Drip Portfolio Report
Wednesday, November 05, 1997
by Randy Befumo (TMFTemplr@fool.com)


ACCOUNTING FOR THE DRIP PORTFOLIO

ALEXANDRIA, VA (Nov. 5, 1997) -- How are we going to account for this thing?

Folks out there have been wondering for months. Today, as we stand ready to receive our first share of delicious, juicy JOHNSON & JOHNSON (NYSE: JNJ), we should brief you on how exactly we are doing our accounting for the performance of the Drip Portfolio.

Imagine for a moment that you are setting up a mutual fund. No, not one of those underperforming wonders Wall Street churns out all of the time. It will be your own, personal fund. All you need to do is figure out how many shares to start with and start buying stocks. Every time you add money, you simply buy new shares at the market close.

Why do this share nonsense? When you are putting money on a regular basis, it is unfair to count the money as if it had been there for the entire period. If you start with $500 and put in $100 a month for 12 months, you will have put $1,700 into stocks. But a good portion of that money will have been invested for less than six months, meaning it would be difficult to earn any kind of return on it. On the other hand, that initial $500 will have been in the market for a year and it will have definitely done something.

If you just judge performance on the total value versus the amount of money you put in, you will constantly be weighting the money you put in recently more than the money that has already been sitting there. This means if you have done poorly, your performance will look better, but if you have done well, you performance will look less auspicious. The share price accounting method allows us to smooth this out by weighting each dollar equally as we convert it into shares.

Sound devilishly simple? It certainly is. It is the share-price account method and it will be what we use to account for the ol' Drip Portfolio. Let's explain it using the portfolio as an example.

Day one we put $500 smackers into the Drip Portfolio. As of that day, Jeff and I have decided we will have had 20 shares. This means that on day one, before we spent a single dime, our ten shares were each worth $25.

                      Total Value       $500
Per Share Value = ----------------- = -------- = $25
                       Shares Out        20

Now, we started the Drip Portfolio on July 28th. On August 15th, we added our first $100. In the intervening time, we paid $40.50 for a subscription to the MoneyPaper, leaving us with $459.50. How do we work the purchase?

Before we added the $100, each share of the Drip Portfolio was worth $22.975.

                    Total Value      $459.50
Per Share Value = -------------- = ------------ = $22.975
                     Shares Out        20

Now, with that $100 we added, we bought 4.35 shares.

               Money Put In          $100
New Shares = ------------------ = ----------- = 4.35
              Price Per Share       $22.975

So, on August 16th we had 24.35 shares worth $22.975 apiece. Our performance since inception had not changed a whit because of the money added. However, we had added $100, meaning that the actual performance will be fully reflected -- after paying all fees and commissions. This means that the Drip Portfolio will probably be down 10% to 15% in the first year as we will pay a lot of fees getting our first shares. However, after that, we expect to pay very little in the way of fees and over time we expect to more than make up for our initial costs.

Now, on September 8 we bought our first share of Intel, which cost us $109.69. We deduct this $109.69 from our $559.50 in cash to leave us with $449.81 in cash and one share of Intel. As Intel was worth $94.69 on that day, our per share value was:

                    Total Value     $449.81 + $94.69
Per Share Value = --------------- = ------------------ = $22.36
                     Shares Out         24.35

The next transaction was on September 15, when we added another $100. With our one share of Intel at $92.06 on that day, our total value that evening was the $449.81 in cash plus the $92.06 in Intel, or $541.87, with 24.35 shares out. This means our buy-in per share value was $22.25, so we added 4.47 shares. This increased our cash balance to $549.81 and our shares outstanding to 28.84. We can see from below that even though cash went up, because we increased the shares we actually kept things stable.

                    Total Value         $549.81 + $94.69
Per Share Value = ---------------- = ------------------- = $22.36
                     Shares Out             28.82

Our only transaction since then has been add another $100 -- creating 4.47 more shares for a total of 33.29. In a few days, we will add another $100 and hopefully get confirmations on our Johnson & Johnson purchase and our first COMMISSIONLESS buy of $300 of Intel. Although we are down 10.56% on a per share basis, we expect this to begin to creep up as we add shares commission free to our current Dividend Reinvestment Plan holdings. Also, we may have gotten a small dividend in Intel that we will automatically reinvest, meaning we could find out we have 1.002 shares or somesuch.

Hopefully this outline of share price accounting will help investors out there account for their own investments. Our own Tom Christiansen (TMF Sargon) will soon perfect a version of PortTrak that will do this for you if you are interested.

Tomorrow, we begin our survey of food companies. I will take the Drip Portfolio over the next week and a half, giving Jeff a break. We aim to add a consumer food company to our Drip holdings if we can find one that is attractive enough.


TODAY'S NUMBERS

  
              Stock   Close    Change
               Intel  $74 5/8  -1 5/16

            Day   Month Year  History
        Drip:    +0.00%   0.00%  0.00% 0.00%
        S&P:     +0.00%   0.00%  0.00% 0.00%
        NASDAQ:  +0.00%   0.00%  0.00% 0.00%


        Rec'd   #    Security         In At 
       9/8/97   1      Intel         $94.69

                          
                        Base: $800.00
                    Expenses: $ 70.50 (Moneypaper)
                   Purchases: See above and below
                        Cash: $634.89**
                 Total Value: $710.00 apprx.

**Transactions in progress:
1. $81.00 sent on 10/17/97 to buy one share of JNJ and
   enroll in its DRIP.
2. $300.00 sent on 10/23/97 to buy more shares of INTC.