Should You Invest Like Buffett ?

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There was an article published in the November 5th edition of the Wall Street Journal titled "Mind Games: Finance Pros Keep Trying To Get Inside Warren Buffett's Head." It profiled a new fund, based in Manchester, England, that attempted to duplicate the stock picking strategy of one of the most successful investors in history. The fund was up 29% this year as compared to the FTSE All Share Index which has returned 6%

Should the retail investor try the same thing? I'll do a quick analysis of the top five stocks that he held as of June 30 to help answer the question. 

Number one on the list, and representing a fifth of his portfolio, was the Coca-Cola Company (NYSE: KO). He held 200 million shares worth over $15.6 billion of the company that has the best known brand name and is the world's largest distributor of soft drinks.

The company has grown earnings over 11% a year for the past five and revenues by over 14%, although the growth has slowed somewhat over the trailing twelve months. And in keeping with the Buffett value investing philosophy, Coca-Cola is reasonably priced compared to the rest of the beverage industry. It's P/E is about 13% lower than its peers. An added bonus is a dividend of about $1 a share resulting in a yield of 2.75%. The dividend has been paid every year since 1920 and has been increased each year since 1962. 

A close second place in the portfolio is Wells Fargo & Company (NYSE: WFC). Mr. Buffett holds 411 million shares which was valued at about $13.7 billion. He increased his stake slightly in the April-June period this year. It seems reasonably priced with a P/E that is about half that of its peers and a price to book ratio of 1.24. 

Looking at some of the financial's indicate it is performing well. Diluted earnings per share on a TTM basis have risen by about a third over the past five years. Revenues have increased by 2/3 over the same period. Wells Fargo also pays a dividend of about $2.60 a share. 

International Business Machines (NYSE: IBM) is ranked number three in the Buffett portfolio. It held 66 million shares worth about $13 billion at the end of June. Big Blue is sort of non-traditional holding for him as it could be considered a tech stock and has a relatively high valuation when considering price to book. However, its TTM P/E ratio of about 14 would price it more fairly against others in the industry. 

IBM has doubled EPS over the last five years in spite of flat revenue growth. I didn't look closely but was that due to share buybacks? It pays a dividend of $3.40 a share.

Next up is American Express (NYSE: AXP). Like many financial institutions it was hurt in the 2008 recession but has recovered somewhat since then. Earnings, in the form of EPS on a diluted basis, have increased by over 2/3 even though revenues have not grown much since late 2007. In keeping with the Buffett theme it is relatively cheap at a TTM P/E of 13. It only pays $0.20 a share in a dividend.  

Rounding out the Buffett top five is the consumer stalwart Procter & Gamble (NYSE: PG). Although he has reduced the stake this year it still comprises almost 5% of the portfolio, which contains 59.6 million shares worth $3.7 billion. The company has been under-performing Wall Street earnings and revenue expectations over the last few years and the stock has been flat.

However, one of the great strengths of P&G is its ability to keep offering and increasing its dividend though thick and thin. The company has raised it every year since 1956 and has paid it out for 120 consecutive years. The current dividend is $2.24 a share resulting in a juicy yield of about 3.25%. The company is a member of the Dividend Aristocrats, the group of large businesses which have increased payments every year for at least 25 years in a row. 

So how would you have done with the top five from the Buffett portfolio? Pretty well, actually.

If you looked at the recent past (say 5 years) an equal amount of $10,000 invested in each stock would have resulted in a current portfolio value of $66,889 and a total return of 33.8%. A similar investment in the S&P500 would now be worth $52,400, a total return of only 4.8%.

If you bought 15 years ago your original $50,000 cost basis is now worth $139,547. This represents a total gain of 179.1%. Investing $50,000 in the S&P500 would have netted you $97,850. This would have been an increase of 95.7% for your portfolio.

So I'd say sticking with Warren over the long haul would have been worth it. I'd recommend getting into his head on a regular basis. 

 


Mathman6577 owns shares of The Procter & Gamble Company, International Business Machines, and The Coca-Cola Company. The Motley Fool owns shares of International Business Machines and Wells Fargo & Company. Motley Fool newsletter services recommend American Express Company, International Business Machines, The Coca-Cola Company, The Procter & Gamble Company, and Wells Fargo & Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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