Drip
Portfolio Report
Friday, November 21, 1997
by Jeff Fischer
(TMFJeff@aol.com)
ALEXANDRIA, VA (Nov. 21, 1997) -- I dislike having to make any investment decision on short-term or even intermediate-term criteria. There's a good reason why: the near term is much more difficult to predict than the long term. In the long term, even a human life will smooth out and become predictable, if you think about it. While with leading companies, the earnings and stock performance smooth out as well. Leading stocks offer very steady appreciation over all the years when averaged out.
There are some traders who live and breathe the market each day, jumping in, jumping out, trying to scalp points -- people who in their frenzy know the market so poorly (yes, poorly) that they write in chats, "I wish I'd bought Intel when it was below $75 today. I missed it!" (This is a true story.) So I checked Intel's stock prices for the day. The stock had never even been below $75 5/8 that day. The guy (who is a professional money manager) also answered someone's question on Pfizer with, "I love Pfizer. I wish I bought it at the close today. I really should have bought it at the close." I checked the stock price. It had closed around $71 that day. The stock opened the next day lower and within a week was down to $68 before rebounding.
What was his point of having to buy it "at the close" that day?
The trading mentality is that the stock will open higher the next morning and you can sell for the quick point. "I love Pfizer," he had said. Does he really? Does he even know why? Why not just buy anything if you're buying while just hoping for the market to open higher in the morning?
Worse than all of this is the thought of a life spent watching numbers tick across the screen. But to each his own. There are less exciting and profitable ways to live, but there are also -- in my opinion -- much more meaningful ways to life than trading stocks day in and out.
Of course, at the Fool the way to invest is for the long term in things we understand -- and to make investing Foolish, or worthwhile. If it isn't entertaining or fun the monetary profits that are made are only half as valuable, if that. The way to make the investing part of your life meaningful is to make investing just one small part of your life. A fully Foolish life comes from everything outside of dollar signs and point spreads. Direct investing is an integral part of that life (of finding the time to enjoy oneself) because I've never known anyone that has begun a DRIP investment with any intention of selling -- ever. These investments are approached like a good friendship -- as something for a lifetime.
That's where the Drip Port contradicts itself sometimes. We set up a twenty year goal -- for fun, and to have a stated objective -- and so we work hard to find investments that will hopefully lead us to that goal in the 19 years and 9 months that we have left. But out there (imagine eyes looking at you through the monitor) and in my personal life, I find that many people invest for much longer than twenty years and so they worry even less about the current valuation of stocks. They're dollar cost averaging. That's the whole point. They may realize that a stock is pricey, but in a business market where there are so many unknowns, you never really know if a company will become more or less valuable on the next bit of news -- and so you don't know what a stock might do. (And let's not even mention the economy.)
At the beginning of this year my brother and I bought my sister some shares of Disney (NYSE: DIS) for her birthday. The stock was $72 and traded at 30 times earnings, a multiple much higher than the growth rate. I would not have been surprised if the stock didn't rise for three years. Disney stock looked rich, but my sister is sixteen. She has time. Had we waited for a lower price we'd now be staring at a $94 stock. Excessive analysis may have caused us to wait. So far, that analysis would have been wrong.
Our analysis of Coca-Cola (NYSE: KO) makes me think somewhat the same. We began our look at Coke when the stock traded around $68. The stock has been as low as $54, and is now at $63 -- a few dollars higher than the price it was when we decided to wait on it. The stock trades at 35 times earnings estimates for 1998. Since 1990, the stock has traded at an average P/E multiple of 24.
Analysts expect 6% earnings per share growth next year and yet the rich stock has not deflated. Coca-Cola is, surprisingly, not owned by a vast amount of mutual funds in large amounts. Berkshire Hathaway is by far the largest holder. Perhaps a wide majority of the individuals in Coca-Cola are long-term investors, making the stock more stable. People know a good business model and are reluctant to sell it. As it is now, a downside business surprise next year is hard to imagine (could Coke disappoint and grow less than 6%?), while an upside surprise seems quite possible.
