Warren Buffett has made his reputation as the World's Greatest Investor by taking the longer view -- buying quality stocks with good earnings power and hanging on through bull and bear markets.
During the past few decades, he has parlayed some well-chosen core holdings into an unparalleled record, not to mention an enormous personal fortune.
The stock of Buffett's company, Berkshire Hathaway, topped the broader market in 2007 and 2006 after underperforming for a few years. Longtime Berkshire holders are sitting on impressive gains.
Berkshire's book value per share has grown at a compounded annual rate of more than 20% over the past 40 calendar years. If you had invested $10,000 in Berkshire in January, 1968 (the shares closed at $20.50 on the last trading day of that month), your holding would be worth more than $50 million today.
How does he do it? Author Robert Hagstrom tried to compile Buffett's key investing strategies in his 1994 best seller, The Warren Buffett Way: Investment Strategies of the World's Greatest Investor. With Hagstrom's book as a source, Standard & Poor's Portfolio Services analyst David Braverman put together a stock screen that picks companies using criteria similar to those that fit the legendary investor's growth-oriented style.
S&P updates this screen on a semiannual basis, during February and again in August.
How the screen works
Over the years, the screen has put in a pretty good performance itself. From Feb. 13, 1995, through Jan. 17, 2008, the screen had an annualized return of 14.9%, vs. 8.2% for the S&P 500. In 2007, the screen stocks gained 15.7%, vs. 3.5% for the S&P 500. (All results reflect price appreciation only.)
It should be noted that these are not necessarily stocks that Buffett has bought or personally plans to buy. The list reflects only the criteria that Buffett has emphasized in the past.
Each time the screen is run, the stocks that were previously returned are "sold," and the new stocks are "purchased." There is 100% turnover each time the stock screen is run. The full criteria for this screen:
1. Owner earnings (cash flow less capital expenditures) above $50 million (changed in February, 2006, from $20 million)
2. Net margins of at least 15% for the trailing 12 months
3. Return on equity of at least 15% the previous quarter and in every year for the last three years
4. Retained earnings that have grown less than the market capitalization, on an absolute basis, in the last five years
5. Looking five years into the future, projected cash flow per share greater than the current market price for each stock (discounted to the present using the 30-year Treasury yield); this helps remove overpriced stocks from the list
6. Market capitalization of $500 million or more
Many of the stocks from the previous update of the portfolio in August, 2007, also appear in this edition. The current edition contains a generous sampling of consumer products, technology, and telecom outfits. Once again, we note the presence of a number of European and Asian names.
Sixty names emerged when the screen was completed.
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report.
Standard & Poor's Regulatory Disclosure
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.