Tuesday, November 01, 2005

Homer's Hot Tip, Volume III, No.11

Homer's Hot Tip
November 1, 2005

Kid: Homer, how are we doing on our investments?

Homer: What investments?

Kid: You know, that list you offered me at Christmas, and then we reviewed in May.

Homer: Oh, you mean the list that I told you that YOU should accumulate for a Fail-Safe Investment Strategy?

Kid: Yes sir, that’s the one.

Homer: Do you remember what it means?

Kid: Not exactly.

Homer: Figures! Look Kid write these down one more time. Got a pencil?

Kid: Yep, right here.

Homer: Good. Here goes, one more time. I picked at the beginning of the year the top five performing stocks of the Dow Jones Industrial Average as of the end of 2004. So if you followed my advice to the letter, you would have bought stock in each company in equal dollar amounts. Understand, the number of shares in each would not have rounded out to a perfect round lot or an increment of 100. However, if you played the scenario out as I suggested, you would put equal Dollar amounts into each position, each and every month. Since I have no way of knowing if you followed my advice in that regard the only thing I have to go on is if you had invested in the top five and stopped.

Kid: Let’s say I did that.

Homer: Then you would, of course lost the advantage of compounding the new purchases each month, for example in the same five stocks and the advantage of, reinvesting all the accumulated dividends.

Kid: What’s the advantage in that?

Homer: I’m the one that’s old but Kid you are getting senile. You miss being able to purchase some shares at lower prices thereby lowering your overall coast in each stock over time versus trying to buy the stock all at one time. This permits you or anybody to profit by the rise in the stock market when it comes.

Kid: What if it doesn’t come?

Homer: It always comes. Sooner or later, it always comes. So if you purchased the five stocks I suggested on the first day of trading of this New Year at the then current price and purchased $50,000 worth of stock with $10,000 in each stock position, your investment would have looked like this. So write this down.

McDonalds 32.06 312 shares $10,002.72
Exxon Mobil 51.26 195 shares 9.995.70
Johnson & John 63.42 158 shares 10,020.36
Boeing 51.77 193 shares 9,991.61
Home Depot 42.74 234 shares 10,000.16

Total investment would have been approximately $50030.26

Now I did not figure in a broker's commission or any other costs but for our purposes this is good enough. Let us figure on additional costs of approximately $250. Total cost to us then would approximate $50,280.26.

Then in May of this year McDonalds would have been less in value than what we paid. The same would be true for Home Depot. However the rest of the portfolio did go up and this is what our little five stock portfolio would have looked like.

McDonalds $31.32 312 shares $ 9,771.84
Home Depot 39.96 234 shares 9,350.64
Exxon Mobil 54.75 195 shares 10,676.25
Johnson & J 67.26 158 shares 10,627.08
Boeing 61.64 193 shares 11,695,52

This brings the total current value to $52,121.33

Kid: I remember you pointed out that the portfolio outdid the Market by a wide margin.

Homer: Considering the Dow Jones Industrial Average itself went down 259.45 points since the end of 2004 at that time seems to me to be pretty significant. Since these stocks make up that component, at least three of them were bucking the averages.

Kid: Well where are we today?

Homer: This is what it looks like:

McDonalds $32.19 312 shares $10,043.28
Home Depot 40.94 234 shares 9,579.96
Exxon Mobil 56.66 195 shares 11,048.70
Johnson & John. 62.32 158 shares 9,846.56
Boeing 65.26 193 shares 12,595.18

This brings our new total value to: $53,113.68

This is about a 6% return so far this year Kid. However if we added in dividend reinvestment our rate would be closer to 8%.

Kid: That’s not so hot Homer.

Homer: Actually Kid, based on what the market has managed not to do this year, it is quite good. And if you had followed my advise and replaced the worst performing stocks such as McDonalds, Home Depot and Johnson and Johnson at mid year with more top five performers in the Dow, you would have almost doubled your rate of return and without dollar cost averaging. What I am trying to point out to you Kid is that you have to stick to the plan, not waiver and follow through. Above all, never get greedy.

Kid: What would your friend Hester have done?

Homer: He would have rolled this portfolio every month replacing the non performers with the best performers in the Dow averages even if that meant replacing all five stocks.

Kid: You’re kidding?

Homer: Not on your life, he was a trader’s trader.

Kid:
Tell me more!

Homer: Another time. See ya.

Kid: Poof, just like that, and he’s gone. He is so unpredictable!