Fool.com: Drips Are Foolish (Drip Port) November 20, 1998

<THE DRIP PORTFOLIO>
Drips Are Foolish
Plus, buying Mellon & Touchstone Friday

by Jeff Fischer ([email protected])

ALEXANDRIA, VA (Nov. 20, 1998) -- The S&P 500 is enjoying its fourth year of above average returns. Why?

Leading American companies enjoyed aggressive earnings growth in 1995, 96, and 97. This year earnings have slowed, but market momentum alone carries some weight.
No small feat: American companies are leading the world.
Interest rates have declined since 1995, making stocks more attractive compared to interest-bearing investments.
The Bull Market has drawn a great deal of attention: more American households have money in equities than at any time in history, decreasing the supply of stock at the same time that demand has risen.
23% of American households are online. The most popular, legitimate use of online services, aside from e-mail and chat, is personal finance and investing. With oodles of free information at one's fingertips, investing is much more approachable -- and possible -- on a personal level.

Regarding number five, I receive e-mail (it's among my favorite) from retired Fools around the country who want to begin DRP investing, saying that it looks fun and they have money they won't need for several years. This sort of e-mail isn't unusual. Investing has spread far and wide. "Buying stock" is being subverted from something that was pinstripe suits, indecipherable language, and mystery -- all of which served to keep commissions high and client dissatisfaction low (because people didn't know better!) -- into what it truly is: Investing is an issue of common sense.

Invest your money in the best companies. How do you define "best?" You know these companies, you like them, and you use their products consistently, as do many of your friends and family members. (That's simplified, but life should be as simple as possible when it can be.)

Buying Intel and Johnson & Johnson didn't require a brain. Ignoring the analysts who said "sell Intel, it's going to $60," and instead buying the stock in the $80s and $70s took only Foolish conviction and the belief that, long-term, Intel is a great company operating in an important and growing industry.

In similar fashion, ignoring the warnings of late 1997 that Johnson & Johnson had a weak pharmaceutical pipeline and fierce competition in consumer products required only the same Foolish, but oddly subverted stance: "Hey, it's J&J. It's the most diversified health-care company in the world, and it spends billions on research & development. Long-term, it should continue to be a great investment. All the qualities are in place for that."

This is common sense. So why does this often seem to be at bizarre odds with the advice given by professionals? We were thinking, "Great long-term company, buy it now." They were saying "sell." We were often all but alone in liking Intel and J&J month after month in 1998. These are two world class companies that many professional investors shunned due merely to short-term concerns. Isn't that wrong? Aren't they mis-serving their clients who want to invest, most likely, for retirement 20 years down the road?

Imagine the highly-paid broker speaking to a client, let's say a busy doctor: "This year, the businesses of both Intel and J&J look weak. Let's avoid them this year, Dr. Jonathan. Let's trade you out of those two, you can pay the capital gains tax -- it won't be so much -- and we'll find a new home for that money. We'll get you in something that will move. We'll watch Intel and J&J and maybe buy them back in 1999 or when things look better."

Cha-ching! Commission earned for the broker. Plus, he looks and feels brilliant. Until the year plays out...

Both stocks have gained over 40% in 1998 including reinvested dividends.

Our fictional broker probably thought he was doing a good deed for the doctor. He didn't mean harm -- and that's the rub. If he can reasonably justify a trade, he'll do it. If he thinks he knows what will happen, he'll act on it and get his clients to as well. That's the problem with full-time, high-paid analysts and brokers: they try to outguess the market because that is, in essence, their job. Plus, it's a great challenge. Actually, an impossible one, which is why we never hear of people leaving the investment industry only to try a new challenge. Imagine the interview with the completely accomplished analyst or broker: "Yeah, I have the stock market nailed down. I know where it's going, I have it figured out. In fact, it's boring now. It's time to move on. There are no surprises left in investing for me." (This will never happen.)

Meanwhile, DRP investing has surprises every month. They arrive in the mail. "Hey, honey, let's see what price we bought Intel at this month!" These are good surprises either way. In one scenario: "The market absolutely tanked! Excellent, we bought more Intel at $71." Or, another scenario, "Intel is up, so we bought it high, but that means our account is also worth more. Hey, great" -- as he files the DRP statement away, grabs a fishing pole and his happy wife (now I'm really dreaming) and heads off for another month.

