traded stocks that Berkshire owns—like Coca-Cola, Gillette,
H&R Block, and General Dynamics. (Berkshire is also the sole
owner of various companies, like See’s Candy and GEICO, the insurance
company, but these companies are not publicly traded.) Because
of Buffett’s history of purchasing reasonably priced stocks,
these stocks should still be worth buying.
A danger, of course, is that Berkshire may have begun unloading
those stocks, the way it began quietly bailing out of Disney in 2000,
as you are just beginning to purchase them. Another danger is that
your portfolio will be askew: You will have more exposure to certain
stocks and industries than Berkshire itself has. As a result, your
portfolio might be a riskier version of Berkshire.
You can balance out your Buffett-like portfolio with stocks from
the holdings of mutual funds that invest roughly the way Buffett
does, such as Sequoia, Tweedy, Browne Global Value and American
Value, Legg Mason Focus Trust (omitting from the last any technology
stocks, which Buffett tends to avoid), Third Avenue Value, Clipper,
Longleaf Partners, Torray, and Vontobel U.S. Value. You can
examine a list of these funds’ recent holdings either by going to their
web sites or by consulting Morningstar Mutual Funds, a newsletter
to which most large libraries subscribe. The list of holdings will be
somewhat outdated, but, again, most of these value stocks should
remain reasonably priced.
You might also balance your portfolio by concentrating on stocks
in industries outside the ones you already have covered in your Buffett-
like portfolio, along with foreign stocks, which Buffett also
tends to avoid. For suggestions of foreign stocks to buy, check those
in the portfolio of Tweedy, Browne Global Value.
For U.S. stocks, I would single out health-care stocks because
Berkshire has tended to ignore this entire industry, perhaps because
the stocks have almost always been high-priced or because they are
outside Buffett’s “circle of competence.”
You can also balance out your Buffett-like portfolio with stocks
chosen from the list compiled at Quicken.com by Robert
Hagstrom. He derives this list using his criteria for picking Buffetttype
stocks, Hagstrom being an authority on Buffett’s strategy.
Buying Buffett-like Mutual Funds
Instead of buying individual stocks, you could buy one or more Buffett-
like mutual funds—in effect, having someone else buy Buffetttype
stocks for you. Even granting that Buffett is in a class by
himself, cheap imitations—cheap in the sense of your being able to
buy many shares for a low minimum—aren’t to be sneezed at. These
funds, in some cases, do not deliberately emulate Buffett’s strategy.
For example, Third Avenue Value, under Martin J. Whitman, doesn’t.
Others, to a certain extent, do—notably, Sequoia, Tweedy, Browne
American Value, Legg Mason Focus Trust, Torray, Longleaf Partners,
and Vontobel U.S. Value.
Which fund most resembles Berkshire? No doubt Sequoia,
which was started by a Columbia Business School friend of Buffett’s
and which invests a big chunk of its assets in Berkshire. (Unfortunately,
Sequoia is closed to new investors.)
Sequoia suffered a dismal 1999, along with Berkshire itself and
with many other value funds. But its long-term record is splendid.
Over the past 10 years it has outperformed the S&P 500 by 2.31 percentage
points, returning 17.56 percent a year.
Which of the other funds most resembles Sequoia? Buffett has
reportedly said that the Clipper Fund is close to his investing style.
A lesser-known fund that has much in common with Berkshire is
Vontobel U.S. Value, run by Edwin Walczak. He readily acknowledges
Buffett’s influence; his portfolio recently had a 5 percent exposure
to Berkshire, its fifth largest position. Other stocks in Walczak’s
portfolio that have overlapped with Berkshire: Mercury General,
Gannett, McDonald’s, Gillette, Wells Fargo. The fund is classified by
Morningstar as mid-cap value.
One possible way to search for other funds that imitate Buffett’s
strategy is to compare their R-squareds, numbers indicating how
closely a fund follows an index.
You might search for a fund with an R-squared close to Sequoia’s.
(If A is equal to B and B is equal to C, then A is equal to C.) The Vanguard
Index 500, which mirrors the Standard & Poor’s 500 Stock Index,
has an R-squared of 100. The higher the R-squared, the more
closely a fund mirrors an index.
Apparently R-squared is simply not a useful guide to identifying
Buffett-like mutual funds, perhaps because the concentrated nature
of some Buffett-like funds loosens their ties to the S&P 500.
Now let’s look at the same funds, zeroing in on (1) concentration,
(2) low turnover, (3) low price-earnings ratios, and (4) low pricebook
ratios. Even with these criteria, it’s hard to tell
which fund is most similar to Sequoia.
Value funds differ from one another because their criteria for assessing
what a company is worth may be different. Many managers,
like Buffett, use the current value of future cash flow; others may
check the prices paid for similar companies recently taken over.
Some managers are “deep value”; others, further along the continuum
toward growth. Value versus growth investing will be covered.
In any case, Buffett-like stocks or mutual funds might constitute
only a portion of your portfolio. Value funds do tend to underperform
during long stretches of time, and you might do well to own
some good growth stocks and growth mutual funds, along with
Buffett-like stocks, just to keep your portfolio more stable over
the years.
Read More : Buying Individual Stocks
