Managing Your Uncertain Investing Future

Nobody can always predict what the market will do to a company's stock. Even if you have a fairly good understanding of the key factors affecting a company, you can't tell in advance how it will respond to those drivers. And even if you get that response right, you can never be certain of how the market will react to the company's results until it's too late to do anything about it.

That reality makes investing a rough and uncertain business. There's money to be made in the market -- especially if you've got the time to let the market's compounding and weighing machines do their work, but there are certainly no guarantees of success. Because there are no guarantees, the best you can do is follow the advice that value investing pioneer Benjamin Graham gave in his famous book, The Intelligent Investor, and treat the market like a roulette wheel.

Be the house
In Graham's strategy, the twin pillars of diversification and reasonable prices provide investors with the equivalent to the casino's edge in a roulette wheel. Not even Graham could guarantee an investor's success, but investors who follow his approach can better protect their overall portfolios from slipups that are bound to happen.

For the real-money Inflation-Protected Income Growth portfolio, last week's performance was a clear example of that roulette wheel in action. Railroad giant CSX (CSX +0.25%) fell the farthest of any pick in the portfolio since last week's update, down a substantial 5.7% on news that coal shipments would likely remain weak for quite some time. Since coal is such a substantial part of the railroad's business, that news hit its shares fairly hard.

Joining CSX in delivering bad news, United Parcel Service (UPS +0.16%) lost 2.5% of its value on hints that its fourth quarter wound up weaker than anticipated. United Parcel Service's struggles stem from the last-minute Christmas surge that forced it to hire temporary workers and ultimately miss several deliveries.

On the opposite end of the spectrum, generic-drug maker Teva Pharmaceutical (TEVA 1.36%) rose farther than any other pick, coincidentally up 5.7%, as the company's leadership team indicated it would be interested in pursuing new acquisitions, which have been a successful part of its strategy in the past.

Likewise, safety equipment manufacturer Mine Safety Appliances (MSA 2.77%) gained an impressive 4.1% on the week. Yet the only substantial news on the company was the fact that it would maintain its $0.30-per-share dividend for the quarter. While most investors appreciate a good dividend, with Mine Safety Appliances' 65% payout ratio, the dividend didn't look like it was particularly at risk. As a result, that maintained dividend probably shouldn't have moved the company's shares that much.

Through the waves, a remarkably steady journey
While those four companies moved the most of any picks in the iPIG portfolio, the overall portfolio wound up down just 0.1% on the week. That's the power of diversification in action, especially when you consider that much of the "news" that moved some companies' shares wasn't much news at all.

After all, the railroads' dependency on coal, despite its weakness, was well known when CSX became a selection for the iPIG portfolio. That makes the coal news not really "news" at all, much like Mine Safety Appliances' stock-price leap from its maintained dividend. Similarly, UPS' problems were well known since December, making the "news" more a confirmation of what was already expected, rather than new information.

And while Teva's willingness to go back to the deal table does signify a strategy shift, it's one that carries significant risks. That makes it far from a sure thing. Indeed, part of the company's current problems stem from the patent cliff it's facing on Copaxone, a drug it picked up in an acquisition.

These large moves based on speculation or old news show why it's important not only to diversify, but also ti look for a reasonable price when buying as well. As Graham said, "In the short run, the market is a voting machine but in the long run it is a weighing machine."

Changes in sentiment -- not changes in provable long-run value -- drove much of the moves in those companies' stocks in the past week. That shows how much influence the market's voting machine can have on a company's short-term stock movements. It also illustrates why that longer-time weighing machine is what should drive your investing decisions. After all, that's the only way you'll really know whether the market's short-term gyrations give you a price you can't refuse.

Put together a portfolio of companies picked in part because they fit Graham's key roulette wheel criteria, and you get something similar to the iPIG portfolio. As of last Friday's close, the overall portfolio looked like this:

Data from the iPIG portfolio brokerage account, as of Jan. 17, 2014.

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