Since the financial crisis of 2008 and the accompanying "Great
Recession", the investment world has been filled with an unceasing
refrain. "Things are different now," it goes; "The old rules don't
apply." There is talk of a "New Normal", and of new investment
paradigms, and we've been told that value investing, long-term
investing, and even equities as a whole are all "dead". In short,
the old ways of making money through investing just aren't going to
My Warren Buffett-inspired Guru Strategy would beg to differ.
Since the start of 2009, a 10-stock portfolio picked using this
quantitative strategy -- which is based on the value-centric
approach Buffett used to build his empire -- is up more than 104%
(through August 8). That's nearly double the S&P 500's 55%
return. Last year, the portfolio gained more than 10% while the
broader market was flat, and this year it's up 16.1%, nearly 5
percentage points ahead of the S&P.
I've done nothing to change my Buffett model since the financial
crisis. It has generated these returns using good old-fashioned
value investing -- that is, by identifying strong companies and
buying their shares at attractive valuations. I base the approach
on the book Buffettology, written by Buffett's former
daughter-in-law Mary Buffett, with whom he worked closely. It's one
of my more stringent strategies, looking back a full decade into a
firm's fundamentals and financials. It likes to see companies that
have grown earnings-per-share on a consistent basis over the past
10 years, and which have averaged returns on equity of at least 15%
over that same 10-year span -- a sign of the "durable competitive
advantage" that Buffett is known to seek in his investments. The
model also likes companies that are conservatively financed,
looking for those that have enough annual earnings that they could,
if need be, pay off all of their long-term debt within five years
(and preferably two).
Like Buffett himself, my Buffett-based strategy also looks for
companies with strong management, through the return on retained
earnings rate. This metric looks at the amount a company's
earnings-per-share have increased over the past decade, and then
divides that by the total amount of earnings that the company has
retained (i.e., not paid out as dividends) in that span.
Essentially this measures what kind of return management is able to
generate using the earnings that it holds onto.
Of course, being perhaps the greatest value investor of all
time, price is critical for Buffett. My model thus looks at a
company's earnings yield, and wants that to be significantly above
the yield an investor could obtain by buying long-term treasury
bonds. Buffett has always said that the best time to buy is when
others are fearful, and my Buffett-inspired portfolio has done just
that, a big part of why it has produced such outstanding returns in
recent years. For example, back in September 2009, it picked up
Coach, Inc. At a time when fears were rampant about the health of
the US consumer, many if not most investors were running away from
a luxury goods stock like this. But my Buffett model liked Coach's
exceptional long-term track record and its dirt cheap shares, and
the stock has rewarded it by surging 90% since then.
I believe that my Buffett-based model's success in recent years
shows that the fundamentals of investing have not changed.
Investing in companies with good balance sheets and long histories
of success, and buying their shares at cheap prices, is an approach
that I don't think will ever die. Sure, it may not work in some
short-term periods, but over the long term, if you follow Buffett's
tenets, you should produce some strong returns.
With that in mind here are a handful of stocks that my Buffett
model is high on right now.
Jos. A. Bank Clothiers (
A $1.2-billion-market-cap firm like this Maryland-based men's
clothing company is probably too small for Buffett's behemoth
Berkshire Hathaway to invest in, but Bank's fundamentals are
actually quite Buffett-esque. The firm has increased EPS in each
year of the past decade, has no long-term debt, and has averaged an
18.4% return on equity over the past decade. Its shares also trade
at an 8.0% earnings yield, far exceeding the long-term treasury
yield, which remains well under 3%.
Infosys Ltd. (
Like Bank, this India-based IT firm has upped EPS in each year of
the past decade, and has no long-term debt. Infosys ($24 billion
market cap) also nearly doubles my Buffett model's 15% return on
equity target, having averaged a 29.1% ROE over the past decade.
And, its shares are reasonably priced, trading at an earnings yield
of about 7.4%.
FactSet Research Systems Inc. (
This Connecticut-based firm provides global financial and economic
data and analytical applications to a variety of customers in the
financial world. The $4.2-billion-market-cap company has increased
EPS in each year of the past decade, has no long-term debt, and has
averaged a 26.5% return on equity over the past 10 years.
Management has also earned a 17.6% return on retained earnings over
the past decade, and the company's shares trade at a 4.2% earnings
yield. That's not dirt cheap, but it's still way better than the
yield on long-term Treasuries.
The TJX Companies, Inc. (
The parent of discount retailers that include Marshalls and T.J.
Maxx has done exceptionally well in recent years, and has grown EPS
in each year of the past decade. It has also averaged a 37.7%
return on equity over the past decade, and its annual earnings are
more than twice its long-term debt. Like FactSet, its shares aren't
trading at bargain basement prices, but their earnings yield of
4.8% isn't bad, considering the quality of the company.
Polaris Industries, Inc. (
It's hard to imagine Buffett riding an all-terrain vehicle or
snowmobile, but this Minnesota-based firm -- which makes those as
well as motorcycles and other vehicles -- gets high marks from my
Buffett-based model. Polaris ($5.1 billion market cap) has upped
EPS in all but two years of the past decade, and after each of the
two declines it bounced back with strong gains. Its debt is also
less than half of its annual earnings, and the company has produced
a 39.4% return on equity over the past 10 years. Its earnings yield
is close to 5%, which makes it a good enough buy at this price,
according to my Buffett model.
I'm long JOSB and TJX.