How Investors Make Their Own Luck
Since last week's update, the real-money Inflation Protected Income Growth portfolio posted some decent returns, rising a bit more than $500. That's a strong week for a portfolio that just started over four months ago with $30,000. In addition, over the past week, the portfolio's total balance crossed above $33,000 and its overall returns surpassed the psychologically important 10% threshold.
Those returns relied on a certain amount of luck. After all, absolutely no transactions happened in the portfolio last week. Not a single buy or sell, not a penny in dividends or interest. The only thing that took place was the market doing what the market does best -- it shifted prices around.
Where luck gets created
While the market's moves were fortuitous for the iPIG portfolio, being invested in order to take advantage of the market's good graces was not luck. Every stock in that portfolio was selected because the company behind each pick exhibited a handful of key characteristics:
- It had a well-covered dividend that it had a decent history of increasing.
- It looked capable of continuing to increase that dividend.
- Its balance sheet looked solid enough to withstand a reasonable financial hiccup.
- It looked fairly to cheaply priced based on some fundamental valuation technique.
- It fit decently well with the other iPIG portfolio selections from a diversification perspective.
Taken together, those characteristics improve the odds that the iPIG portfolio will withstand the test of time and see its share of good luck, even if some of its individual picks falter. There are still no guarantees in investing, but this time-tested, Benjamin Graham-inspired approach has enabled the portfolio to be invested in its selections when the market provided its rewards.
That earned luck in action
A big reason the portfolio saw that kind of luck is that by favoring cheaper stocks over expensive ones, it can often pick up shares priced with a decent margin of safety. That margin means that when companies falter, their shares may still wind up OK. And falter, they do.
For example, this past week, iPIG pick Microsoft's shares dropped more than 4% in a single day, on news of a 14% drop in personal computer sales. Yet overall, its shares have gained better than 5% since being added to the portfolio, thanks to the fact that when originally picked, Microsoft was already priced as if it were going nowhere.
Similarly, fellow iPIG pick Hasbro announced earlier this year that it badly missed its estimates for the all-important holiday quarter in 2012. Still, its shares are up an astounding 27% since making the cut to be a part of the iPIG portfolio in December. That's luck, all right, but it's luck aided by the fact that when selected, the stock had what looked like a nearly 25% margin of safety built into its price.
Another key reason the portfolio saw that kind of luck is that while dividends aren't guaranteed, companies that have established patterns of raising their dividends try to keep raising them, if possible.
That's one reason that defense contractor Raytheon earned a spot in the iPIG portfolio, in spite of the sequestration-related risks facing the business at the time of its selection. Raytheon's subsequent 10% dividend hike helped confirm that thesis. Did we get lucky that Raytheon elected to increase its dividend in spite of the risks facing its business? Yes -- but it was luck helped by experience.
A similar story can be told for fellow iPIG pick NV Energy , and its 12% dividend hike shortly after making the cut as a selection. In spite of the regulatory risks facing the company and its electricity-generating business -- including the recent decision to shutter its coal-fired capacity for environmental reasons -- it also had an established pattern of increasing dividends. Again, there was a certain amount of luck involved in picking up that hike -- but it was luck based on an established track record.
"Luck is what happens when preparation meets opportunity."-- Seneca
Yes, it's true that the iPIG portfolio has gotten extremely lucky in its early months, but it's the type of luck that the Roman philosopher Seneca was talking about when he penned that quote above. To see how long the iPIG portfolio's luck will last, watch my article feed by clicking here. To join The Motley Fool's free discussion board dedicated to the iPIG portfolio, simply click here.
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iPIG Portfolio Snapshot as of April 12, 2013
No. of Shares
Total Investment (including commissions)
Value as of April 12, 2013
Mine Safety Appliances
United Parcel Service
Air Products & Chemicals
The article How Investors Make Their Own Luck originally appeared on Fool.com.Fool contributor Chuck Saletta owns shares of every public company named in this article. The Motley Fool recommends Aflac, Becton Dickinson, Emerson Electric, Hasbro, McDonald's, Mine Safety Appliances, and United Parcel Service. The Motley Fool owns shares of Hasbro, McDonald's, Microsoft, and Raytheon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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