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Friday, October 16, 2009

Challenge Project Investment Purchase: McDonalds (MCD)

"You cannot afford to wait for perfect conditions. Goal setting is often a matter of balancing timing against available resources. Opportunities are easily lost while waiting for perfect conditions." -Gary Ryan

I've "done run out" (as we would say down south) of time in the Challenge Project Investing Account. The perfect setup would have seen me have about $400.00 in available cash before the purchase of another dividend stock. The problem there? Is that the markets do not wait for 'perfect setup'. They move how they move, and when they move.

And let's face it, we're not getting an equities pullback in October. We talked about this possibility, and what we would do about it.

Making money in the markets is not about predicting exactly what will happen. I've said that more times than I care to count. Participation in the capital markets is more like chess. In chess, you don't try to predict everything your opponent will do. You defend the center of your board, and plan for contingencies. You understand that while you have a primary strategy, you have to allow for flexibility while implementing that strategy.

So let's go over the last Challenge Project balances we had last week, for the investing account ...

Last Weeks Investing Account Balance: $653.84
(YTD cash and equity up about 35% Return is about 0.5%)
  • 4.1377 shares of KO (DRIP on)
  • 3.0546 shares of JNJ (DRIP on)
  • Cash: $239.12
-$60.00 of this I reserve to D.C.A. KO
-$60.00 of this I reserve to D.C.A. JNJ
-This leaves $119.12 for cash for new purchases
  • Additional $37.53 available from slush fund
Ok, so today I bought 2 shares of McDonalds (MCD) at $58.20. Therefore, the new balances look like this:

New Investing Account Balance: $642.20
  • 4.1377 shares of KO (DRIP on)
  • 3.0546 shares of JNJ (DRIP on)
  • 2 shares of MCD (DRIP on)
  • Cash: $112.41
-$60.00 of this cash I reserve to D.C.A. KO
-$60.00 of this cash I reserve to D.C.A. JNJ
-$80.00 of this cash I reserve to D.C.A. MCD
-This leaves a -$87.59 shortfall for D.C.A. cash
  • Additional $37.53 available from slush fund
So the cash that we would need in the event of a pullback in the stock market, is currently down by $87.59. And if you will notice I reserved more money to Dollar Cost Average (D.C.A.) my MCD position than the JNJ or KO positions. That is because MCD has a smaller "weight" in the portfolio than the other stocks. Therefore, if we get a pullback in the price of MCD, then a little more money would help properly weight that position.

So what about this negative "reserve" balance? Well, it should be noted that if we really need some more cash? We have the slush fund to draw from. And we still have $112.41 available at the moment. This means that at this moment we could have $149.94 to use.

But just as time worked against us? It can work for us.

Somehow, I seriously doubt the market will pullback significantly, before I can push up the cash balances on the investment account. I mean, think about it. I wouldn't be looking to D.C.A. my McDonalds position, until McDonalds was at least at $50.00. MCD hasn't been below $52.00 since May of 2009. I wouldn't be looking to D.C.A. my JNJ position until about $52.00. Again, we haven't seen $52.00 on JNJ since May. The same goes for KO. I would be looking to D.C.A. my KO position at around $46.00; which we haven't seen since June. And remember that as the stock price dips, the cash that we do have, buys more shares. So what I see on the proverbial 'chess board' at the moment ... is some time. $87.59 that I am deficient is only 3 1/2 weekly deposits from Rule No. 2 of the Challenge Project.

So. Where is the risk for the Investing Account at the moment? Time. Having enough time, to use Rule No. 2 to bump up the cash, so that we can properly Dollar Cost Average the stocks we own.

At the same time, I don't want to forget about deposits to the Trading Account. And I really don't want to forget about deposits to the Savings account, since any deposits to that account, bump up the amount available to the Investing Account through the slush fund.

To wrap this up .... why McDonalds?

1) Price. Of the dividend stocks that I've been looking at? It had not yet soared, so the price was right. The P/E isn't great at 15.46, but this is a near-large cap stock, it is McDonalds, and there are stocks out there that are a lot worse. As well, I'm already positioning myself to take advantage of a pullback. The dividend has been growing nicely.

2) Survivability. The dividends stocks that I'm interested in purchasing right now? Have nothing to do with where I see 'the hottest growth'. It's where I see survivability in this economic depression. And somehow? I don't see people stopping their eating of Big Macs anytime soon.

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Note: This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 13 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.

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