Thursday, September 5, 1996
Moving Forward Into Foolishness
or
Mutual Funds Aren't That Bad, But They're Not Good Enough
by MF Runkle
This week my wife and I took another step toward Fooldom. We sold four of our mutual funds. We initially got into mutual funds in our pre-Foolish days. However, we discovered that we were doing better buying individual stocks. What about the money we took out of the funds? I'd like to say we are reinvesting it, but we are using it to pay off the credit card bills we ran up this summer. You see, it is easier to be Foolish when you aren't carrying all that debt. Not that what we bought was bad, a transmission and paint job for the Foolmobile (210,000 miles), tuition, and yes, a vacation. Here's the mutual funds we sold and the S&P index:
3 Yr 5 Yr
1 Mo 3 Mo 1 Yr Avg Avg
...................................................................
Janus -3.97 -2.36 12.70 12.69 12.89
Janus Enter. -10.44 -7.96 17.42 17.79 n/a
Janus Merc. -7.08 -9.14 6.93 21.62 n/a
Berger Small -11.75 -7.61 21.83 n/a n/a
...................................................................
S&P Index -4.42 -1.58 16.55 15.61 13.63
As you can see, these funds haven't done that badly compared to the S&P 500, with the exception of Janus. This wasn't luck; Barbara and I chose them very carefully. We checked them out in Morningstar, and read their prospectuses. It's funny, but we did as much work choosing these funds as we would have in choosing DRiPs on individual stocks.
Now, we are going to take the money that we sent to these funds every month and invest it in our DRiP stocks. DRiP plans allow you to purchase the stock directly from the company, saving on brokerage commissions. I like the ones where you can have money taken out of your account automatically. Being as undisciplined as I am, this helps.
How did we choose our DRiPs? Well, it's a real complex system, but since I have a degree in engineering and am halfway to my MBA, I felt I could handle it. We took this publication called the S&P Stock Guide (a broker friend of mine gave it to me for free; not am I only undisciplined, I'm cheap) and looked up companies we knew. If their stock price over the past 5 years beat the S&P 500, they were in the running. Next, did they have steadily increasing earnings? Finally, increasing dividends? Benjamin Graham recommended this, by the way. Unfortunately, we didn't use this method initially, as you'll see:
Company 5 yr Annualized Return
(end of 95)
...................................................................
Coca Cola 28.1
McDonald's 26.8
Intel 43.4
Johnson and Johnson 21.8
Procter and Gamble 16.8
Rubbermaid 5.5 (ooops!)
Texaco 10.8
..................................................................
S&P 500 16.6 % (end of 95)
Benjamin Graham recommended that you look at profitability, stability, growth, financial position, dividends, and price history. Rubbermaid flunks the profitability and price history test. Texaco flunks the price history test until the beginning of 1996, but it made up for it this year. As you see, it did not outperform the S&P 500 in the past 5 years prior to 1996. We didn't consciously buy the stock, I had it "left over" from an ESOP when I worked for them in the early 80s. They've done a lot of restructuring in the past years (meaning they fired my former boss), so I personally felt bullish on them. The recent price run-up proved me right. Rubbermaid has been a dog, and we never would have bought it if we'd looked in the Stock Guide (about 3 minutes work). McDonald's also has been stagnant in price recently. No problemo, it allows us to buy more shares. That is the beauty of a DRiP compared to a mutual fund.
Mutual fund managers may often try to buy the latest "hot" stock. That is fine for momentum, but doesn't allow you to get into stocks that are undervalued. In a DRiP, you are buying stock in your companies at a greater rate while they are out of favor on Wall Street. Thus, while Texaco was stuck at $65 a share, you could have been snapping those babies up, while the Wise were ignoring oil company stocks. Here's another, Procter and Gamble seems to be vacillating between $85 and $90 a share. We've made money on this, because most of our shares have been purchased at the lower prices. Finally, you don't really have to worry if your favorite stock is temporarily overvalued, you won't be buying as many shares, which weighs the average cost of your portfolio lower.
This isn't the most exciting way to buy stock. It doesn't attract attention in the chat rooms, and you don't make big bucks quickly. You do, however, have much less risk, and can beat the overall market average. It also allows you to get the closest to market timing that a small "buy and hold" investor can get. I figure if my portfolio gets too boring, I'll just watch Beavis and Butthead with my son for excitement. Above all else, I am investing to make money, not for thrills, excitement, or to impress other people. I'll admit it was a little unnerving to decide to cash out of the mutual funds, but it was one small step for a Fool, and one giant leap to Fooldom.
Transmitted: 9/5/96