The following article contains a blueprint. The exact formula's and functions to use with a stock screener to find stocks a young Warren Buffett would buy. These stocks are not just cheap, they have low debt levels, high quality management and strong profit margins.
A lot of us wish we could invest like Warren Buffett — and for good reason. Buffett and his partners acquired control of Berkshire Hathaway (BRK.A) in 1965. Since then, by taking positions in publicly traded companies such as McDonalds (MCD) and buying other companies outright, Buffett transformed Berkshire into, in effect, a closed-end mutual fund.
To say that shareholders in at the beginning have benefited mightily is a masterpiece of understatement. According to Forbes, Berkshire (Class A) shares were worth $15 apiece when Buffett took over the floundering textile manufacturer. The last time I looked, they were changing hands at $87,000 a share.
You can get in on the action by buying Berkshire Hathaway stock. Although, Class A shares will set you back the aforementioned $87,000,Class B shares (BRK.B) can be had for only $2,900 and change. Whats the difference? Not much. Besides representing less ownership, the only disadvantage of Class B shares is that you have limited voting rights compared to Class A shares.
But buying Berkshire shares may not be the best way to profit from Buffetts stock-picking wisdom. Heres why.
Buffett is your classic buy-and-hold investor and rarely sells. Consequently, Berkshires portfolio is stuffed with stocks bought years ago. For instance, Buffett added Coca-Cola (KO) in 1988, and its still Berkshires biggest holding. American Express (AXP), the portfolios second-largest holding, was added in the 1960s.
Its possible that Berkshires portfolio is laden with tired stocks whose best days are behind them. A close look at the performance numbers lends credence to that argument.
As of July 2004, Berkshire Hathaway shareholders had enjoyed a 16.1% average annual return over the previous 10 years, easily beating the S&P 500s ($INX) 9% or so annual return over the same period. But that 16% figure was no match for the blistering 31.7% average annual return that Berkshire racked up in the prior 10 years (July 1984 to July 1994). So while recent Berkshire Hathaways returns are still impressive, they are not keeping up with the earlier pace.
Also, Berkshires wholly owned company portfolio is heavily weighted with insurance stocks, making its performance susceptible to a downturn in that industry.
All things considered, picking stocks that a young Buffett would buy if he were just starting out today may be a better alternative than buying into Berkshires existing holdings. Here are some ideas about how you might go about doing that.