There are very few figures in the financial markets that are universally loved and respected. Warren Buffett is one such luminary. His carefully crafted persona of humble wisdom resonates deeply within the American psyche.
His down-home style and otherworldly investment skills have earned him the respect of everyone from Joe Six Pack to the world’s wealthiest people.
In this ultra-greedy age of tabloid sensationalism and ever-changing financial markets, it is incredibly impressive that his reputation and stock picking skills have remained solidly intact.
One of the things contributing to his stellar reputation is the fact that he does not believe in personal or family dynasties.
His pledge to give away 99% of his wealth and join forces with Bill Gates, another universally loved philanthropist, endeared him to many.
His stock picking skills are built upon the teachings of Benjamin Graham, David Dodd, and Phil Fisher. He has said his stock picking philosophy is 85% Graham and 15% Fisher.
How Buffett Picks Stocks
Buffet’s stock-picking success is based on three elementary principles.
First, he looks at stocks as individual businesses that he would like to own. This strategy enables Buffett to see the entire picture beyond just the stock price. If you are going to own the company, knowing it deeply is critical to your success.
Secondly, he likes to use the market’s gyrations to his advantage. Rather than only buying new highs like many investors do, Buffett buys price weakness in fundamentally strong stocks. The old “buy the dip” mantra fits Buffett’s philosophy perfectly. However, the company must possess strong fundamentals and other factors. Buffett would never buy a stock based on weak technical alone!
Thirdly, Buffett loves companies that dominate their industries.
Fourth, he has a definite bias toward huge firms. The reason for this is that large companies can better weather economic downturns. Furthermore, large firms have proven their worth based on their growth.
Finally, and perhaps most critically, he only buys stocks with a margin of safety. The margin of safety, or moat, refers to the difference between the price of the stock and its intrinsic value. Buffett is only interested in stocks that are trading sharply less than their intrinsic value.
Another way to look at it is that when the market price of a stock is significantly below its estimated intrinsic value, the difference is the margin of safety.
Following these factors is known as value investing. Buffett is the leading value investor in the world.
Here are three funds that Buffett would buy:
1. Akre Focus Retail (AKREX)
This mutual fund boasts a 27% gain over the last 52 weeks. Its performance of over 16% since inception makes it a strong performer.
AKREX focuses on a select number of companies that the managers believe are extraordinary businesses. The holdings need to meet high standards of management, cash flow, and execution discipline to be included in the portfolio.
Management views the factors as a “three-legged stool” and the companies that fit the criteria as “compounding machines.”
Holdings of AKREX include American Tower Corporation, Mastercard, and Moody’s Corporation.
2. FMI Large Cap (FMIHX)
This mutual fund focuses on value stocks that are selected by the committee. As you might expect, FMIHX’s second largest holding is Berkshire Hathaway. TJX is the largest holding with Dollar General taking the third position.
Just like Buffett, the fund invests in stable businesses trading at reasonable to low prices. Also, the managers follow Buffett’s edict of company size being a critical factor for its continued success.
The fund is trading higher by just over 4% this year after posting 19% plus in 2017. Following Buffett’s rule of buying value, now may be a great time to get long FMIHX.
3. BBH Core Select (BBTEX)
The managers are known fans of Buffett’s investing ideas. Similar to number two on the list, Berkshire Hathaway is a significant holding with over 7% dedicated to the Buffett run company.
BBTEX seeks stocks that are trading at a minimum of 25% below their intrinsic value fitting perfectly with Buffett’s investing theme.
The No. 1 holding of the fund is Berkshire Hathaway with Oracle and Alphabet taking the second and third spots, respectively.
Steady three-year returns of just over 11% and an underperforming market sub 3% return so far in 2018 may mean it’s time to get long.
Risks To Consider: Even Warren Buffett makes mistakes in the stock market. You can lose money by following Buffett since no one knows what the future holds. The key is to diversify, use stop-loss orders, and position size properly when investing.
Action To Take: Investing in funds that mimic Buffett’s tactics is a grand long-term strategy for stock market investors.
— David Goodboy
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Source: Street Authority