Drip
Portfolio Report
Wednesday, May 6, 1998
by Vince Hanks ([email protected])
NORTHVILLE, MI (May 6, 1998) -- Dale is busy finishing his Industry Snapshot work for the week (great product!), so today he'll be taking a break from the Drip Port. This is fortuitous at this point.
Every now and again we think it's a good idea to take a look back and review some of the things that we've learned along our journey, perhaps adding a few nuggets of information as we do so. Today is one of those days.
When we first introduced the accounting method that we use to track the Dripfolio back in October of 1997, we received a sizable chunk of e-mail asking for the clarification, explanation, and even obliteration of the concept.
The two prevailing questions were:
1. What can't we just use the traditional method of determining percentage gain?
2. What exactly are you bozos talking about?
The answer to the first question, at least, is that we do not have a stable and permanent portfolio basis. We are adding money monthly and by doing this we're changing the basis each month, as well as contributing a time relationship to portions of our ever-evolving basis.
If we don't recognize these two factors, we fall into the trap the Beardstown Ladies have recently found themselves snared in. I'm not here to pile on the Ladies -- if you'd like to review their woes, read the Fools Speak Out About the Beardstown Ladies. Bottom line though, is that adding your own cash to a portfolio does not and cannot affect its performance. At least not until it goes to work for you. (The slacker!) If you start with $500 and add $100 a month for 12 months, assuming that you've invested in nothing that has increased in value, then you've gained exactly Zero. That's "My Hero, Zero" by the way.
So, how do you account for added money over time? This is where the Net Asset Value or Share-Price valuation model comes into play. Let's review, shall we?
Step One -- Setting Parameters
Identify your original basis. This what you begin with on day one. For our purposes here, we'll begin with $500.
Divide the value of your portfolio into shares. We'll assign 20 shares at a value of $25.00 each ($500 divided by 20 = $25 per share).
Note: It's important not to confuse portfolio shares with shares of stock held. Portfolio shares are issued as a method of accounting, whereas shares of stock are real and reside in your portfolio.
Step Two -- Buying & Selling
Buying and selling shares of stock will not increase nor decrease the number of shares that comprise your portfolio. The value of these shares will most likely be changed, however. (AOL users, please maximize the window.)
Cash + Stocks Held - Fees & Commns
Per Share Value = --------------------------------------
Shares Out
Assume we purchased one share of FOOL at $125 + $7.95 commission. Our price per portfolio share is now $24.603.
($500 - ($125 + $7.95)) + $125
Per Share Value = -------------------------------- = $24.603
20
Selling is the same process except you shift value from stocks to cash on hand and deduct commissions and fees.
Step Three -- Adding Funds
First determine the buy-in value for shares in your portfolio:
Per Share Value Cash + Current Value of Stocks Held
(Buy-In Value) = -------------------------------------
Shares Out
Since our purchase, FOOL has skyrocketed to $150 per share (Impressive!). We'd like to add $100 cash to the portfolio:
$367.05 + $150
Per Share Value = ---------------- = $25.853
20
Our $100 will buy us 3.868 new shares for our Drip port at $25.863 per share. We now have 23.868 shares comprising our portfolio.
Adding the cash will not change the current value per share:
$467.05 + $150
Per Share Value = ---------------- = $25.853
23.868
Step Four -- Dealing with Dividends
Since dividends in a Drip portfolio are automatically reinvested, we'll add them to the share base of our holdings (current value of shares held), thus increasing the total portfolio value without changing the number of portfolio shares outstanding.
In this case, FOOL paid a dividend of $3.63 (Not bad for one share!). We'll add it to the total value and calculate our new per share value:
Assuming that the price of FOOL held steady at $150...
$467.05 + ($150 + $3.63)
Per Share Value = -------------------------- = $26.005
23.868
Adding the dividend has increased value per share as would be expected. The procedure would be the same for a cash dividend, naturally, except that you would add the dividend to the cash on hand rather than the current value of stocks held. The effect on per share value being identical either way.
This concludes our review. If anything above was not totally clear please drop me a line at [email protected] and I'll try to confuse you even more. :)
Jeff, Dale, and I will see you on the message boards! If you have questions about today's column, or anything, please visit. The boards are linked in the top right of this page.
Fool on!
Vince
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