<THE RULE MAKER PORTFOLIO>
Adding New Money
The first of five articles
by Tom Gardner
ALEXANDRIA, VA (May 3, 1999) --
"If a man's wit be wandering, let him study the mathematics."
--- Francis Bacon
Today marks a formal transition in the way we'll be presenting our ideas to you each week. Heretofore, we've rotated as writers on a weekly basis. The results have been quite good. We're happy to report that over 10,000 Fools read the Rule Maker column on a daily basis. This affirms your interest in helping us to build the best available model for investing in stable, enduring, worldwide businesses -- and beating the market.
But we're changing patterns. We'll now begin rotating as writers on a daily basis, with an emphasis on thoroughly covering one topic each week. Each writer will get a shot at exploring everything from whether Pepsi can catch up with Coca-Cola to which Internet companies will not be able to make the rules a decade from now, to why access to quarterly conference calls is so critical, to who was the greatest investor in the 19th century, etc. We hope you'll supply ideas you'd like to see covered here by posting them to our Rule Maker Strategy message folder.
We've decided to kick off this new format by covering the wonderful, important, and oft-confusing problem of how to add new money to your Rule Maker stocks. Your pay period has arrived or the taxman has a refund or you just inherited some money, and you're baffled as to whether you should add that money to a new holding or an existing holding. I'll start with a few ideas, and then Phil, Al, Rob, and Matt will dig ever deeper in our endless quest to make money management easier, more practical, and more fruitful for you.
If you're holding new savings in your hands and are wondering what to do, I'd start by asking these three questions: 1) Should I really invest this money in stocks? 2) If so, when should I add it to an existing position? 3) If so, which one should I buy? Let's tackle them, one after t'other:
1. Should I really invest this money in stocks?
Not necessarily. If you are sitting on credit card debt or non-tax-deductible debt with an interest rate above 8%, I'd always use the new money to pay down those debts. Having to cash out stocks to meet debt payments is a great way to increase your risk and threaten your enduring reward. The ongoing flow of short-term capital gains taxes and the ever-present and ever-real threat of a bear market may have you losing to the market's average return (and worse) decade after decade.
I also don't think you should invest new savings into equities unless you can afford to put the money away for at least five years. Tracking five-year intervals back to the turn of the century, investors would have beaten the returns in a passbook savings account 90% of the time by having their money in the stock market. We like those odds. Very much. Thus, the money we can afford to invest for at least five years, we direct to stocks. That which we can't, though, we don't.
2. If so, when should you add it to an existing position?
If you're ready to sock away your savings for sixty months and you're unencumbered by high interest-rate debt, you may be wondering where to drop it. I would suggest that you think about adding it to an existing position only if:
- You have more than five stocks in your portfolio.
- You will not add it to a position that makes up more than 33% of your total invested capital.
I think it's most prudent not to add new money to an existing position if you have less than five holdings or if you're thinking about loading up on an already-overweighted position in your portfolio. Conversely, if you have more than 15 stocks in your portfolio, I would seriously consider selling out the weaker businesses or discipline yourself not to add new positions from there.
3. Okay, but which one should you buy?
So you have more than five years to invest, no high-rate debt, and a well-rounded portfolio -- and you're wondering where to put your birthday check.
For me, that's among the simplest of all investment questions -- answered most eloquently by Francis Bacon in the quotation that led off this column. When adding to an existing position, I suggest investing in the company with the highest Rule Maker score, as determined by our Rule Maker Spreadsheet (linked for free at the bottom of each nightly column).
Because I don't use price evaluation as a metric when opening a position, I see no reason to introduce it as a variable when adding to a new position. For me, the quality of the business is always hundreds of times more important than its present price. If I can find the best 10 large businesses in the world, and I can afford to hold them for a long time, the present pricing of their stock doesn't matter much. When buying anew or adding to an existing position, I look for the best.
And so, I just let the mathematics tell me what to do.
Look for more on this topic in the days to come, and share your thoughts in the Rule Maker Strategy message folder.
In our Rule Maker Companies folder, Fools are collaborating on the research of existing and potential Rule Makers. Tonight, we're introducing our inaugural Rule Maker Company Rankings -- a living document of the companies that have been ranked using our Rule Maker spreadsheet (linked below). Each time a Fool posts a company analysis, it will be added to the list at month's end. Over time, hopefully Fools will be regularly ranking 30, 50, or more companies. In our first month, we already have 16! Through shared knowledge, we can more effectively locate and track the progress of high quality businesses. Come join us in this Foolish endeavor.
Tom Gardner, Fool
- Rule Maker Strategy Board
- Rule Maker Companies Board
- Rule Maker Beginners Board
- Rule Maker Spreadsheet (Excel 97, 68k)
- Rule Maker Spreadsheet (Excel 95, 41k)
Day Month Year History R-MAKER +1.28% 1.28% 13.53% 43.65% S&P: +1.46% 1.46% 10.52% 36.70% NASDAQ: -0.29% -0.29% 15.64% 53.40% Rule Maker Stocks Rec'd # Security In At Now Change 5/1/98 55 Gap Inc. 34.37 70.50 105.12% 2/3/98 48 Microsoft 39.13 79.88 104.10% 6/23/98 34 Cisco Syst 58.41 113.63 94.53% 2/13/98 44 Intel 42.34 63.13 49.10% 2/3/98 22 Pfizer 82.30 117.00 42.16% 2/17/99 16 Yahoo Inc. 126.31 162.56 28.70% 5/26/98 18 AmExpress 104.07 133.38 28.16% 2/6/98 56 T. Rowe Pr 33.67 38.50 14.33% 8/21/98 44 Schering-P 47.99 49.75 3.66% 2/27/98 27 Coca-Cola 69.11 69.19 0.12% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Exxon 64.34 86.06 33.77% 3/12/98 17 General Mo 72.41 93.75 29.48% 3/12/98 15 Chevron 83.34 102.06 22.46% 3/12/98 20 Eastman Ko 63.15 75.25 19.17% Rule Maker Stocks Rec'd # Security In At Value Change 5/1/98 55 Gap Inc. 1890.33 3877.50 $1987.17 2/3/98 48 Microsoft 1878.45 3834.00 $1955.55 6/23/98 34 Cisco Syst 1985.95 3863.25 $1877.30 2/13/98 44 Intel 1862.83 2777.50 $914.67 2/3/98 22 Pfizer 1810.58 2574.00 $763.42 2/17/99 16 Yahoo Inc. 2020.95 2601.00 $580.05 5/26/98 18 AmExpress 1873.20 2400.75 $527.55 2/6/98 56 T. Rowe Pr 1885.70 2156.00 $270.30 8/21/98 44 Schering-P 2111.7 2189.00 $77.30 2/27/98 27 Coca-Cola 1865.89 1868.06 $2.17 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Exxon 1286.70 1721.25 $434.55 3/12/98 17 General Mo 1230.89 1593.75 $362.86 3/12/98 15 Chevron 1250.14 1530.94 $280.80 3/12/98 20 Eastman Ko 1262.95 1505.00 $242.05 CASH $70.09 TOTAL $34562.09
Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and
it adds $2,000 in cash (which is soon invested in stocks) every six months.