DRIP PORTFOLIO

<THE DRIP PORTFOLIO>
Our Performance
And a word from Intel

by Jeff Fischer (TMFJeff@aol.com)

Alexandria, VA (Feb. 2, 1999) -- When you view the performance results of the Drip Portfolio, you might feel somewhat betrayed. And you should. Our numbers show our portfolio as having gained only 16.5% since its inception, while the S&P 500 has returned 34.5%. However, we're not here to make excuses, because we don't have to. This portfolio has actually gained much more than our numbers show. In fact, Drip Port has -- surprisingly to me -- just about kept pace with the S&P 500 since its inception. That's surprising because our 18 months of life have included very heady starting costs and a very long process of actually getting our money invested.

Anyway, when measuring the portfolio's cash value, the Drip Port has gained 22.1%. The base of cash that we have for investment is $2,300. The value of the portfolio is already $2,810 meaning that we've made $510 after expenses, or 22% already. But the return on our investment in the market is even a little better. We've invested only $2,140 worth of our cash. $160 is still on the sideline. With the $2,140 we've invested we've achieved a total return of 30.8% -- close to the S&P which is at 34.4%. (We are losing significantly to the high-flying Nasdaq, though. However, with Drip-only companies that isn't surprising. The comparison of large cap giants to the Nasdaq's many small and mid-caps is of limited value, but is something we'll address and even confront.)

So, why do our numbers show us as having returned only 16.5%?

Primarily, the time value of money has entered the picture, and the slow process we have of getting cash invested hampers our return. Our record keeping is based on a Value Per Share accounting method (which is similar to what mutual funds employ) because we're adding money every month and we need a fair way to value our returns under this scenario.

In fact, our returns are understated. There are several reasons.

First, we launched the portfolio with $500 in July of 1997. The accounting method we use considers the time that it takes for the money to achieve a return. We first began to invest in September when we bought one share of Intel (Nasdaq: INTC). Meanwhile, the rest of our cash sat on the side, earning nothing until November when we invested $300 more in Intel at $78 per share. Even though that $300 has since earned 71% for us in just over one year, our accounting system has been valuing the money's return since months earlier, deflating it's performance.

Next, it wasn't until November of 1997 that we bought a second company: Johnson & Johnson (NYSE: JNJ). And then we couldn't invest more money in J&J until January of 1998. Meanwhile, these initial purchases had fees attached, too, which lowered our return (into negative one for a long while).

Also dragging down our return is the fact that we diligently added $100 to the portfolio on the first of every month. I only recently considered the negative implications of this.

We add the money to the spreadsheet the first of each month and it begins to impact the calculation of our returns immediately, but we don't invest the money typically until the end of the month; hence, each month's $100 initially drags us down because it's dead money. And beyond that, we don't get our purchase prices until weeks after sending the money in, at which point numbers are entered and the money is at last officially put to work in the spreadsheet. In the future, we'll only add money to our portfolio as we mail it for investment. We will of course continue to add $100 in savings every month, but usually not on the first of each month; instead, near the end of a month.

A final handicap to our returns is the fact that we are adding and investing $100 in new money every month. The longer that your money is in the stock market, the more likely that you are (if you're investing in strong companies) earning a positive return on that money. If you're investing more every month, though, it's always likely that your new money is either flat or in negative territory for a while. That drags on our returns, too, sometimes for months at a time.

Of course, we're not worried about any of this long term, but it seems worthwhile to explain our returns. They should matter more in terms of dollars than as measured by value per share accounting methods. By dollars, we've made over $500 already on a base of $2,300, of which only $2,160 is invested. This admirable return keeps up much closer to the S&P, and considering our initial fees, that ain't bad. Perhaps our worst failure is how we're lagging behind the Nasdaq so greatly, which is up a giant 54.5% -- even if we can't invest in many Nasdaq companies. (We'll address this in the future! There are going to be ways for us to be more aggressive, while still Drip investing, in the future.)

In conclusion: We watched Intel double in price while our returns look relatively puny, but we've actually made over $500 already (or the entire starting value of the portfolio). This is even more heartening when one considers that seven months ago we only had about $1,500 invested in the stock market. We've been very fortunate to achieve such quick returns as Intel as our first choice has rewarded us well. J&J has done very well, too, for dollar-cost-averagers; it hasn't soared like other pharmaceuticals did early last year, but that's actually a positive for long-term Drip investors who were just beginning to buy the stock. Again: we're not concerned about these numbers in the near term; long term compounding and dividends should put us ahead of the market if we're choosing our companies well.

INTEL NEWS TODAY. Intel shared at a conference that its first quarter began strong, but it didn't change its earlier guidance for lower sales from the fourth quarter (meaning sales below $7.6 billion), lower gross margin, and lower expenses, too.

The company also shared that it plans to launch its new Pentium III by the end of this month. The 500 MHz Pentium IIIs will debut on February 17th, and they'll be available in PCs on February 26th. Among many improvements, the Pentium III will offer much greater 3D graphics capabilities. You might want to wait on buying the 500 MHz model, however. Soon speeds of the Pentium III will increase to over 600 MHz (so much for the 266 MHz Pentium I bought a whole ten weeks ago).

Intel is continuing to roll out its 0.18 micron technology; years from now we'll be able to say with pride: "I remember when Intel built chips on 0.35 micron -- that's when the Drip Port first bought the stock. Then it went to 0.25. Then 0.18. Then...."

The smaller size makes each chip less expensive to make and allows for faster speeds and greater yield per wafer (more chips can fit on each wafer). All Intel chips should be made with 0.18 micron before the end of 1999. This is a fast improvement following Intel's complete move to 0.25 micron just last year. By the way, one micron is about 1/25,000 of an inch in size.

Tomorrow, our specific oil company study begins! Meanwhile, we'll see you on the message board for any discussion that you care to have.

Fool on!

Would you work for a bunch of Fools?

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2/2/99 Close

Stock    Close     Change
JNJ     82 15/16   -  3/4
INTC   134  5/8    -3 1/4
CPB     44  7/16   -1 3/4
MEL     66 11/16   -  1/4
             Day     Month    Year    History
Drip       (1.86%)  (3.36%)   2.44%    16.50%
S&P 500    (0.87%)  (1.35%)   2.66%    34.49%
Nasdaq     (1.86%)  (1.69%)  12.35%    54.56%


Last Rec'd  Total #  Security   In At    Current
 11/02/98    8.055     CPB     $52.880   $44.438
 12/01/98    9.731     INTC    $80.248  $134.625
 12/08/98    8.605     JNJ     $74.109   $82.938
 01/04/99    3.994     MEL     $62.227   $66.688


Last Rec'd Total # Security In At    Value   Change
 11/02/98   8.055    CPB   $425.95  $357.94 ($68.01)
 12/01/98   9.731    INTC  $780.89 $1310.03 $529.14
 12/08/98   8.605    JNJ   $637.71  $713.68  $75.97
 01/04/99   3.994    MEL   $248.56  $266.38  $17.82


Base:  $2300.00
Cash:   $162.89**
Total: $2810.92

The Drip Portfolio has been divided into 96.509 shares with an average purchase price of $23.832 per share.

The portfolio began with $500 on July 28, 1997, adds $100 to invest 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.
01/22/99: Sent $100 to buy more MEL.


</THE DRIP PORTFOLIO>