This Strategy Survives Even When the Market Drops

Sometimes the market drops, as do even the greatest companies within it. Last week was one of those weeks, as both the S&P 500 index and the real-money Inflation-Protected Income Growth portfolio lost a bit of value since the previous week's update.

For an investor looking to ride through the ups and downs that the market will have, investing based on a strategy that can stand the test of time matters at least as much as the individual investments. That's the true benefit of investing in a way similar to how the iPIG Portfolio operates. It's a strategy based on the teachings of Benjamin Graham, the father of value investing and the man who taught investments to Warren Buffett.

It may not set the world on fire, and there's no guarantee that it will trounce the market. Still, it has survived since the Great Depression era and made significant money for generations of investors who have followed it. That's pretty much the definition of staying power and surviving the test of time.

And what is that successful investing strategy?
The iPIG portfolio's selection strategy is based on three key factors:

  • Dividends -- Consistently paid, covered by operations, and growing as the business does.
  • Valuation -- Somewhere between fairly priced and downright cheap, based on the fundamentals.
  • Diversification -- Each position is separated enough so that troubles in any one company or industry wouldn't take down the entire portfolio.

It's not exactly rocket science -- even though Raytheon (NYSE: RTN  ) , one of the portfolio's top-performing picks, does make the Patriot anti-missile rocket system. In fact, Raytheon was selected when fears of the defense sequestration knocked its shares down to a reasonable price. The company's growing and well-covered dividend, along with its reasonable price due to those sequestration fears, were the key drivers that made it a worthwhile pick.

While Raytheon relies on innovative defense systems to earn its revenue, tremendous innovation isn't really needed to earn a spot in the iPIG portfolio. Indeed, Teva Pharmacuticals (NYSE: TEVA  ) has a spot in the portfolio because it's the world's largest manufacturer of generic medications. Executional excellence, scale, and a low-cost mind-set (at a reasonable valuation with a well-covered and rising dividend) are what earned Teva its spot.

Similarly, McDonald's (NYSE: MCD  ) has a spot in the portfolio, even though at its core, what it does is basically sell a $0.15 hamburger, adjusted for inflation. It just does so on a worldwide scale, with incredible operating efficiency and cost discipline, and it passes on a reasonable share of its profits to its investors in the form of a rising dividend.

Likewise, the railroads are based on technology dating back to the early 1800s. But still, CSX (NYSE: CSX  ) and Union Pacific (NYSE: UNP  ) each earned half a slot in the iPIG portfolio. The technology may date back centuries, but the fundamental need to move stuff from point A to point B cheaply and safely hasn't changed.

Indeed, these days, the railroads are enjoying something of a renaissance, as cost- and ecology-conscious shippers are moving to intermodal transit as an alternative to long-haul trucking. Both of the iPIG portfolio's railroads are taking part in that renaissance, and passing along some of the profits to their shareholders.

If there's a common theme that holds these five companies -- and the other 16 currently in the portfolio -- together, it's that they earned their spots in the portfolio because they fit the overall strategy. Dividends, valuation, and diversification may not be rocket science, but it's a strategy that has worked for generations and continues to work for the iPIG portfolio today.

And what of that iPIG portfolio?
As of last Friday's close, the iPIG portfolio is still performing to expectations, with every selection's dividend either in line with or ahead of where it was at the time it was picked. From a total return perspective, the portfolio has clocked 21.7% returns since its December 2012 inception, just about keeping pace with an S&P 500 index fund with the dividends taken as cash. Put it all together, and the iPIG portfolio finished the week looking like this:

Company

Purchase Date

No. of Shares

Total Investment (including commissions)

Current Value
Aug. 9, 2013

United Technologies

12/10/2012

18

$1,464.82

$1,901.16

Teva Pharmaceutical

12/12/2012

38

$1,519.40

$1,536.34

J.M. Smucker

12/13/2012

17

$1,483.45

$1,926.10

Genuine Parts

12/21/2012

23

$1,476.47

$1,899.34

Mine Safety Appliances

12/21/2012

36

$1,504.96

$1,919.16

Microsoft

12/26/2012

55

$1,499.15

$1,798.50

Hasbro

12/28/2012

43

$1,520.60

$1,976.28

NV Energy

12/31/2012

84

$1,504.72

$1,994.16

United Parcel Service

1/2/2013

20

$1,524.00

$1,756.20

Walgreen

1/4/2013

40

$1,501.80

$1,984.40

Texas Instruments

1/7/2013

47

$1,515.70

$1,869.66

Union Pacific

1/22/2013

6

$805.42

$958.74

CSX

1/22/2013

34

$712.50

$873.80

McDonald's

1/24/2013

16

$1,499.64

$1,561.92

Becton, Dickinson

1/31/2013

18

$1,518.64

$1,798.92

AFLAC

2/5/2013

27

$1,466.35

$1,661.04

Air Products & Chemicals

2/11/2013

17

$1,510.99

$1,813.90

Raytheon

2/22/2013

27

$1,473.91

$2,078.46

Emerson Electric

4/3/2013

28

$1,548.12

$1,733.20

Wells Fargo

5/30/2013

37

$1,525.48

$1,599.51

Kinder Morgan

6/21/2013

42

$1,518.37

$1,579.20

Cash

     

$285.86

Total Portfolio

     

$36,505.85

Data from the iPIG portfolio brokerage account, as of Aug. 9, 2013.

To follow the IPIG portfolio as buy and sell decisions are made, watch Chuck's article feed by clicking here. To join The Motley Fool's free discussion board dedicated to the IPIG portfolio, simply click here.

Which iPIG pick is well on its way toward dominating the world?
Profiting from our increasingly global economy can be as easy as investing in your own backyard. The Motley Fool's free report "3 American Companies Set to Dominate the World" shows you how and reveals which iPIG pick made the cut. Click here to get your free copy before it's gone.


Read/Post Comments (3) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 13, 2013, at 9:53 PM, bornboring wrote:

    To the table, please add a column of dividends received.

  • Report this Comment On August 13, 2013, at 10:02 PM, TMFBigFrog wrote:

    Hi bornboring --

    Thanks for the feedback. Due to technical limitations, tables over 5 columns wide don't generally work well.

    Let me see what I can do. Maybe I can replace the "Purchase Date" and/or "No. of Shares" column with one more dividend related values.

    Best regards,

    -Chuck

    <I>Inside Value</I> Home Fool

  • Report this Comment On August 20, 2013, at 5:32 PM, DavidBressler wrote:

    Great minds think alike Chuck.

    I wrote a post about why a 200 point drop in the Dow doesn't bother me. Seems you beat me to it.

    http://elephantspaycheck.com/blueprintbasics/big-drop-in-the...

    It's so important for people, individual investors, to take a different view than the one promoted by mainstream financial media (and the financial services industry). We're in a marathon, not a sprint, and we have to change our investing strategy to excel as individuals. I believe the game truly is loaded in our favor if we have the right strategy. It just takes patience, as you clearly show.

    I've created a (free) email course to help people take a longer term perspective, including how to measure their results in a way that motivates them to stick with their strategy, and gives an understanding of what information to pay attention to in order to make the best possible decisions.

    db

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2592555, ~/Articles/ArticleHandler.aspx, 10/23/2014 9:08:20 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement