Drip
Portfolio Report
Monday, November 24, 1997
by Jeff Fischer
([email protected])
ALEXANDRIA, VA (Nov. 24, 1997) -- As mentioned last week, we're mailing our $100 for this month to Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>. We mailed it today. If you've forgotten to do this, drop everything and run to the mailbox right now.
OK. Welcome back. If your check is mailed today or tomorrow it should make it before the December First purchase date. (The informal deadline for making each month's purchase is a few days before the first of the month.) If the check doesn't make the deadline, it's never the end of the world (certainly some months you will miss it, unless you use automatic payments). Harris Trust will simply invest the money for you next month, and any additional money that you send them as well. Sometimes a late check actually allows you to buy at a lower price.
We're sending the money to Intel partially because the Johnson & Johnson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %> account isn't yet ready. Our first share of that stock wasn't bought until November 14, though the check was sent at the end of October. With each DRIP plan there are different processes to get enrolled. Some companies run the plans on their own (like Pfizer), but most use a transfer agent. We were told that all of our individual shares of Johnson & Johnson couldn't be bought until mid-November, because the date of purchase was at the discretion of the broker. Also, more significantly, the price was different than previously thought. We received confirmation last week that the price for our share was $62.125, not $60.125. An extra two bucks is not a big deal (though $2 compounding for 20 years at 11% annually becomes $16) -- either way, we'll live.
To mail your savings to Intel this month, use the blue or gray envelope provided by Harris Trust last month. Each month that you invest Harris Trust will send you a confirmation statement and an envelope in which to send future investments. The gray envelope is for additional investment monies only, so it is the best one to use. Be sure to put your account number on your check and fill in the dollar amount invested on the slip that you send with the check. The slip tears off from the top portion of your monthly statement. Finally, be sure to sign your check Foolishly.
We now own two stocks that we're very comfortable sending money to every month, which means that our quest to find another stock (though obviously we're not in a frenzy to do so anyway) shouldn't be hurried. It does take a long time to build a portfolio of leading companies, especially if you're at all sensitive to your buy price. We can arguably afford to be sensitive now. Just as a company's success is much determined by its capital allocation (by how and where it spends its money), the same is true with your portfolio. Now that we have two stocks that we're comfortable investing in on a regular basis -- both for the businesses and for the current value offered -- we're that much less hurried to rush into another position unless we're certain that we want to start buying it now.
Why?
As great a company as Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> is, would our capital be better allocated to Intel right now at 19 times fiscal '98 earnings estimates, or into Coca-Cola at 35 times fiscal '98 estimates, while Intel is expected to grow more quickly? Arguably, Intel. In the future, even a mere year from now, Coca-Cola may be more worthy of our money than Intel, depending on what the stock prices do. Having such a long-term horizon while already building upon what is believed to be a very solid base gives us the liberty of being very discerning with our next purchases. We have two great places to send money right now. We needn't compromise and begin to send capital to a stock that may not offer as much value.
Heck, we might be able to send the money to only Intel and Johnson & Johnson for the rest of the portfolio's life and meet our goal. Certainly I'm kidding -- but it might be true for some people out there. Meanwhile, if we do invest only in Intel and Johnson & Johnson for another month or three, or more, then later down the road when we find something better or equal, we'll be putting the money into that each month for several months. Though I've written that in the end the money will be equally allocated to each stock more or less, the reality is that stock valuation will at least partially dictate how much money is allocated to each company over the years, and the premise that they'll all be end up equal is probably inaccurate. We will work to keep our investments fairly even, but we're not going to compromise the potential value of the portfolio merely for the sake of following the more simplistic approach of putting equal amounts into every stock. If we're following stocks as we are -- looking at every quarterly earnings report as we go along -- we should be able to tell which stocks are offering more value, if we're true Fools.
One mistake that some people might make is beginning to DRIP and, once comfortable with the process, buying a big handful of stocks right off the bat, and indiscriminately sending money to each. While over the long haul that strategy should accomplish the desired effect, instead working very steadily to slowly build a portfolio and sending your capital only to stocks that you're comfortable with on all measures should build better value over the long term; especially when compared to just randomly beginning to buy every well known but arguably overvalued large cap in the world (Gillette, GE, Coca-Cola, etc). We'll see where Coca-Cola is five years from now compared to Intel.
If you begin by investing in stocks that you feel offer current value while keeping an eye on those companies that you want to buy when they offer more value, your dollars should be much better allocated and much more able to grant you market beating returns even over the long haul. When the stock of a great company does begin to offer value again, it is usually offering that value for a long time -- more than long enough to DRIP into. This is partially why the Foolish Four approach works so well even over an eighteen-month holding period -- or longer.
Again, much like I discussed in Friday's column, the process you use should depend on how you want to invest. If you don't have time to follow quarterly reports or discern where your money is best allocated, and you would rather just send equal dollar amounts to every company, that is very Foolish indeed. You're saving money and investing it in great companies that you know. You can't get much more Foolish than that. But if you do want to take the time to allocate your money only where you feel it currently offers the best potential, that's doubly Foolish if you have the skills to do so. It's what we aim to do here, and we hope that you'll enjoy the process and see the reasoning behind it.
But if you're not doing quarterly homework on your stocks or you don't have time for allocation decisions, you're best off doing the automatic payments. As we're beginning from scratch here, though, and following our stocks regularly, we're in the perfect position to allocate our money as we see best. The process is actually one key part in meeting our twenty-year goal. If we wanted to simply send money to every well-known great company, we'd already have a full portfolio of five to eight stocks. But we want to send money to great companies that also offer us value for our dollar. As Warren Buffett said, the key to great investing is buying a piece of paper (stock) with your dollar that is worth more than your dollar. Over time, in part because the market is inefficient, we'll find plenty of leading companies offering value. In the meantime, there is no rush whatsoever. We already have two great places to start allocating our money.
That said, we're always looking for another investment, and we will end up well diversified by industry. In the food and beverage industry, we already know that at least Campbell Soup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %>, Anheuser Busch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BUD)") else Response.Write("(NYSE: BUD)") end if %>, and Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> are all well worth our close attention and further consideration. Tomorrow we'll look at General Mills <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GIS)") else Response.Write("(NYSE: GIS)") end if %>. The stock trades at 24 times trailing earnings and yields 2.80%.
To close, I suggest that you think in terms of years when going through the process of making investment decisions, rather than weeks or months. As David Gardner quoted from Warren Buffett today on the Fool's new message boards on the Web, "Someone is sitting in the shade today because someone thought to plant a tree a long time ago."
Certainly do try the new Fool message boards on the Web. They're quite incredible.
Fool on!
--Jeff
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TODAY'S NUMBERS
Day Month Year History Drip (1.25%) (1.49%) (10.25%) (10.25%) S&P 500 (1.71%) 3.50% 27.80% (0.49%) Nasdaq (2.08%) (0.42%) 22.92% (0.43%) Last Rec'd Total # Security In At Current 11/03/97 4.835 INTC $81.623 $78.125 11/14/97 1.000 JNJ $60.560 $64.125 Last Rec'd Total# Security In At Value Change 11/03/97 4.835 INTC $394.69 $377.77 ($16.92) 11/14/97 1.000 JNJ $60.56 $64.13 $3.57 Base: $900.00 Cash: $389.75** Total: $831.65 GOAL: The portfolio began with $500 on July 28, 1997, adds $100 on the 15th of every month, and the goal is to grow the port to $150,000 by August of the year 2017. **Transactions in progress: None. The Drip Portfolio has been divided into |