How This Portfolio Makes Its Own Luck

The real-money Inflation-Protected Income Growth portfolio finished this week at $39,936.13, up nearly $10,000 in market value since its December 2012 launch and more than $340 since last week's update. In addition, while the S&P 500 is down about 0.7% so far in 2014, the IPIG portfolio is actually up around 1% over the same period. 

How has the portfolio managed to gain while the market dropped? In a word -- luck. But not just any luck. The IPIG portfolio relies on the type of manufactured luck available to investors who focus on the fundamentals and invest with time-tested, financially solid investing principles.

Manufactured luck in action
For instance, one of the first lucky breaks the iPIG portfolio caught came when Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) decided to buy out Nevada's electric generator NV Energy in an all-cash deal. The announcement of that deal came only a few months after the IPIG portfolio bought its stake, enabling the portfolio to pick up a surprisingly large capital gain on the purchase.

Berkshire Hathaway's purchase price was more than NV Energy looked to be worth as a standalone company at the time the IPIG portfolio picked up its stake. It might seem strange for a company headed by noted value investor Warren Buffett to pay more than fair value for an investment, but in this case it probably made sense. There are significant overhead costs involved in running a utility, and NV Energy was worth more to Berkshire Hathaway because it could combine it with its MidAmerican Energy unit.

Did the IPIG portfolio know that Berkshire Hathaway was looking to expand its energy holdings? No. But at the time it found NV Energy, the utility had the makings of a solid investment based on its valuation, balance sheet, and dividend. It was the focus on those fundamental factors that led the IPIG portfolio to NV Energy in the first place. From the IPIG portfolio's perspective, Buffett's purchase was lucky timing on top of a reasonable investment.

Similarly, IPIG portfolio selection Air Products and Chemicals (NYSE: APD  ) has caught the eye of activist investor Bill Ackman. Ackman claims that Air Products and Chemicals could potentially double in the next few years with the right CEO at the helm. Did the IPIG portfolio know that Ackman would soon start investing in the company -- big time -- when the IPIG portfolio bought its stake? Again, the answer is a resounding no.

Instead, all that the IPIG portfolio knew when it picked Air Products and Chemicals was that the company had a healthy balance sheet and a great dividend history, and looked reasonably priced. Those factors were what led the IPIG portfolio to Air Products and Chemicals, and it was simply luck that the IPIG portfolio happened to already own its shares when the company caught Ackman's attention.

And in what might be the clearest example of the IPIG portfolio's manufacturing its own luck, the portfolio has seen an astonishing 77% gain in its shares of defense contractor Raytheon (NYSE: RTN  ) . The IPIG portfolio bought Raytheon almost exactly a year ago, when the threat of defense sequestration knocked its shares down.

Did the IPIG portfolio know that Raytheon would find a way to strengthen its business even amid the reductions in defense spending growth associated with the sequestration? No. In what hopefully sounds like a broken record at this point, all the IPIG portfolio knew was that when Raytheon was picked, its shares looked reasonably priced, even assuming the sequestration took place as expected.

Raytheon's ability to "soldier on" in spite of the sequestration happened to be a pleasant surprise. The IPIG portfolio was simply lucky to have been invested as the company retooled itself to operate and thrive in that reality.

Can you make your own luck?
While the IPIG portfolio has received its share of lucky breaks, the only reason it was able to take advantage of those breaks was that it happened to be invested when they came along. A relentless focus on the fundamentals is what enabled the IPIG portfolio to buy when it did and hold on to be there when lady luck graced those companies with her presence

Nobody can guarantee that luck will continue, of course. But to the extent that investors have the opportunity to make a bit of their own luck, focusing on the fundamentals is a great way to give yourself the time to improve your chances of being there when that luck does arrive. If nothing else, you may find yourself with a portfolio that looks something like the IPIG portfolio, which closed on Friday looking like this:

Company Name

Purchase Date

Total Investment (Including Commissions)

Current Value
Feb. 21, 2014

Current Yield
Feb. 21, 2014

United Technologies

Dec. 10, 2012

$1,464.82

$2,076.84

2.05%

Teva Pharmaceutical

Dec. 12, 2012

$1,519.40

$1,841.10

2.69%

J.M. Smucker

Dec. 13, 2012

$1,483.45

$1,664.98

2.37%

Genuine Parts

Dec. 21, 2012

$1,476.47

$2,006.75

2.64%

Mine Safety Appliances

Dec. 21, 2012

$1,504.96

$1,861.20

2.32%

Microsoft

Dec. 26, 2012

$1,499.15

$2,088.90

2.95%

Hasbro

Dec. 28, 2012

$1,520.60

$2,334.90

3.17%

UPS

Jan. 2, 2013

$1,524.00

$1,922.20

2.79%

Walgreen

Jan. 4, 2013

$1,501.80

$2,652.80

1.90%

Texas Instruments

Jan. 7, 2013

$1,515.70

$2,075.05

2.72%

Union Pacific

Jan. 22, 2013

$805.42

$1,074.72

2.03%

CSX

Jan. 22, 2013

$712.50

$928.88

2.20%

McDonald's

Jan. 24, 2013

$1,499.64

$1,543.20

3.36%

Becton, Dickinson

Jan. 31, 2013

$1,518.64

$2,069.64

1.90%

Aflac

Feb. 5, 2013

$1,466.35

$1,682.64

2.37%

Air Products & Chemicals

Feb. 11, 2013

$1,510.99

$2,010.59

2.40%

Raytheon

Feb. 22, 2013

$1,473.91

$2,608.20

2.28%

Emerson Electric

April 3, 2013

$1,548.12

$1,775.76

2.71%

Wells Fargo

May 30, 2013

$1,525.48

$1,687.20

2.63%

Kinder Morgan

June 21, 2013

$1,518.37

$1,387.26

4.97%

Scotts Miracle-Gro

Jan. 3, 2014

$1,974.68

$1,800.96

3.11%

Cash

   

$842.36

 

Total Portfolio

   

$39,936.13

 

Data from the IPIG portfolio brokerage account, as of Feb. 21, 2014.

Why dividends rule
A key reason dividends play such an important part to the IPIG portfolio is one of the dirty secrets that few finance professionals will openly admit: Dividend stocks as a group handily outperform their non-dividend-paying brethren. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best.

With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

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.


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