we should not have Buffett, Schloss, Rogers, and Soros etc who are the great masters to pick great stocks undervalued to beat the market. Ironically, one of Prof Fama’s brightest students, Clifford Asness, who practically did just the opposite of the EMH in investment and has become one of the richest men in the world. Asness left academia and joined Goldman Sachs for several successful years and then left Goldman and lunched his own hedge fund firm, AQR Capital Management. AQR is an extremely successful hedge fund, which has made Asness a billionaire. What he has done is simply to find the distorted prices (either too high due to irrational exuberance & complacence or too low due to irrational pessimism & panic)for companies when the market is out of its mind. Right now, IBM is exactly at this moment that the market is losing its mind to have dumped its shares. All you need to do is to hold your gut and buy more of it.

You probably have noticed that I’m talking more and more about value investment. Actually I have become obsessed to it. After almost 20 years in the stock market, I can say this is one of the best and most efficient way to make money with very little risk and without much attention needed. Also, there are so many different ways to further draw additional money out of it. FYI that right now I’m writing a step by step little guide book on value investment with dividend reinvestment. I’m thinking to present a model retirement portfolio in which a few value stocks could turn to over a million dollars after 15-20 years without additional  capital input and much attention. You simply hold them with dividend reinvestment. I have been over half way done and will publish it online. Will let you know when I’m done.