Picking Winners Warren's Way
Warren Buffett has made his reputation as the World's Greatest Investor by taking the longer view—buying quality stocks with good earnings power and hanging on through bull and bear markets. During the last few decades, he has parlayed some well-chosen core holdings into an unparalleled performance record, not to mention an enormous personal fortune.
While the stock of Buffett's company, Berkshire Hathaway (BRK.A), has lagged the overall market in the past few years, long-time Berkshire holders are still sitting on impressive gains. Berkshire's book value per share has grown at a compounded annual rate of more than 20% over the last 39 calendar years. If you had invested $10,000 in Berkshire in January, 1968 (the shares closed at $20.50 on the last trading day of that month), your holding would be worth more than $40 million today.
Author Robert Hagstrom tried to compile Buffett's key investing strategies in his 1994 best-seller, The Warren Buffett Way: Investment Strategies of the World's Greatest Investor. With Hagstrom's book as a source, we at S&P have put together a stock screen that picks companies using criteria similar to those that fit the legendary investor's growth-oriented style. S&P updates this screen on a semiannual basis, during February and again in August.
Over the years, the screen has put in a pretty good performance itself. Since its inception on Feb. 13, 1995, through July 31, 2006, the screen had an annualized return of 15.3%, vs. 8.9% for the S&P 500. After lagging the "500" in 2005, the screen is back to its winning ways in 2006, rising 5.8% through July 31 vs. the index's 2.7% gain (all results are price appreciation only).
Here's how the screen portfolio has stacked up against the S&P 500 since inception: