Buffett’s “To-Don’t” List

When you are widely considered the greatest investor in the world, people want you to give them advice on what they should do. But in a recent CNBC appearance, Warren Buffett also have some valuable advice on what you shouldn’t do, and CNBC compiled a five-point list.

Continue reading

Buffett Not Deterred By Ukraine Troubles

The ongoing trouble in Ukraine has been a daily worry in the stock market news. But Warren Buffett says it’s not impacting his approach. Asked if talk of potential world war or a new Cold War impacts his investing, Buffett said in a CNBC interview that even if those things did happen, he’d still be buying stocks. Continue reading

Thinking Small, Buffett-Style

In an interview with FOX Business Network, Validea CEO John Reese recently looked at how his market-beating Warren Buffett-inspired model works — and why small investors actually have at least one big advantage over the “Oracle of Omaha”. Reese delves into some of the fundamental criteria his Buffett model uses, such as high return on equity and persistent earnings growth. He says that, while individual investors can use such fundamental criteria to target thousands of stocks of all sizes, Buffett is constrained by Berkshire Hathaway’s size; only by investing in extremely large stocks can he really move the needle on Berkshire’s huge portfolio. Reese looks at five small-cap stocks that pass his Buffett-based approach — stocks that Buffett might be interested in but which are too small to be of interest to Berkshire. Among them: pawn broker First Cash Financial Services.

Screen shot 2014-02-26 at 11.19.46 AM

Buffett’s Pipeline Bet

Already having a major stake in the transportation industry with Burlington Northern Santa Fe, Warren Buffett’s firm is now making a move into another type of transportation investment.

Berkshire Hathaway is acquiring Phillips Specialty Products Inc., the flow improver business of Phillips 66, in exchange for Phillips stock Berkshire already owns, MarketWatch reports. Phillips Specialty Products makes polymers designed to reduce drag and increase flow potential in pipelines, MarketWatch said. The deal is expected to close sometime in the first half of 2014.

The move is a logical step for Berkshire, says MarketWatch’s Jim Jelter. Burlington Northern transports oil via rail from the blossoming Bakken oil field in North Dakota, where the use of fracking is growing. “Because it’s new, there are few pipelines serving the region, which means about 90% of the state’s crude is being sent to refiners by rail,” Jelter says. But, he adds, pipelines are much safer and more efficient when it comes to transporting oil and gas.

Validea’s Buffett-inspired portfolio is up 125% since its 2003 inception vs. 74% for the S&P 500.

“At the same time, Berkshire’s PSPI acquisition neatly fits Buffett’s move into a broad spectrum of energy companies over the past few years, including the 27-million-share stake he took in Phillips 66 earlier this year,” Jelter says. “The next logical step for Buffett’s empire building in the energy sector would appear to be investing in pipelines and, at the other end, the refineries that stand to benefit most from them.”

Why Buffett Is Not The World’s Best Value Investor

Warren Buffett is often called the greatest value investor in the world. But in his latest column for Forbes.com, Validea CEO John Reese takes issue with the notion.

“My issue with the … statement doesn’t involve the part about Buffett being the greatest; it has to do with the use of the term ‘value investor,” writes Reese. He says that, while value is important to Buffett, Buffett is more concerned with quality — he’d much rather buy a great company at a decent price than a decent company at a great price. “In fact, in a recent Fortune interview, Buffett explained how decades ago his partner at Berkshire Hathaway , Charlie Munger, led Buffett to change his approach from a beaten down, bargain hunting one to one that looks for great businesses — businesses Buffett and Munger are willing to pay up for,” Reese says, adding that many of Berkshire Hathaway’s recent buys also reflect that philosophy.

The philosophy is also reflected in Reese’s Buffett-inspired Guru Strategy. “Based on the book Buffettology, written by Buffett’s former daughter-in-law Mary Buffett (who worked closely with him), this strategy includes some value components but really focuses more on the quality of a firm’s business,” Reese says. He looks how the strategy works, and at a handful of stocks that get high marks from his Buffett-based model. Among them: The TJX Companies.

Is Buffett The Greatest? Study Says Yes

Warren Buffett has often been called the world’s best investor. And according to a new study, the data backs up the claim.

“Looking at all U.S. stocks from 1926 to 2011 that have been traded for more than 30 years, a paper published this week by the National Bureau of Economic Research calculated that Buffett’s so-called Sharpe ratio is 0.76 since 1976. That was about twice the stock market’s 0.39,” Bloomberg reports. “The ratio is also larger than all 196 U.S. mutual funds that have been around for 30 years. The median Sharpe ratio for them is 0.37.”

Validea’s Buffett-inspired portfolio is up 119% since its 2003 inception vs. 68% for the S&P 500.

The study, Bloomberg says, found that Buffett has succeeded by focusing on cheap, safe, quality stocks and using leverage wisely. “The study said Buffett is willing to take on borrowing to finance investment, then picks stocks that have low volatility, are cheap — with low price-to-book ratios — and are high quality, meaning they are profitable and have high payouts,” Bloomberg says. The study also found that Berkshire Hathaway’s success was due more to the performance of its tradable equities than its operating businesses.

The Gurus Accessorize with Coach

In his latest Seeking Alpha column, Validea CEO John Reese takes a look at a luxury goods stock that’s getting strong scores from his guru-inspired models: Coach Inc.

Reese notes that Coach shares have stumbled over the past year and a half, with the latest negative catalyst being a downward revision to its forward guidance. “Some weakness in North America, in part due to increased competition, is a driving factor behind the guidance change. Investors also may be nervous that Coach is in the process of changing up its business model, shifting from a handbag/accessory specialist to more of a ‘lifestyle brand,’ a la Louis Vuitton,” Reese explains. “But it looks like the declines are an overreaction. That’s what my Joel Greenblatt- and Benjamin Graham-based approaches … are telling me. Both of these models look for companies with strong balance sheets that are trading at attractive prices, and that’s just what they see in Coach.”

Reese says the Graham- and Greenblatt-inspired models recently triggered a “Trade Alert” for Coach. Historically, stocks that have triggered this alert have gone on to gain an average of about 19% over the next six months, beating the S&P 500 about 70% of the time. Reese looks at the specific reasons why these two models are high on Coach, and why the firm has the sort of “durable competitive advantage” that Warren Buffett likes to see.