At the end of 2000, we considered the stocks that we had bought monthly over the year in a column titled "Buying at Good Prices." We invest regularly in our companies, using dollar-cost averaging to smooth out our purchase prices. However, we've always tried to buy our stocks at good prices just the same. The price that you pay for a stock cannot be separated from the long-term return that it eventually achieves -- they're two sides of the same coin.
(That said, we understand that there are times when you can't realistically value a company in a meaningful way, as when buying most young Rule Breakers, and we understand that the quality of a business is ultimately more important, within good reason, than the price that you pay for a stock, as Rule Maker investors and others espouse.)
2000 was a tough year, with the S&P 500 falling 11% and the Nasdaq diving 39%. Yet, partly because we didn't buy any more Intel (Nasdaq: INTC) until after it tanked in late 2000, and because we bought Johnson & Johnson (NYSE: JNJ) when it swooned to the $30s on bad but surmountable news, Drip Port did well in 2000, gaining 7.4%.
2001 was another hard year, with the S&P 500 falling 13% and Nasdaq dropping again, this time 21%. We didn't do as well as we did in 2000, but we fared all right. We bought Intel at $30 and twice more at $25 (it's now $35) and we bought J&J a few times in the $40s (it's now $57). It's too early to claim victory on these new purchases (or on any of our investments period), but so far we can be happy. These investments the past few years have handily topped the S&P 500.
How we did in 2001
Consider how our individual holdings fared last year, then we'll consider our additional 2001 purchases.
12/29/00 12/31/01 Change* J&J $52.50 $59.10 +12.5% Intel $30.06 $31.45 +4.6% PepsiCo $49.56 $48.69 -1.8% Campbell $34.63 $29.87 -13.7% Mellon $49.19 $37.62 -23.5%
S&P 500 1148 1320 -13.0% Dow 30 10,786 10,021 -7.0% Nasdaq 2470 1950 -23.5% *Does not include dividends
So, without counting dividends, three of our five holdings topped the S&P 500 -- and including dividends (not shown on the chart), four holdings topped the S&P. J&J, PepsiCo (NYSE: PEP) and Intel had positive returns (including reinvested dividends in Pepsi's case). Only Mellon Financial (NYSE: MEL) had a market-losing decline in 2001.
But how did we do on our new purchases of these stocks during the year? Let's look:
Drip Portfolio Purchases for 2001 Intel J&J Mellon Pepsi Campbell Year Low $18.59 $40.25 $27.75 $40.25 $25.52 Year High $38.59 $60.97 $51.63 $50.46 $34.63 Median $28.59 $50.40 $39.69 $45.35 $30.07 Year-End $31.45 $59.10 $37.62 $48.69 $29.87 Pur. Price $25.13 $45.64 $32.58 $43.00 -- Pur. Price $25.79 $47.25 $46.38 $45.00 -- Pur. Price $30.77 $50.71 -- $46.00(2x)-- Pur. Price -- -- -- $49.00 --
Looking at the table, we did well again on our J&J and Intel purchases. (By the way, we missed Intel once at $19 because our check didn't arrive in time, showing a risk of Drips.) J&J ended the year up 25% from our average 2001 purchase price, and is now up nearly 70% from our average 2000 purchase price (again, because we bought on a dive). Intel rose 20% from our two best purchase prices in 2001, and we're now up 40% on those purchases.
Now some "ugly."
We hesitantly made a purchase of Mellon in early 2001 at an expensive looking $46 mainly because we hadn't bought it in a long time (the stock hadn't come down for us!). It turns out that greater patience would have been rewarded, as the shares eventually sank to the low $30s. Of course, we couldn't foresee that happening (even though the valuation indeed proved a good barometer), and we'll continue to make some future purchases at prices that make us less than thrilled. Sometimes that pays off -- it has with J&J, so far, when we've bought higher than we'd like -- and regular purchases are part of Dripping. Mellon is now back to $40.
Finally in 2001, we purchased PepsiCo several times as we built a position in our newest holding. There again we would like to see lower prices, but we haven't yet. So far, waiting would have disappointed us and kept us out of a rising stock.
So what's the lesson?
All this isn't to navel gaze. We have the weekends to be self-absorbed. This is instead to reiterate what we spoke of last year: Knowing your companies well, and following their valuations, you can often improve your buying prices by purchasing more when a stock trades near the lower-end of its price-to-free cash flow (or price-to-earnings) multiple range. That is how we typically decide on our monthly purchases.
We follow our businesses. We compile a history of their price-to-free cash flow and earnings multiples. This way we know when a share price is near the high or low-end of its usual valuation range. If the business seems healthy, we buy more when the price slips down in the range. This isn't rocket science. It isn't even balloon science. It's more like whale watching. You tend to know when you see something.