A Fool emailed me asking if he'd done something unFoolish by beginning to DRIP into Coca-Cola at these prices. I wrote back my opinion with an empathic "No." I own and buy the company as well, and as was concluded Thursday, it's hard to find a more respectable business model (and performance) when looking at the last seventy years, and when trying to look forward to the next 30. I've spent the last few days writing a 3,000 word overview of the soft drink beverage industry for a year-end product that will begin to sell around December 15. We cover some twenty industries and then suggest one stock in each. My opinion of Coca-Cola following this in-depth process is not much different. From that report, I quote:
"Intrinsic value weighs the net present value of all future cash flows at a company, but it also takes into consideration the brand name and all the intangibles that go along with consumer-driven businesses. Coca-Cola and Pepsi are two of the better known brands in the country -- while Coca-Cola is the leading brand name in the world. Add a leading brand name with a repeat purchase, inexpensive product, and you have a long-term business that can be capable of withstanding economic slowdowns and providing steady (if sometimes slow) growth. In April of last year the world population was 5.7 billion. By the year 2015 it's expected to top 8 billion -- a 43% increase. A strong beverage company could arguably turn the existing younger international markets coupled with the coming world population growth into market-meeting or market-beating earnings per share growth for the next seventeen years."
But this column isn't supposed to be about Coca-Cola and the merits of it as a possible investment. It's about keeping the Drip Port objectives and realities in check. We have somewhat of a conflict: we have an intermediate-term goal to meet (I call 20 years intermediate term in that the average working life of a person is about 40 years, and they should invest for as much of that time as possible), but we also want to invest in companies that we'd never want to sell, which makes your buy point less meaningful. I want us to lean toward buying stocks that may not blow the market away in the next five years, or ten, but that should still be dominating their industry twenty years from now, or thirty.
Randy wants that too, but he also wants to be certain to find value now, before buying anything. With dollar cost averaging, though, finding current value (as I've said many times) isn't quite so important. One of the advantages of the dollar cost averaging process is that your entry price is smoothed out over the years. Both of our arguments have merit, of course. Both approaches can work well, in their own time frames. But so far we've needed to blend the two approaches together in this portfolio. Meanwhile, all of you Fools out there, or in the Fool message boards sharing stock information or strategies (all of us together are much more valuable to each other than one mere daily column) -- we all need to find the best strategy for ourselves. The Fool and the message boards and finally this column and portfolio are here to help.
We'll continue with a more Foolish look at food companies next week, along with an update on Johnson & Johnson (NYSE: JNJ) and other Foolish tidbits. Have a very Foolish weekend!
P.S. Disney has recently begun a dividend reinvestment plan. For the information on the Disney plan (you must buy $1,000 worth of stock to start it, or $600 and commit to buying $100 per month) please call 1-800-948-2222.
P.P.S. I'm still answering email from the past week, so if you've written recently, I'll get to it!
--Jeff
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TODAY'S NUMBERS
Day Month Year History Drip (0.36%) (0.24%) (9.11%) (9.11%) S&P 500 0.43% 5.30% 30.02% 1.24% Nasdaq (0.36%) 1.70% 25.54% 1.69% Last Rec'd Total # Security In At Current 11/03/97 4.835 INTC $81.623 $80.250 11/14/97 1.000 JNJ $60.560 $64.375 Last Rec'd Total# Security In At Value Change 11/03/97 4.835 INTC $394.69 $388.05 ($6.64) 11/14/97 1.000 JNJ $60.56 $64.38 $3.82 Base: $900.00 Cash: $389.75** Total: $842.17 GOAL: The portfolio began with $500 on July 28, 1997, adds $100 on the 15th of every month, and the goal is to grow the port to $150,000 by August of the year 2017. **Transactions in progress: None. The Drip Portfolio has been divided into |