Drip Portfolio Buying at Good Prices
Our purchases in 2000 were often based on price

Drip Port reviews all the purchases it made in 2000. As long as the companies were strong, the port's additional new buys were made based mainly on price. The new purchases have turned out well so far. For 2001, the port plans to lay out a formal framework that uses its P/E-to-growth rate consideration when making purchases.

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By Jeff Fischer (TMF Jeff)
December 28, 2000

What a year 2000 was for investors!

The Drip Port began 2000 with approximately $3,200 invested, it added $100 more each month (as is our protocol), and now it will end 2000 with about $4,400 invested. This year, adding $100 per month gave us an advantage in the negative stock market.

One advantage of dollar-cost averaging is that an investor can buy more shares when stocks are whacked down, lowering a cost basis and improving chances for positive returns. One disadvantage of dollar-cost averaging is that sometimes you could be buying shares at temporarily inflated prices. We attempt to avoid those situations, just as we attempt to buy more of a stock when it falls to more attractive prices.

In 2000, our simple selective strategy for what to buy and at what price worked well. We stopped buying Intel (Nasdaq: INTC) when it rose above $45 early in the year; we jumped on Johnson & Johnson (NYSE: JNJ) after it fell from $93 to $70, buying shares at $68 and $75 in March and April -- it's now $105; and we loaded up on Mellon Financial (NYSE: MEL) for 15 months in the low $30s. It's now $51.

The system that we've been using to decide what to buy at the start of most months has been based largely on the simple Price-to-Earnings (P/E) ratio of our investments. The lower a company's P/E ratio compared to its expected earnings growth rate, the more interested we become in the stock, and the more we'll usually buy. When the P/E rises, as Intel's did from a P/E of 25 to a P/E of 50, we slow down our buying due to the higher valuation. Finally, as always, throughout our buy decisions we weight business strength as vitally important. We're not interested in buying consistent laggards at any price.

The following tables show our buying results for 2000, showing a company's price at the start of each month, and if we bought more in a month, showing how much more.

Date        Stock Price          
Intel                            

01/03/00    $43  Bought $50 More
02/01/00    $51
03/01/00    $58
04/03/00    $65
05/01/00    $64
06/01/00    $65
07/03/00    $68
08/01/00    $65
09/01/00    $74
10/02/00    $40  Bought $100 More
11/01/00    $45  Bought $50 More
12/01/00    $34  Bought $100 More
Johnson & Johnson                
01/03/00    $92  Bought $50 More
02/01/00    $85
03/01/00    $73  Bought $100 More
04/03/00    $73  Bought $124 More
05/01/00    $83
06/01/00    $88
07/03/00   $101
08/01/00    $95
09/01/00    $93  Bought $60 More
10/02/00    $93
11/01/00    $91  Bought $50 More
12/01/00    $98
Mellon Financial                 
01/03/00    $32
02/01/00    $34  Bought $100 More
03/01/00    $30
04/03/00    $32
05/01/00    $33  Bought $100 More
06/01/00    $40
07/03/00    $37
08/01/00    $39
09/01/00    $44  Bought $100 More
10/02/00    $47
11/01/00    $47
12/01/00    $47

J&J and Mellon are enjoying new 52-week highs the final week of 2000. Intel is suffering a 52-week low, at $30. The largest mistake that we could have made this year, with these three stocks, was to keep buying Intel as it soared from $40 to $76 from February to September. We sidestepped that due to Intel's higher P/E ratio during its rise -- a ratio that made us invest elsewhere instead.

Meanwhile, buying J&J during the only two months that it fell below $80 proved fruitful, so far, and we have steadily bought Mellon in the $30s since 1998. Now that Mellon is above $50, we might wish that we'd bought more of it than we did in 2000. Overall, though, we're ending the year with equal total investments in our three main holdings (at $1,300 each), and that seems "right," given how each business has performed. The following table compiles more information from 2000.

                                      Drip Port's
  52-week   Median   Monthly    Avg. 2000
         Range    Price   Average*    Buy Price
Intel 
$30 - $76    $53    $56  $38
J&J    $66 -$105    $85    $89   $80
Mellon $26 - $51    $39  $39   $37
*Calculated on first trading day of each month.

Based on the past three years of our monthly purchases, it seems worthwhile to try to make a "system" of our thought process, partly because the process is simplistic. We buy more of our steady, reliable companies (Intel is the riskiest company we own, with good reason) when those companies' P/E ratios are lower rather than higher. Watching our companies regularly, so that we know both the business quality and the share prices of the past years, aids us in buying more stock with confidence during price swoons, especially with the steadier J&J and Mellon.

Of course, every month we invest $100 in our companies no matter what, and some months none of our stocks look incredibly appealing near-term, but all, ideally, will be strong long-term businesses, so we're happy to buy monthly. On the months that we do buy selectively based on price, remember that our selective system is not proven to be better than simply buying regularly every month, no matter the price. Over time, that may prove most beneficial to most investors -- and easier. However, it will be interesting in 2001 to try to devise a system that further helps us in our monthly buy decision based on price-to-earnings and growth rate. We have a thought process that we use each month, but not a shared "system." It's time to try building one. We'll do so publicly.

Have a great New Year celebration, and a wonderful 2001! Fool on!

Drip Portfolio


12/28/00 as of ~8:30:00 PM EST

Ticker Company Price
Change
Daily Price
% Change
Price
CPBCAMPBELL SOUP0.310.93%33.75
INTCINTEL CORP(1.63)(4.99%)30.94
JNJJOHNSON & JOHNSON1.751.70%104.75
MELMELLON FINANCIAL CORP(0.19)(0.37%)51.13
PEPPEPSICO INC(0.13)(0.26%)48.75

Overall Return -- total % Gained (Lost)
  Day Week Month Year
To Date
Since
Inception
(7/28/1997)
Drip(1.05%)0.30%(2.61%)7.43%27.89%
Comparable S&P 500n/an/an/an/a14.82%
S&P 5000.40%2.16%1.47%(9.19%)42.12%
S&P 500 (DA)0.39%2.12%1.44%(9.04%)44.75%
NASDAQ0.72%1.62%(1.55%)(37.15%)62.96%

Internal Rate of Return -- Annualized Rate of % Gained (Lost)
  Since Inception (7/28/1997)
Drip13.18%
vs. S&P 5007.40%

Trade Date # Shares Ticker Cost/Share Price Total % Ret
10/7/9837.4877MEL34.8351.1350.01%
11/14/9716.236JNJ80.11104.7533.00%
9/8/9752.2886INTC24.8930.9424.82%
7/28/006.12PEP47.3948.752.88%
4/13/988.465CPB53.8133.75(33.69%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain
10/7/9837.4877MEL$1,305.64$1,916.56$652.99
11/14/9716.236JNJ$1,300.69$1,700.72$429.25
9/8/9752.2886INTC$1,301.42$1,617.68$322.98
7/28/006.12PEP$290.00$298.35$8.35
4/13/988.465CPB$455.50$285.69($153.46)
 
Cash: 
Total: 
$0.02
$5,819.02
 


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.