DRIP PORTFOLIO
I Called It (Wrong)
Can anyone consistently call the bottom on a stock?

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By George L Smyth
May 2, 2000

One of my favorite stocks, Ariba (Nasdaq: ARBA) suffered a downturn and I wanted to take advantage of the situation. After reaching a high on March 8 of this year, it started to plunge. By March 27 it had lost more than a quarter of its value. I looked at the reasons for the drop and reconsidered the company. I felt that this was still an excellent long-term hold and the time was right for another purchase.

I examined my finances to see if there was some way that I could afford to buy more of the company. The problem was that I had recently purchased a house and you know how expensive it can be to get the telephone hooked up, the electricity turned on, etc. I decided that I simply couldn't afford to buy more at the time.

The stock continued its slide and by April 4 it was worth 40% less than the early March high. I looked at the news again, noted that the bottom had fallen out of the other Nasdaq companies, and I decided to add more onto my stake.

Again, I checked through my finances for extra money. However, I had recently purchased a house and we were looking at a security system -- and you know how expensive those can be.

On April 24 I looked again at the price and it had now dropped more than 60% from the March high. This is a company with a tremendous future that was getting carried downstream with the rest of the other Nasdaq companies. I knew that it was absolutely time to pool my resources and make another purchase.

My finest comb, however, could not find funds that were not accounted for, as I had bought this house, you see, and� well, you get the picture.

I had called it -- the bottom -- three times, and so far, two of those were wrong (the jury is still out on the third call).

As I had called the bottom wrong two of the three times, it got me thinking about the wisdom of setting up a fee-laden Pseudo-Drip in cases where the company offers a fee-free Drip. The most commonly mentioned reason for doing this is to take control of the timing of the purchases. Paying a fee to be able to work the timing aspect is certainly something at which I would not be successful.

It is no problem to watch a price fall and call the current condition a dip. However, it is a much different matter to know the point at which the falling action should actually trigger an additional purchase. If one could do so on a consistent basis, then it would make sense to set things up to take advantage of those opportunities.

Beginning a Pseudo-Drip to make one's purchases this way can be a costly affair. The fee for a single purchase should be of little concern. The problem, however, shows itself when one does this on a regular basis. Consider a $2.99 monthly fee invested over 20 years where it returns 11%. That $717.60, when invested as such, would result in $2,588.26. Suddenly we are talking about real money.

However, I am not willing to discount the use of a Pseudo-Drip for this purpose completely. Because BuyandHold.com (www.buyandhold.com) and Sharebuilder (www.sharebuilder.com) do not charge the customer if a minimum number of purchases are not made during the course of a year, it would make sense to open an account to use them to make those additional purchases.

For instance, if one had made a purchase of Intel through the regular Drip and the price then dropped to a level at which one wished to make an additional purchase, the Pseudo-Drip account could do this at a cost much less than a typical discount broker. There's certainly nothing wrong with holding the shares of a company in two different places.

But I would like, at some time, to return to the problem of determining the trigger point for an additional purchase. If you have an unemotional, mechanical means for doing this, I would invite you to share your idea with us on the Drip Investing boards linked below.

Drip Portfolio

5/2/2000 Closing Numbers
Ticker Company Day Chg % Chg Price
CPBCAMPBELL SOUP7/161.68%$26.50
INTCINTEL CORP-5 15/16-4.67%$121.19
JNJJOHNSON & JOHNSON1/21.81%$84.19
MELMELLON FINANCIAL CORP-1/8-0.38%$32.75

  Day Week Month Year
To Date
Since
7/28/1997
Annualized
Drip -2.11% -1.49% -1.49% 15.60% 50.18% 15.84%
S&P 500 -1.50% -.42% -.42% -1.56% 54.06% 16.92%
S&P 500(DA) -1.50% -.42% -.42% -1.56% 56.68% 17.63%
S&P 500(DCA) n/a n/a n/a n/a 26.38% 8.84%
NASDAQ -4.36% -1.95% -1.95% -6.98% 141.18% 37.49%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/199722.9859INTC45.653$121.19165.45%
11/14/199714.965JNJ78.923$84.196.67%
11/5/199831.5773MEL34.290$32.75-4.49%
4/13/19988.269CPB54.401$26.50-51.29%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/199722.9859INTC$1,049.37$2,785.60$1,736.23
11/14/199714.965JNJ$1,181.08$1,259.87$78.79
11/5/199831.5773MEL$1,082.79$1,034.16($48.64)
4/13/19988.269CPB$449.84$219.13($230.71)
  Cash: $0.01  
  Total: $5,298.76  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.