Profitable Investing: Repetitive, Boring, and Dull

One of the more common comments I receive as manager of the real-money Inflation-Protected Income Growth portfolio is the fact that the portfolio isn't very exciting to watch. In a sense, that's true. Since the portfolio launched in December 2012, the portfolio has made 22 purchase transactions and only parted ways with one pick -- and it didn't have a choice with that one.

Instead of actively trading, the IPIG portfolio follows a "buy to hold" method, where it looks to pick up shares of companies that it could potentially hold onto for quite some time. Then, it just sits back, collects dividends, and reviews each selection from time to time to make sure it's still a fit. The portfolio is willing to sell, but only if there's a reason. In a very real sense, it's a repetitive, boring, and dull strategy -- but it has a key redeeming property: it's profitable over time.

How so?
There are no guarantees in the market, but overall, the iPIG portfolio has returned 36.1% since its December 2012 inception. That's about in-line with what you would have earned by investing a lump-sum in the SPDRs (SPY -0.05%), an ETF that tracks the S&P 500, and reinvesting dividends over that same period of time.

That's pretty good when you consider that the iPIG portfolio pays commissions, "reorganization fees" like the one that hit it in last week's update, and in one company's case, foreign withholding taxes. In addition, the IPIG portfolio invested its starting capital over time, and in its early days, it had a large chunk of cash at an essentially 0% return going up against a benchmark that was rapidly rising.

That the portfolio has kept up with -- or even slightly outpaced -- that benchmark in spite of its real-world shortcomings is a testament to the potential profits in that "repetitive, boring, and dull" style.

What counts factors
The IPIG portfolio relies on four key factors when making investing decisions. A company's stock has to hit on all four of those factors in order to make the initial cut, and once it's in, the company gets reviewed against those factors to determine whether it should stay.

No. 1: Valuation. The IPIG portfolio looks for companies to be reasonably priced vs. an estimate of their intrinsic value. That's a key reason why defense contractor Raytheon (RTN) made the cut only after the defense department sequestration knocked its shares down. Certainly, Raytheon is in an industry that will always be needed, but its shares -- like any investment -- only make sense to buy when they can be found at a reasonable price.

No. 2: Balance sheet strength. The IPIG portfolio will only buy shares in a company if its balance sheet is solid enough to enable it to survive the inevitable slip up. This past holiday season, IPIG pick UPS (UPS -1.51%) failed to deliver on its promises to get packages delivered by Christmas. While the costs associated with that slip up did cause United Parcel Service to miss its earnings guidance, the company's decent balance sheet meant the slip up wasn't fatal to the overall business.

No. 3: Dividends. The IPIG portfolio insists on a company having a history of paying and increasing its dividends and a decent reason to believe that trend can continue. This is because dividends are both a direct reward for the risk of investing and a strong signal of what a company's leadership team really thinks will happen. That's one key reason why Scotts Miracle-Gro (SMG -0.09%) made the cut, while the other key players in the lawn and garden industry did not.

Scotts Miracle-Gro is certainly a solid company, but it plays in an industry where seasonality is brutally harsh and "blame it on the weather" can be a legitimate reason for poor results. By paying attention to what the company does with its dividend instead of just what its leadership says, the IPIG portfolio can get a better handle on what its leadership really thinks about the company's prospects.

No. 4: Reasonable Diversification. Both Hasbro (HAS 11.85%) and Mattel (NASDAQ: MAT) suffered from weaker than anticipated holiday sales in 2013. It's not surprising that both were affected similarly -- as they're both toymakers competing for consumers' limited holiday spending budgets. It's because the two are so tightly related that the IPIG portfolio only owns one, Hasbro. At the time the portfolio was looking for a new holding, Hasbro looked like a better overall fitbased on the first three criteria

When boring is good
Put together a portfolio built on those principles, and you get one where not much happens on a day to day basis. Still, as the IPIG portfolio has shown, it's a strategy where over time, real money can earn real returns for the risks investors take by following it. The table below shows a snapshot of that portfolio, as of the market's close on Friday March 21, 2014:

Data from the iPIG portfolio's brokerage account, as of March 21, 2014.

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