<THE DRIP PORTFOLIO>
The Drive to Work Index
Patience is needed for outperformance
by Vince Hanks (TMFElwood)
by Vince Hanks (TMFElwood)
NORTHVILLE, MI (May 21, 1999) -- More than three months have passed since my mysterious expedition through the Foolish Zone. It's time now to check back and see how the five stocks I encountered during the journey have fared. Dusting off my nuclear-powered calculator, I come up with the numbers below.
As you'll see, the first quarter in the life of the "Drive To Work" (DTW) index hasn't been a glamorous one (cancel the parade!). What does this tell us? Clearly, I need to find a new route to work each morning! Here are the numbers:
Company: Close 1/29/99: Close 5/20/99: Change: Clorox (NYSE: CLX) 126.00 110 15/16 -12% Harley-Davidson (NYSE: HDI) 52 1/16 55 7/8 7% Coca-Cola (NYSE: KO) 65 5/16 67 15/16 4% Pitney-Bowes (NYSE: PBI) 68 5/8 69 1/8 1% Wrigley (NYSE: WWY) 93 5/8 90 1/2 - 3% Total: 405 5/8 394 3/8 - 3%
S&P 500: 1279.64 1338.83 5%
Seriously, though, I think it's a good demonstration of how good companies can and usually will underperform the market during narrow periods of time along the way to eventual outperformance. No guarantee, naturally, that any or all of these five industry-leading stalwarts will outdistance the market in the long run, but strength in the areas of management, brand popularity, industry dominance, along with a proven track record all lead me to believe they will. This slow start does not concern me at all.
Perspective. Perhaps nothing is more key to investing. Take a look at the Fool Drip port returns and you'll notice ol' Drippy trailing the S&P 500 by around 8% year to date and by nearly 30% in its history. One might see that and think "Hmmm, those Fool Drip folks sure aren't the shiniest nickels in the parking meter. Why would I want to start a Drip port?"
It's a matter of perspective. A couple things must be recognized when viewing our progress to date. First, the relatively small amount invested thus far is offset a great deal by the costs required to initiate each position. Foolish accountability demands that we (and we wouldn't want it any other way) deduct all costs associated with running our portfolio from its returns. While significant now, the influence of those costs will decline with time and eventually become inconsequential.
Another key consideration is simply a realistic timeframe. A get-rich-quick scheme the Drip port is not. Dollar-cost averaging is only rewarded after several years of contributions, rather than a few spot purchases. Once all the holdings have been established, a more regular schedule of contributing will work toward the strength of cost averaging. But it is a slow process. I would expect another year or two to pass before we can make a serious run at the S&P 500. Then I expect we'll clobber it like an unlucky arcade mole staring up at an eight year-old with a keen aim. At least, that's the plan.
It's also worth mentioning the effect monthly contributions have on portfolio's reflected returns. Using a Value Per Share method to fairly account for funds added over time can be misleading in the short-term as Jeff explained a few months back, but it will be more precise as the calendar pages turn. I won't go into more detail about this now since it's been adequately addressed already.
The point here is not to make excuses for our performance or even that of the DTW index. That's the last thing I want to do. It's all about the mindset required to be a long-term investor, especially when investing primarily in Drips. Having long-term focus in an otherwise short-term, instant-gratification society can be difficult at times. We have instant coffee, fast food, electronic mail, and now only need to wave a wand at a fuel pump to pay for gas on the fly. We want everything now, including instant returns. A Fool must have the patience and educated confidence to wait out the crawling phase of a portfolio, to look past minor downswings and let time and compounding do the work for her. Only gambling provides instant returns. You won't see this Fool gambling with his savings.
We'll check back on the Drive To Work index in a few more months to see how it's coming along -- more so out of curiosity than anything else in these early stages. It's a long drive, after all.
Touchstone Friday. Signaling in once again from Japan on Monday, George put Wal-Mart through the litmus test to see if it stacks up as a Rule Maker. On Tuesday, Jeff was making our interest list and checking it twice. Drawing from that list to take a deeper look, Brian, on Wednesday, gave us the dirt on Clorox. Then, on Thursday, Jeff served up our plans for Campbell's Soup and restated our goal of long-term, cost-free investing in leading companies.
Have a great weekend, Fools!
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