Investing Like Buffett

11/14/2003 12:00 am EST


Paul Tracy

Editor, The StreetAuthority Market Advisor

StreetAuthority Market Advisor is a research-driven service with a value-oriented philosophy, edited by Paul Tracy. One of its specialties is a proprietary screening system, and its latest screen is used to find Buffett-style investments. Here are some of the top picks from that filter, as well as a fascinating look at a fund that mimics Buffett's portfolio.

"Commonly referred to as ‘The Oracle of Omaha’ due to his Nebraska roots, Warren Buffett is widely regarded as the world's most prominent value investor," notes Paul Tracy, editor of StreetAuthority. "Thanks to an uncanny ability to spot undervalued companies and purchase them on the cheap side, Buffett has made many people very wealthy over the course of his five-decade career -- including himself. Given his extensive track record of above-average investing performance, it's not surprising then that millions of investors around the world attempt to mimic Buffett's unique value-oriented approach. In doing so, they tend to look for companies with strong competitive advantages, positive free cash flow, above-average returns on capital, and quality management that are trading at substantially discounted prices in the open market (relative to their actual estimated value, of course).

"In an effort to incorporate these and many other Buffett-related strategies into our own research, this week we ran a search for firms that currently meet many of his stringent investment requirements. My goal was to come up with a list of firms that are fairly large, reasonably valued, cash flow positive with strong returns on equity, and significant competitive advantages. After running this data through StreetAuthority's advanced screening software last weekend, I came up with the following list of companies: Equifax (EFX NYSE), H&R Block (HRB NYSE), John Wiley & Sons (JW.A NYSE), and Merck (MRK NYSE). After having my research staff take a closer fundamental look at each of the above firms, we came to the conclusion that all four stocks are worth a closer look.

"I would also note that there is a special mutual fund that replicates Warren Buffett's investment portfolio (both its public and privately traded holdings) and has held up extremely well over the last few years. Although you could perfectly match Buffett's returns by investing directly in his compan--Berkshire Hathaway--that stock historically trades at a 40-70% premium to the firm's underlying asset value. Essentially, you pay this premium for Buffett's track record. An alternative is The Wisdom Fund (WSDVX). Although he isn't able to replicate Buffett's holdings exactly, fund manager Douglas Davenport comes close by not only purchasing all of Buffett's publicly-traded holdings, but also by making sure that each represents an identical percentage of his portfolio (when compared to Berkshire Hathaway's portfolio). The Wisdom Fund also does the same with its cash holdings. For example, Berkshire keeps about 25% of its assets in short-term Treasuries, and not surprisingly, so does the Wisdom Fund. When it comes to privately held companies, things get a bit trickier. When Buffett buys a full 100% of a particular company (which he does quite often), it makes it impossible for The Wisdom Fund to invest in that exact same firm. In these cases, Davenport and his staff simply invest in the publicly traded company that most closely matches the firm Buffett invested in. The fund has done an excellent job of mimicking the returns of Buffett's Berkshire Hathaway since its inception. In an effort to piggyback on Warren Buffett's investing brilliance, we have held The Wisdom Fund in our Fund Portfolio since November 2002."


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