<THE DRIP PORTFOLIO>
by Selena Maranjian (TMFSelena)
ALEXANDRIA, VA (May 25, 1999) --
"That's one small step for a man,
one giant leap for mankind."
-- Neil Armstrong
Dripping is all about the power of small things. Small steps for investors turn into giant leaps for their nest eggs, and even their descendents and heirs.
Lots of small things adding up to something very big and powerful is not a particularly unusual or ground-breaking concept. Think of what termites can do to a house. Of all the Lilliputians managing to tie down Gulliver. Of a small bacterium knocking you out for a few days.
Those aren't the most positive examples, though. So think of our democratic process here in the U.S. One single person's vote might not seem too significant, but when added together with those of her neighbors, her state-mates, and everyone else in the nation, they culminate into the will of the people. They result in decisions. Think of the lonely writers of books -- there are many of them toiling right now. They scribble in solitude, perhaps producing a few pages per day. Each day's work might not stand up too well on its own, but wait until it's all finished. Then step back and see that you're looking at a masterpiece (or, less impressively, a self-help book or number 179 in a series of Gothic romances).
Turning back to investing, the point that Drip advocates rightfully make is that by regularly investing modest chunks of money, vast fortunes can be built. For example, invest $100 per month for 25 years earning 12% per year on average, and your portfolio will swell to about $188,000, pre-tax. (Your total contributions, not adjusted for time, would have been only $30,000.) Increase the amount of your contributions over time, and/or earn a higher rate of return, and your worth will be even higher.
It's not just with Drips that many small financial items can add up to something big. The same goes for financial analysis. If a company has robust gross margins, that's great. But it's not enough. Not enough to give you a real good understanding of the business. Not enough to base an investment decision on. But keep adding more measures to the mix, and everything becomes clear.
Once you know things such as a company's product line and market share, its margins and growth rates, its inventory and asset turnover, its accounts receivable turnover and debt load, its return on equity and return on invested capital, and the trends for these figures, then you've got a pretty good handle on the company. (To learn more about these topics, read through our new Investing Basics area or our How to Value Stocks area.)
While I've got the podium here, let me point out a minor epiphany I've had. Chances are you'll sigh to yourself, thinking, "well, duh -- that's so obvious!" But if not, then this might be of some value. It's basically that there are two main questions to answer when thinking of investing in a company:
1) Is this a high-quality company that I'd love to own a piece of? (QUALITY)
2) Is the price right to buy it now? (PRICE)
Different Fools put different emphases on the second question. To some, as long as you've got a terrific company, then the price isn't that important. To others, price is very important. But to just about all Fools, it's vital to understand a company's business and get a handle on its quality.
Conveniently, just about all company evaluation measures are related to either quality or price. Here are some:
Sales and earnings growth
Margins and margin growth
Return on equity
Return on invested capital
Return on assets
Product and services
Proprietary technology or knowledge
Price-to-earnings (P/E) ratio
Price-to-cash flow ratio
Price-to-book value ratio
One last thought regarding the power of small things is Fooldom itself. Recall that the Fool began as a very small publication, reaching just several dozen readers. Things have changed since then. As more and more people drop in, we grow and are more able to make a difference in the world. When Starbucks wasn't permitting individual investors access to its conference calls, Fools across the country contacted the company and it changed its policy. (Thanks, Starbucks!)
This growth will continue -- and you can help that happen, if you're so inclined, by adopting an "each one, teach one" attitude. Take a little time to bring up the subject of saving and investing with a friend. Many people are really losing out as time goes by while they haven't given investing a thought. You could do someone a big favor by jump-starting their financial planning process.
You can help folks with non-Fool fare, such as Peter Lynch's books or an explanation of your own investing methods. Or nudge them toward us, perhaps by loaning your copy of You Have More Than You Think, or by using our handy insta-referral service, Yo!, which lets you select the topics your friend most needs information on. You also might encourage them to register here at the Fool so that they can receive our new guide: The Motley Fool's 13 Steps to Investing Foolishly. It's absolutely free to all new registrants (and, of course, registration is free, too).
Incremental growth... it's where Drips get their power, it's how the secrets of a company's business are revealed, it's how the Foolish message reaches more and more people, and it's the means to fulfilling most of your financial dreams.
I'll close with a few inspirational words from Fidel Castro:
"I began [the] revolution with 82 men. If I had [to] do it again,
[I'd] do it with 10 or 15 and absolute faith. It does not matter
how small you are if you have faith and [a] plan of action."
-- Fidel Castro
Change the World... work for the Fool.