Last week we examined one consideration for determining the number of companies to hold in a Drip portfolio. Namely, it should be limited to the number of companies to which one can make regular purchases.
The second part of the answer involves the ability to follow the company during the lifetime of the investment. As this is a recurring duty, you must consider how much time you will devote to it.
When you select a company, typically you're committing to making regular purchases over a long period of time. However, this commitment is contingent upon the performance of the company. Just because we are long-term, buy-and-hold investors doesn't mean we turn a blind eye to the goings-on of our companies.
This is one of the reasons we should know why we made our purchase selection in the first place. If the company does not fulfill our expectations, or changes course, then it may be moving contrary to our original intentions. This could signal a reconsideration of the investment.
This occurred to my Kodak (NYSE: EK) Drip. I had selected the company because I felt it would be making real inroads in digital imaging, as the popularity of silver gelatin photography will significantly fade over the next decade. I felt that Kodak had an advantage over other imaging companies with its depth of understanding, not only of the image, but also the technology.
However, I started noticing something I didn't like. Kodak was losing market share to Fuji in the film business, which cut into its earnings significantly. Kodak's suit against Fuji was unsuccessful, so it responded to the earnings problem, in part, by cutting back on numerous parts of the company.
I was seriously concerned when I noted that spending in their Research & Development department had been slashed. This section had always been important to Kodak. It was instrumental in developing its T-grain technology, which not only led to a superior black and white film, but also allowed Kodak to help create the now-profitable APS camera system.
I followed the numbers, and when R&D was slashed for the third consecutive quarter, I realized that the company had strayed from the reasons why I had initially purchased it. I reconsidered and made the decision that it was time to sell my Kodak shares and split the money amongst my other Drip holdings. Note that my concern had nothing to do with the current share price.
This is why I suggest that investors read the annual report and at least scan the quarterly report of each company they own. We must ensure our companies follow through with the original reasons we had for buying them, and examining the relevant portions of these documents can do this. It can be a rather time-consuming process, and absolutely overwhelming for the individual holding too many companies. However, if you know why you made your purchase, you will much more likely know when it is time to sell.
To summarize, I suggest limiting the number of companies you hold to the ones that you can 1) make regular purchases in, and 2) follow. This way you'll ensure you're utilizing the Drip strategy for its strengths.
We are almost ready to start looking at companies, but there is one final step that we need to take. That step is to build a strategy. After all, how will you know what companies to examine without a strategy? I will offer some suggestions next week. To discuss this column, please visit the Drip Basics discussion board.