MONDAY, MARCH 22, 2010<\/small><\/p>\n
By MIKE HOGAN<\/p>\n
IT’S OFFICIAL: WARREN BUFFETT HAS TOPPED<\/strong> every mutual-fund money manager of his era. Shares of Buffett’s Berkshire Hathaway<\/a><\/span> have delivered an average annual return of 22% since 1965, easily beating the 16.3% average logged by the top mutual fund, Fidelity Magellan<\/a> (ticker: FMAGX) fund, according to a recent report in the Wall Street Journal based on calculations from Morningstar. The biggest contributor to Fidelity’s performance was Peter Lynch.<\/p>\n If you’d like to get in on some of Berkshire’s future gains (ticker: BRK-A) but don’t have the $125,000 price of a ticket, you can, at least, learn to invest like Buffett on Validea (www.validea.com<\/a>). The seven-year-old Website has simplified Buffett’s strategy and tactics to a formula investors can use to weigh their choices. And not just Buffett’s: the $30-a-month advisory service lets you filter your ideas through investing models suggested by the views of 10 other famous value investors, including Benjamin Graham.<\/p>\n You can get a quick thumbs-up or -down assessment on your own ticker choices or copy 10- or 20-component portfolios recommended in the writings of gurus like Fidelity’s Lynch, or David Dreman or Martin Zweig. Many of these money managers have built upon the principles outlined in Security Analysis<\/em><\/a>, the valuation bible that Graham co-authored in 1934 with fellow professor David Dodd. For example, Kenneth Fisher of Fisher Investments (www.fi.com<\/a>) popularized the use of price-to-sales ratios as a way to identify attractive stocks in his best-selling Super Stocks<\/em><\/a>. Validea reports the Fisher-inspired Price\/Sales Investor model is up 84.1% over the past 12 months, compared with 59.2% for the Standard & Poor’s 500.<\/p>\n Meanwhile, the Validea Earnings Yield Investor portfolio focuses on a company’s return on invested capital and its earnings yield as suggested by The Little Book That Beats The Market<\/em><\/a>, by Joel Greenblatt, managing partner of the Gotham Capital hedge fund. The Earnings Yield Investor is up 106.9% over the past 12 months.<\/p>\n These are mostly value-oriented, long-horizon models whose fundamental approach is to buy into cash-generating businesses — so-called “predictable” companies — whose years of consistent growth can, adherents hope, be extrapolated. Guru screens are designed to uncover strong earnings growth, sound balance sheets and free cash flow. And gurus like to buy companies when their shares are trading at a discount to fair-market value. That’s determined using a variety of traditional value measures and regressions such as the discounted cash-flow model.<\/p>\n THE BUFFETT PORTFOLIO IS<\/strong> called the Patient Investor, a reference to the long investment horizons for which the Omaha Oracle is famous, as well as to his uncanny ability to discern value in distressed or misunderstood investments. Few investors are in a position to duplicate Buffett’s approach exactly, since he can take a controlling interest in companies. But his investment choices also reflect a philosophy retail investors can adopt. His oft-repeated advice is to invest only in companies you wouldn’t mind owning in whole.<\/p>\n Validea’s Patient Investor portfolio has a 12-month return of 77.1%, compared with 59.2% for the S&P — about an 18-point outperformance. But approaches like Buffett’s really need to be judged over longer periods. They can underperform in the short-term such as early 2009 when you could hitch a ride on Berkshire for a mere $75,000 a share. Since its 2003 launch, the value of Patient Investor has grown 34.2%, while the S&P’s value has expanded 7.9%.<\/p>\n “What our portfolios show is that, if you have a good strategy, it doesn’t necessarily have to be the best,” says Validea co-founder Justin Carbonneau. “Success lies in the discipline of selecting a good investing approach and sticking with it.”<\/p>\n Validea differs from other guru-oriented sites like GuruFocus (www.gurufocus.com<\/a>) — first, in that it’s focused on a much smaller universe of investors. GuruFocus tracks the actual trades and holdings of about 100 active value-fund managers via SEC filings that get detailed on the site. For $249 a year, GuruFocus subscribers can closely track the moves of their favorite gurus and, hypothetically, duplicate those trades in their own real-world or model portfolios.<\/p>\n Validea doesn’t report the trades of its gurus, but you can type a ticker into its search engine and have it assessed by all their models. They tend to be risk-averse and to include rather difficult-to-achieve metric thresholds, all of which must be met for a company to qualify as a long bet. Failure to meet even one metric results in a verdict of “no interest.” As a result, Validea tends to favor large-cap stocks with long track records.<\/p>\n But newer and smaller companies also have a place in a well-diversified portfolio. As a result, Validea has derived a Small-Cap Growth Investor portfolio from the writings of Tom and David Gardner, co-founders of Motley Fool (www.fool.com<\/a>), another value-oriented Website. Since inception in 2003, Small-Cap Growth Investor has returned 16.2% annually, compared with 2.1% for the S&P, and with only a slightly higher beta than the index.<\/p>\n These are model portfolios only; Validea does not manage money. But it is affiliated with Validea Capital Management (www.valideacapital.com<\/a>), where Validea co-founder John Reese will manage individual portfolios of a minimum of $250,000 via the investor’s choice of eight similar portfolio styles for fees that range between 1% and 1.5% annually.<\/p>\n On March 15, Validea launched a new pro service that issues trade alerts for high-conviction stocks; they are set off when fundamentals suggest upward momentum. In addition to e-mail alerts, the $100-a-month service offers swing traders access to detailed research reports on Validea picks, as well as sector and regional recommendations, much like ETFs. But unlike ETFs, which mirror large indexes, Validea pro portfolios are concentrated on the top 10 stocks derived from guru recommendations for a sector or region.<\/p>\n Since Validea pays scant attention to asset correlation, its recommendations represent just a piece of a well-diversified portfolio. The site is best used in conjunction with a portfolio designer like MarketRiders (www.marketriders.com<\/a>), focused on assembling the right balance of non-correlated assets. But building a portion of your portfolio the way Buffett or Graham might build it sure can’t hurt.<\/p>\n Share Investor Links<\/span><\/a><\/a><\/p>\n Share Investor Blog<\/a> – Stockmarket & Business commentary Download the 2009 Warren Buffett Letter & 2009 Annual Report to Berkshire Hathaway Shareholders<\/span><\/a> Recommended Amazon Reading<\/span><\/p>\n
Discuss this topic @ Share Investor Forum<\/a> – Register<\/strong><\/strong><\/a> free<\/p>\n
Download the 1977 – 2009 Warren Buffett Letter’s to Berkshire Hathaway Shareholders<\/span><\/span><\/a><\/p>\n