Warren Buffett is the Best
Who is Warren Buffett?
Warren Buffett is my hero. In my mind, he is the best investor
ever. If you had invested in one share of his Berkshire Hathaway
(BRK-A) 25 years ago when it sold for a mere $3,030 per share,
your one share would now be worth $143,000 today. The increase
works out to a compound annual growth rate of 16.7%. You would
have doubled your investment every four and a half years!
Warren Buffett Stocks
How did Mr. Buffett achieve such remarkable returns? He
invested in undervalued high-quality companies using a
fundamental value approach. His largest holdings include:
Coca-Cola, Wells Fargo, IBM, American Express, Proctor &
Gamble, Wal-Mart and Johnson & Johnson. Warren Buffett has
owned these leading companies for decades while ignoring the many
ups and downs of the stock market.
Warren Buffett is someone I admire not only for his legendary
investment skills, but also for his intelligence, wit,
down-to-earth personality and generosity. Known as the "Oracle of
Omaha," his investing prowess has propelled him to become one of
the wealthiest people on the planet.
Warren believes the U.S. economy will strengthen during the
next several years, because the American free enterprise system
is alive and well and has worked splendidly during our 200-year
history with the exception of a few minor glitches. And there is
no reason to believe that America will fall apart during the next
century or two.
Warren Buffett Biography
Buffett graduated from the University of Nebraska at Lincoln
with a B.S. degree in Business Administration. He then enrolled
at Columbia Business School after learning that Benjamin Graham,
author of one of his favorite books, The Intelligent Investor,
taught there. He earned an M.S. in Economics from Columbia
Business School in 1951 at the age of 20.
In 1954, Buffett convinced Benjamin Graham to hire him as a
securities analyst in New York. When Mr. Graham retired two years
later, Buffett started his own investment company. His initial
investments in Berkshire Hathaway, a textile manufacturing
company based in New Bedford, Massachusetts, and Government
Employees Insurance Co. (GEICO), originally located in Washington
D.C., became huge investment successes. They provided the
foundation to generate large investment profits and cash flows.
The profits and cash flows could then be invested in additional
stocks. This simple formula snowballed into millions and then
billions of capital under management.
The profit formula was simple, but Buffett's investment
strategy was more complex. He never strayed from what he learned
from his mentor from many years ago, Benjamin Graham. Wait
patiently for the stock price to decline to the desired level.
Buy when the stock price is well below the value of the company.
Warren Buffett stated clearly: "The basic ideas of investing
are to look at stocks as business, use the market's fluctuations
to your advantage, and seek a margin of safety. That's what Ben
Graham taught us. A hundred years from now they will still be the
cornerstones of investing."
Value versus Growth
I want to comment briefly on another, related subject: Value
versus Growth. I have always advised my readers to divide the
stock portion of their portfolio into 50% value stocks and 50%
growth stocks. Many investors, though, load up on growth stocks.
They are exciting and fun, but value stocks will perform as well
as growth stocks, will give you a smoother ride, and provide you
with higher dividends. Just ask Warren Buffett.
The Intelligent Investor
Want to invest like super-investors Graham and Buffett? I
strongly recommend reading Benjamin Graham's book, The
Intelligent Investor. In the book, Graham provides easy-to-use
checklists to find stocks that are selling for less than they
should be: stocks that will beat the market with minimal
down-side risk. The Intelligent Investor is easy to read and easy
to implement. Warren Buffett described the book as "by far the
best book on investing ever written."
The Graham-Buffett Strategy
Here are eight guidelines to get you started in the right
direction. You can read other guidelines and find out what Warren
Buffett's current holdings include at: www.buffettbuys.com.
For this Cabot Wealth Advisory, I combined Warren Buffett's
and Benjamin Graham's criteria for choosing stocks. To find
investment opportunities for you, I looked for stocks with:
1) Free cash flow more than $20 million - cash needs include
dividends, operating expenses, capital improvements, and
2) Net profit margin more than 15% - a good indicator of growth
3) Return on equity more than 15% - a barometer of future
4) Discounted cash flow value higher than current price -
Standard & Poor's is a good source to find discounted cash
5) Market capitalization more than $1 billion - small companies
6) Standard & Poor's rating of B+ or better - indicates
financial stability and steady growth of earnings and dividends.
