Want to Invest Like Buffett?
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Guitarists have Eric Clapton, actors Al Pacino, and basketball players have Michael Jordan. Investors are fortunate enough to have Warren Buffett, who not only is an incredibly successful investor, but a highly respected philanthropist. Lecture halls turn to complete silence when the Oracle of Omaha steps up to the podium--everyone wants his secrets.
If you follow his company and pay attention to its business, you can see that he keeps things pretty straightforward. He invests heavily in simple American businesses that have long-term viability, and broadly speaking, he stands by the buy-and-hold investment style. One important part of his strategy is picking companies with good management. Unfortunately, as individual investors, we don't have the luxury of sitting down with Directors and CEOs to get to know them on a personal level. So how do we know which companies to invest in if we want to invest more like Buffett?
The truth is that no one ever knows for sure, but to improve your odds of selecting some great companies to invest in, why not just add some Berkshire Hathaway (NYSE: BRK-B) B class shares? Check out which stocks Buffett owns.
Having the world's most famous money manager handle part of your portfolio isn't a bad idea. Over the last 15 years, shares of Berkshire have returned an average of about 7.6% per year, compared to the S&P500's 4.8% annual return. In the hedge fund space, the stock is loved by many of Buffett’s peers; Eagle Capital Management keeps about 5.8% of their 13F portfolio invested in the company. In fact, it’s the fund’s biggest individual holding (see all of Eagle Capital Management's picks here).
A Director at Berkshire Hathaway, insider Ronald Olson, even added $225,000 worth of Berkshire to his holdings in December. I'm not the first to think to add on Berkshire Hathaway stock to lock in some low-risk, reliable returns. If you don't have a lot of railroad, utility, energy, finance, insurance, or service and retailing companies in your portfolio, this stock would be a fantastic addition.
Looking at the metrics, Berkshire Hathaway's class B shares have a beta of .29, which is very low; Berkshire's stock has fared better since the start of 2008 (up 46%) compared to its closest competitors, namely Allstate (NYSE: ALL) (up 32%), RenaissanceRe Holdings (NYSE: RNR) (up 37%), and RLI (NYSE: RLI) (up 10.4%). Arch Capital Group (NASDAQ: ACGL), one of the only peers to outperform Berkshire, is another property and casualty insurance provider up almost 95% over the same period. This group of stocks has provided investors impressive returns over the past half-decade, and performance should only get better as the economic climate improves.
Looking at Berkshire, there is nothing remotely concerning about the company’s financial health. From a valuation standpoint, a PEG ratio of 1.46 is respectable given the low-growth nature of Berkshire's businesses. The company’s return on equity for the past 12 months has been 7.73%, above the industry average of 7.3%; their profit margin of 8.9% is also above the industry average of 8.5%.
Worth noting is that Berkshire's return on equity is markedly lower than Allstate (13%), RenaissanceRe (19%), Arch Capital Group (15%), and RLI (12%). Even more impressive for these four companies is that each has a debt/equity ratio less than 0.3, with RLI, RenaissanceRe, and Arch Capital Group actually closer to 0.1. Berkshire, however, is involved in some more asset-intensive businesses, in addition to property and casualty insurance. Buffett’s baby has a .34 debt/equity ratio, closer to that of Allstate.
To conclude, the simple idea I'm suggesting is that you can have peace of mind knowing that Warren Buffett is looking over part of your portfolio while you scour around for the next big winner. As investors, we understand the importance of not leaving cash idly sitting around. If you're struggling with ideas on where to put some of your investment cash in 2013, Berkshire Hathaway is a low-risk way to capitalize on long-term growth.
This article is written by Mark Jones and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. Mark has a long position in Berkshire. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!