Reuters Insider - The Stocks a Young Warren Buffett Would Buy Today

Pacific Ventures

05/05/2015 16:55

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 Source:             Thomson Reuters                                   
                                                                       
 Description:        What stocks would a young Warren Buffett buy?     
                     Marketwatch's Mark Hulbert picks several on       
                     MoneyBeat. Photo: AP                              
 
 
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Transcript (May be auto-generated)

                 There is a young and handsome Warren Buffett in 1960. His investing style has 
clearly served him well over the years, and countless scores of acolytes have 
tried to mimic it. While the Oracle's focus these days on big companies for his 
massive global conglomerate, is there a way to replicate his style by finding 
some smaller companies, maybe more affordable companies to buy? MarketWatch's 
Mark Hulbert joins us with this investing story. Mark, how are you? Okay, how 
are you? I'm doing all right. So this is actually kind of interesting. Look, so 
Buffett had his 50th anniversary of running Berkshire this weekend- a lot of 
attention there. A lot of attention focused on what he invests in, how he does 
it- and you always get these questions: how can I be like Warren Buffett? How 
can I invest like Warren Buffett? That's what people really want to know. Mark 
Hulbert, how can people invest like Warren Buffett? Well, right. Actually, I'm 
wondering in fact. 

I'm not the only one to ask this question. I'm not sure you should try to 
emulate Warren Buffett anymore because he so big- his conglomerate is so big 
that he can only invest in these very large companies, and he's been the first 
to say that his company is not going to be able to do as well in the future as 
it has in the past because of that size. And so the question becomes: what would
he be investing in today if he weren't so big? Because presumably, there are 
some very attractive companies out there that are just as compelling, if not 
more so - I'm going to guess more so - than 

some of these huge mega cap stocks which are the only ones that are big enough 
to interest him. Right, so you came up with a- you're writing about in your 
column this week- groups came up with a screener to kind of take Warren Buffett-
what Warren Buffet would look for in a company and screen companies today for 
that kind of a thing. Talk to me a little bit about that. Well, that's right. My
column relies heavily on a study that was produced by three academics who work 
for AQR Capital Management, the hedge fund firm in Connecticut. The study's been
published by the National Bureau of Economic 

Research. And what they have done is find an investment algorithm that each one 
of us could follow. It doesn't mean it's easy but nevertheless it's publicly 
available, that if you've been following it over the last 50 years, you would 
have done just as well as Warren Buffett has done with Berkshire Hathaway. And 
it's a very complex algorithm. There's a link to the study in my column, but 
basically it boils down to three major characteristics which is to buy very 
cheap, safe, and high quality stocks. And I can mention what the broad 
definitions of each one of those. But again, it can get complicated by cheap, 
they look at price-to-book ratio, by safe- they look at stocks that a very low 
data, has very low historical volatility is relative to the overall market. And 
by high quality they look at stocks that have very high profit margins, a high 
growth rate of those profitability as well as they pay out a big portion of 
their profit in dividends. And those things all led up to a very safe and very 
un-volatile, and high quality group of stocks. I was going to say, let's get 
into it. Let's talk about a couple of them. 

There are three in particular I want to focus on. The first one is American 
Eagle. Well, that's right. Now this is a 3 of 12 stocks that I came up with 
using FactSet's database- an extensive database. And I ran this screen- this 
particular algorithm. And these are the 12 stocks that came up. The three that I
mentioned- or were mentioned here on the show are ones that are also being 
recommended by some of the top-performing investment advisors that I track, the 
Hulbert Financial Digest. And the American Eagle satisfies each one of those 
criteria. 

It has a very nice dividend payout ratio of 3.1%. It's been growing. It's very 
profitable. It pays out a very big portion of its profit in dividends. Yeah. And
then Kohl's is another one, another retail story. Well, that's right. Similar 
story- it has a dividend payout- a dividend yield right now about 3%, pays out 
over half of its profits in dividends, which is to say that it is sharing back 
with its shareholders a big portion of its profitability. And of course, its 
profits have grown at a very fast pace over the last five years. And then the 
last one we want to focus on: Owens & Minor. 

That's right. That's in the healthcare industry. And they begin to satisfy each 
one of those criteria. It's actually all of these stocks recommended by the 
greatest number of the investment advisors I track who have beaten the market 
over the long term. So if you were to give a nod to any one stock, that's one 
you perhaps will look at first. But the authors of this study would be the first
to say that you need to buy a very larger diversified group of stocks in order 
to try to emulate what Warren Buffett has done. Right, and if you folks want to 
see the entire list, you can go to Mark's column on www.marketwatch.com. What I 
thought was interesting, Mark, was all of them- none of them are really- the 
stock's up. We spent a lot of time talking about. They're not the momentum 
stocks, the hot go-go stocks- these are really Warren Buffett type companies 
that he's not investing in any of then right, but they are- these are the kinds 
of things. It's really an interesting list. Well, that's right. They- and 
especially one of the reasons why you don't hear about them is that they've been
so- their volatility is low relative to the market. And you and I are both 
journalist. We love to ride about stocks that are up or down by a huge amount. 
These don't end up capturing attention but nonetheless over the long-term of the
kind of stocks, when they're as profitable as these, end up rewarding 
shareholders quite nicely. Yeah. Alright, we'll leave it there. Mark, thank you 
very much. My pleasure