01-28-2015, 09:16 AM
(This post was last modified: 01-28-2015, 10:14 AM by hendi_alex.)
I'm not suggesting that MSFT is a good or bad position, just that the goal is stated pretty strangely, and that there seems to be an absence of any relevant litmus test, at least as stated in the post.
Another example. Suppose that I buy shares of XYZ primarily for its 5% yield and for its safety of that distribution. The price goes goes up and the yield drops to under 4%. A quick survey finds company ABC that sports a 5% yield which appears to have an excellent coverage ratio. Given that my objective is a relatively safe 5% yield, XYZ no longer meets my objective nearly as well as ABC does. I would sell XYZ, harvest my gains, and plow the funds into the more appropriate choice, ABC. Someone who is caught up in the 'yield on basis' mode of thought would never even consider selling XYZ. From their point of view the stock still yields 5% on investment. The market reality in the example is that XYZ no longer provides the 5%, but a suitable replacement does. The key here is in always looking at market yields and anticipated future growth when making investment decisions. Value in the current market has nothing to do with what someone paid for a stock or for what it used to yield. It only has to do with current prices, current yields, and future prospects.
Another example. Suppose that I buy shares of XYZ primarily for its 5% yield and for its safety of that distribution. The price goes goes up and the yield drops to under 4%. A quick survey finds company ABC that sports a 5% yield which appears to have an excellent coverage ratio. Given that my objective is a relatively safe 5% yield, XYZ no longer meets my objective nearly as well as ABC does. I would sell XYZ, harvest my gains, and plow the funds into the more appropriate choice, ABC. Someone who is caught up in the 'yield on basis' mode of thought would never even consider selling XYZ. From their point of view the stock still yields 5% on investment. The market reality in the example is that XYZ no longer provides the 5%, but a suitable replacement does. The key here is in always looking at market yields and anticipated future growth when making investment decisions. Value in the current market has nothing to do with what someone paid for a stock or for what it used to yield. It only has to do with current prices, current yields, and future prospects.
Alex