DRP investing is Foolish: you don't pay a broker anything. You don't attempt to time the stock market, yet you naturally buy more stock when prices are lower, without trying! And you can celebrate for different reasons, whether stocks are up or down, because you're investing more greenbacks every month. Foolish investing is about enjoying what you're doing and celebrating every day -- up or down, down or sideways, backwards or forwards. Heck, a good amount of the posts on the Drip message boards are Fools sharing jokes back and forth. I've never seen any DRP investor lament a stock price (unless it's a price that's too high!).

Plus, we're beating the market and 99% of the pros this year. Why?

We buy and hold.
We don't trade.
We have no "ulterior" interests.
We don't pretend to know where stocks are going.
We don't charge ourselves fees to invest.
We aren't overdiversified.
We don't try to be fancy. In fact, we don't try too hard. Like floating in water, too much thrashing about is counterproductive.

Drip investing is Foolish. Rule Breaking (Fool Port) is Foolish. Rule Making (Cash-King Port) is, too. As is Boring Port and the Foolish Four. The Hall of Portfolios on the Fool, holding real-money examples, demonstrates to Fools how to invest various ways to beat the market. Many Fools mix the styles, making all of their own decisions: completely and utterly Foolish!

Touchstone Friday. This week Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> and Johnson & Johnson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %> made several new all-time highs. Intel rose from its $103 price of last Friday, and J&J from $84.

Intel trades at 24.6 times and 21 times new 1999 and year 2000 earning estimates. J&J trades at 28.7 times 1999 estimates. All pharmaceutical stocks are trading at premiums to their growth rates, yet an overweighting in these stocks is likely a good idea. In the Fool's Industry Focus 1999 publication (due in December), we explain why this industry is so attractive and why owning at least one or even two or more stocks in pharmaceuticals, for the long term, makes great Foolish sense.

We bought more J&J on 11/9/98 at $82.449. It will be entered in the numbers next week. We also received a dividend from Campbell Soup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %>, and that company announced earnings Thursday. We'll cover that on Monday. Sales rose a strong 9%. Finally, Mellon Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEL)") else Response.Write("(NYSE: MEL)") end if %> is ready to roll. We'll invest our $100 in Mellon this month. I explained exactly how it's ready and how to invest more in this post on the message board.

The past week we made excellent progress on our new oil study, as Brian Graney addressed three major topics: political issues, economic issues, and oil prices. On Monday we continued with general information and more terms. Tuesday through Thursday, Brian's must-read-for-starters columns ran, all three linked above. (If you're reading on the Web, the columns are also conveniently linked below, too. It's even easier to keep up with past columns on the Web now, as the past five are always linked below.)

To discuss the week and our ongoing study (and our stocks!), we'll see you on the Drip and other pertinent message boards. Next week, we drink up Campbell's earnings and refine our oil knowledge, beginning with the oil sector's historic performance on the stock market. Have a Foolish weekend!

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FoolWatch -- It's what's going on at the Fool today.

11/20/98 Close

Stock Close Change JNJ 89 +2 3/8 INTC 112 1/16 - 13/16 CPB 57 1/2 + 1/16 MEL 62 1/2 +1 1/16

Day Month Year History Drip 0.48% 14.90% 33.95% 14.07% S&P 500 0.95% 5.90% 19.90% 22.31% Nasdaq 0.44% 8.85% 22.79% 20.98% Last Rec'd Total # Security In At Current 09/02/98 8.027 CPB $52.867 $57.500 09/01/98 9.727 INTC $80.238 $112.063 10/07/98 7.850 JNJ $71.405 $89.000 10/07/98 1.000 MEL $48.560 $62.500 Last Rec'd Total # Security In At Value Change 09/02/98 8.027 CPB $424.36 $461.55 $37.19 09/01/98 9.727 INTC $780.50 $1090.07 $309.57 10/07/98 7.850 JNJ $560.53 $698.65 $138.13 10/07/98 1.000 MEL $48.56 $62.50 $13.94 Base: $2100.00 Cash: $237.52** Total: $2550.29

The Drip Portfolio has been divided into 89.430 shares with an average purchase price of $23.482 per share.
The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.
**Transactions in progress:
10/24/98: Sent $40 to buy more INTC.
10/26/98: Sending $60 to buy more JNJ.

</THE DRIP PORTFOLIO>