3 Buffett-Beating Strategies
10/08/2013 6:00 am EST
When Nicholas Vardy set out a goal to find strategies that could beat Warren Buffet, he was surprised to find not one, but three ETFs, that have outperformed the legendary investor.
SPEAKER 1: Hi. My guest today is Nicholas Vardy and it is so nice to see you again, Nick. Thank you so much.
NICHOLAS: Good to see you also.
SPEAKER 1: So, I was reading recently, you were talking about the three Buffett beating strategies that you have. Now, everybody loves Warren Buffett. He certainly has proven himself beyond the norm so what are these strategies?
NICHOLAS: Recently, I set myself a goal in my Alpha Investor Letter to find a single investment strategy that actually beat Warren Buffett over the past very difficult five years.
SPEAKER 1: Hard to do.
NICHOLAS: Hard to do, and Berkshire Hathaway’s current recommendation in the Alpha Investor Letter as well looking for something that would actually beat that. I was surprised to find that I actually found not one, not two, but actually three Buffett beating strategies. Those are all quite interesting and I can go through those.
SPEAKER 1: I would love to. What is your first one?
NICHOLAS: The first one is the First Trust US IPO Index ETF.
SPEAKER 1: That sounds interesting because I don’t know of any other ETFs that just focus on IPOs.
NICHOLAS: Well, it is a very small exchange traded fund. It has a very disciplined approach to investing in IPOs and not just new companies because it is not just Facebook that it is invested in but it is also invested in IPOs like GM but it falls a very disciplined process and it is actually one of the top performing ETFs over the past five years and it has been better than Buffett.
SPEAKER 1: Wow. That is pretty amazing. How many companies are in that just about?
NICHOLAS: Probably about 30 or 40 companies.
SPEAKER 1: Yeah, so that is pretty good, and all different industries?
NICHOLAS: All different industries, a lot more diversified than you would think, and again, it doesn’t really hold companies for more than four years. It has certain liquidity requirements. It is a very disciplined approach to IPOs and it really is kind of a neat strategy that has done very well in difficult markets.
SPEAKER 1: Sure, and do they buy right out of the gate or do they wait?
NICHOLAS: No, they don’t. Actually, they wait about a month so you are not going to get those kind of crazy upsides in the first days. They let things settle. That is part of the very disciplined underlying index to which the ETF is tied so that is why I have a lot of confidence that this will continue to do well in the future.
SPEAKER 1: Cool. That sounds good. What is the second one?
NICHOLAS: The second one is the Guggenheim Spin-Off Index.
SPEAKER 1: And what the heck does that mean. Guggenheim is an art museum, right.
NICHOLAS: Yeah it is, it is, but it is also an ETF provider. This ETF is linked to an index that tracks spin-off. Now, a spin-off is basically when a company sloughs off a division or a portion of it into a separate company. Generally, what happens is that company becomes much more efficient in its operations and it tends to outperform because management is incentivized to do well and so it is kind of a niche small-cap type of exchange-traded fund. The ticker symbol is CSD for that one and that also is linked to a very disciplined underlying index and over the past five years, it has done very well. In fact, this year, among the three strategies we are talking about today, it is the top performer. It is up about 30% this year versus about 17.5% for the S&P 500.
SPEAKER 1: Yeah, very, very good. Right, and what is your last one?
NICHOLAS: The last one is the PowerShares Buyback Achievers Index.
SPEAKER 1: That sounds interesting because we have had an awful lot of buybacks.
NICHOLAS: Yeah, about $260 billion worth of buybacks this year among US companies, and it basically invests in those companies that in the last 30 months have bought back more than 5% of their shares. Of course, when companies buy back their shares, they reduce their number of shares outstanding, increasing earnings per share, and therefore, giving their earnings that kind of a kicker and that has also been a strong outperformer. That strategy has been a strong outperformer compared to the mainstream S&P 500. Again, this year, I think it is up about 25% so not as much as the spin-off index but again, much better than the benchmark S&P 500.
SPEAKER 1: Sure, and I would assume that would be pretty well diversified.
NICHOLAS: It is pretty well diversified. In fact, it is by far the most diversified of the three ETFs we are talking about. It has about 202 holdings in it so it is very diversified because it is a strategy that a lot of different companies use and it has been a very good strategy, a Buffett beating strategy over the past five years.
SPEAKER 1: That is great. Beat Buffett at his own game. Thank you for joining me.
NICHOLAS: Thanks for having me.
SPEAKER 1: And thanks for being with us at the MoneyShow.com video network.