DRIP PORTFOLIO
The Secret of Our Success

The Drip Port is up nearly 40% in 2000 and 80% in just three years, which is excellent considering that it is adding money to stocks every month. The reasons behind this early success are many, and include buying Intel when it was down and out, investing steadily each month, and buying more shares of other good companies when they're out of favor.

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By Jeff Fischer (TMF Jeff)
August 30, 2000

Pop the champagne bottles! **POP!** Fizzzzz....

The Drip Port has gained 80% since its inception, despite the slow nature of Drip investing. Our best benchmark to compare to is the S&P 500's dollar-cost-averaged return over the same period. It is up 30%. How are we so handily winning? There are several reasons, but our first explanation is Intel (Nasdaq: INTC).

Intel is up 80% this year
Intel has gained more than 220% for the Drip Port in less than three years. In the process, it has earned us $2,300 in paper profits on an investment base of only $1,050. This alone accounts for much our early financial success. That said, you're probably sitting there thinking: "Intel, big deal. That's a no-brainer."

If it were a no-brainer, though, it would not have earned so much profit for us so quickly. This is one of the reasons why we're performing so well: We bought the bulk of our Intel shares during a very dark period for the company, when the stock was held down by many doubts and fears.

When we built our stake in Intel more than two years ago, the stock was languishing because: 1) cheap PCs were emerging and booming, and people feared they would kill Intel's margins; 2) Intel's earnings growth was slow, and many said this would last indefinitely; 3) competition had the upper-hand in new markets.

During this maelstrom, Intel's stock hovered around a price-to-earnings ratio (P/E) of 22 and fell to a P/E ratio as low as 19 as we were buying it. Since then, the P/E has expanded to 55, bringing it much more in line with Intel's world-class technology peers. We only hoped for a P/E expansion into the 30s.

All this isn't to say "we're smart." Instead, we hope this demonstrates at least one thing. Namely, investing in a company that you have researched and believe in, even when you are investing against the grain, should reward you with market-stomping returns... if and when you're proven correct. (In Intel's case, the few bulls in 1997 have been rewarded greatly, and the many bears have not.) Your risks are higher when you invest against the grain, but your potential rewards are higher, too. For us, investing in Intel when it was called "no longer a growth company" has proven to be our best decision to date.

Other strong investments made against the grain
Buying Intel wasn't our only good decision (and each good decision carries luck with it, so we humbly accept our good fortune so far!). We also purchased Johnson & Johnson (NYSE: JNJ) steadily since 1997 (when many argued its drug pipeline was too weak), and we especially buy more when it declines. This year we sent $230 to the company to buy shares at $68 and $75 after the stock fell from above $100 on minor news. Now it's returned to above $90 per share.

We also purchased Mellon Financial (NYSE: MEL) in the low $30s while financial stocks were "out of favor." It's a great company, so Wall Street's "flavor of the month" attitude is not relevant to us (in fact, it can be a good contrarian indicator). Mellon has gained more than 30% this summer to top $40 per share.

We do not try to time the stock market. However, we do try to purchase more shares of our strong companies when their prices are relatively lower than they have been lately (without good reason), or lower than they have been historically (on some key valuation metrics). That said, perhaps just as important to our success as what we've purchased is our discipline.

Summary of why we're performing well

  • We thoroughly researched what we bought, so we understand the business and why we bought it.
  • We bought our companies steadily, but we especially buy more during darker periods. We can do this comfortably because we understand the businesses.
  • We reinvest our dividends. In the past 12 months, this has amounted to $57.17 in reinvested and essentially "free" capital. Being so young, that's meaningful already.
  • We put our earliest dollars, back from 1997, into our best investment ideas at the time: the harangued Intel and the "light pipelined" J&J.

    This is just the beginning, though. Despite our large lead, we have by no means succeeded yet. Tomorrow we'll start to outline our next research study, as we look for a new investment that can boost our performance for the many years ahead.

    Fool on!

    P.S. Don't forget to play Fool Survivor! It's fast, fun, and you could win a couple thousand bucks. Just vote celebrities off an island in the order you think they'll be booted by the Fool community.
  • Drip Portfolio

    8/30/2000 as of ~5:30:00 PM EDT
    Ticker Company Day Chg % Chg Price
    CPBCAMPBELL SOUP-1/2-1.96%$25.06
    INTCINTEL CORP-9/16-0.76%$73.50
    JNJJOHNSON & JOHNSON-1/2-0.54%$92.50
    MELMELLON FINANCIAL CORP1/21.17%$43.25
    PEPPEPSICO INC-9/16-1.32%$41.94

      Day Week Month Year
    To Date
    Since
    7/28/1997
    Annualized
    Drip -.34% -.42% 7.23% 37.91% 79.17% 20.74%
    S&P 500 -.48% -.26% 5.02% 2.27% 60.06% 16.42%
    S&P 500(DA) -.48% -.26% 5.02% 2.27% 62.68% 17.03%
    S&P 500(DCA) n/a n/a n/a n/a 28.89% 8.55%
    NASDAQ .53% 1.51% 8.94% .85% 161.46% 36.43%

    Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
    9/8/199745.9818INTC22.835$73.50221.87%
    11/5/199835.1201MEL34.095$43.2526.85%
    11/14/199715.019JNJ78.956$92.5017.15%
    7/28/20005PEP48.000$41.94-12.63%
    4/13/19988.403CPB53.977$25.06-53.57%

    Trade Date # Shares Ticker Cost Value LT $ Val Ch
    9/8/199745.9818INTC$1,050.02$3,379.66$2,329.65
    11/5/199835.1201MEL$1,197.44$1,518.94$321.51
    11/14/199715.019JNJ$1,185.84$1,389.26$203.42
    7/28/20005PEP$240.00$209.69($30.31)
    4/13/19988.403CPB$453.57$210.60($242.97)
      Cash: $60.08  
      Total: $6,768.23  


    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.