7) Positive earnings growth during the past five years with no
deficits - very important.
8) Dividends currently paid - always important and helps your
I screened my Benjamin Graham Common Stock Database and found
two high-quality companies that fit the above criteria. Both
companies are leaders in their sector, and both have excellent
Aflac (AFL: 52.93)
is the world's largest supplemental cancer insurance provider,
deriving 75% of its business from Japan. Most of Aflac's policies
are individually underwritten and marketed at worksites through
independent agents, with premiums paid by the employee.
Aflac Japan's insurance products are designed to help pay for
costs that are not reimbursed under Japan's national health
insurance system, and include supplemental health and life
insurance. Aflac Japan provides insurance to one out of every
four Japanese households.
Aflac has expanded its product line and added new marketing
venues in recent years. Non-cancer insurance policies now account
for 70% of new sales. Aflac's rapid growth in Japan is propelled
by its success in selling through banks and post offices where
sales reps are located.
Aflac's focus on new products, such as hybrid whole life
insurance products, and its successful promotions in Japan are
performing well. Sales increased 15% and earnings per share (
) rose 40% during the 12 months ended 12/31/12. Insurance policy
sales in Japan are growing more rapidly than expected.
Growth should continue at a rapid pace in 2013, too. Japan's
new prime minister has announced several worthwhile programs to
bring Japan's economy out of the doldrums, which will help
Aflac's sales. In addition, sales in the U.S. sales have improved
AFL shares sell at 9.1 times 2012 EPS of 5.85, which is well
below Aflac's 10-year average P/E of 10.6. Lower risk in Aflac's
bond holdings and further successes in Japan will produce strong
growth in future years. AFL shares are Low Risk and sell at a
deep discount to Standard & Poor's discounted cash flow value
of 79.80. The 2.6% dividend yield adds significant value. I
expect AFL to increase to my Minimum Sell Price target of 79.75
within one to two years.
BB&T Corp. (BBT: 30.26)
, founded in 1872 and based in Winston-Salem, North Carolina, BBT
provides checking and savings, loans and other financial products
and services in the Southeastern U.S. with a high concentration
of customers in Virginia, North Carolina and Florida. BB&T
has 1,800 branches and $178 billion in assets.
BB&T has taken advantage of attractive buying
opportunities during the past four years. The company has
acquired Haven Trust Bank, BankAtlantic and parts of Colonial
Bank. Earlier, in 1995 and 1997, BB&T merged with Southern
National Corp. and purchased United Carolina Bancshares.
Management expects to easily comply with new U.S. government
rules and regulations, including Dodd-Frank and the Volcker Rule.
Consumer protection regulations will increase some expenses, but
Loans increased 8% and EPS soared 45% in 2012. BB&T is
taking market share from other banks and is improving the quality
of its investment holdings. Underperforming assets fell to the
bank's lowest level since 2008, and BB&T has stopped holding
I forecast loan growth of 5% and earnings per share growth of
10% in 2013. The acquisition of BankAtlantic, based in Florida,
could send revenues and earnings higher than expected. With a
current P/E (price to earnings) ratio of 11.4 and a dividend
yield of 2.8%, BBT shares are undervalued. BBT is medium risk.
BBT shares sell at a deep discount to Standard & Poor's
discounted cash flow value of 39.30. I expect BBT to increase to
my Minimum Sell Price target of 38.75 within one year.
I will continue to follow Aflac, BB&T and other blue-chip,
high-quality companies in my Cabot Benjamin Graham Value Letter.
My March issue will include an eight-page feature on undervalued
Graham-Buffett type stocks. I hope you won't miss it!
Cabot Benjamin Graham Value Letter