Tuesday, September 10, 1996
Consider Your Own Situation
or
What's Foolish for Me May Be foolish For You
by MF Runkle

In my last Fribble, I described how my wife and I cashed out of mutual funds and are going into individual stocks. Specifically, we will be sending more money every month to Dividend Reinvestment Plans (DRiPs) of selected companies (Coca-Cola, Johnson and Johnson, McDonald's, Intel, Procter and Gamble, Texaco, and Rubbermaid). I received an e-mail from a reader criticizing this decision.

Without quoting the entire text of the letters we sent back and forth to each other, I'll take the liberty of condensing the gist of what his criticisms were. First, how can I, an individual investor, expect to do better than professional managers of mutual funds? The companies I am buying into are already overvalued, and I'm making my decision on past performance. When these stocks come crashing down, I won't be able to sell out easily, because of the difficulties of selling stock in DRiP plans. Finally, the reader stated that if I didn't trust active mutual funds, I should have my money in index funds. That way, I would at least match the market in my returns, and be better diversified.

I feel all of the points this reader brought up are important, and need to be considered when you are investing. All jokes about the "Wise" aside, I sincerely believe that mutual fund managers for the most part do know what they are doing. They probably do a lot better job managing the huge amounts of money entrusted to them than I would, especially with the restrictions placed on them by the SEC and the fund companies they work for. Peter Lynch details this extensively in his books. However, I can do better with my small amount of money than they can. I don't have the same restrictions they do, and I don't have a lot of money that forces me to buy shares of every company on the planet.

Are companies like Coca-Cola, Johnson and Johnson, etc. overvalued? I think Coke is overvalued. I've been saying it for a year, while the stock has nearly doubled. Will these stocks I've bought go crashing through the floor in the future? Will Intel go out of overdrive? Will Coke lose its fizz? Will McDonald's get fried? Will Johnson and Johnson bleed profits? Is Procter and Gamble all washed up? Will Texaco run out of fuel? Will plastic resin prices rise, and Rubbermaid ... oops, that did happen. Well, you see my point; even a blue chip company isn't totally infallible. However, I feel the risk is tolerable. In my opinion, all of these companies have a future, even Rubbermaid in the long term, although I still regret buying it. Understand, I could be wrong; nobody makes perfect predictions.

Look at your own situation and decide how much risk you can tolerate. My elder relatives tolerate the risk on a T-Bill; that is it. They don't have the time horizon to risk losing money on the stock market. They are also unable psychologically to lose any money. Having lived through a depression and World War II where everything considered safe was destroyed, they constantly expect catastrophes to happen. For them, even mutual funds would be a huge mistake.

Selling stock in DRiP plans is a problem. In one of my earlier Fribbles, I recommended transferring shares out of the DRiP accounts to a brokerage account when you want to sell. However, this does take time. This type of investing isn't really very good if you are into technical analysis, or short-term trading.

The final argument was that I should invest in an index fund as opposed to a more actively managed mutual fund. How can I argue with something as Foolish as that? It is guaranteed to match the market, and it gives you the benefit of less risk with the diversification. Well I could personally do that, but to meet the minimum investment requirements, I'd have to liquidate investments in stocks that are currently outperforming the market. Also, I want to do better than the market and that involves risks.

In order to be Foolish, you need to consider the arguments for and against any strategy you are using. No strategy is completely risk free, and there are valid reasons for and against everything. The strategy I use may be suitable for me, but not suitable for you. The ultimate in Foolishness is to evaluate your own situation, and make your own decisions.

Transmitted: 9/10/96