The track record of master investor Warren Buffett inspires awe and envy: 40-plus years of greater-than-20% annualized returns. That performance helped him build a fortune of more than $50 billion -- one of the largest in the world -- as he did something he loves.
Can you replicate that success? Perhaps not. But a number of money managers have approximated it by investing the same way Buffett has for decades -- and that's something you can do.
The blueprint
Of course, Buffett has kept details of his methods and ideas under wraps. But page 25 of this year's Berkshire Hathaway annual report reveals a Willy Wonka-like glimpse into the inner workings of his empire. That's because Berkshire needs your help.
See, as the company's cash hoard grows, Buffett needs to add bigger and bigger businesses to the portfolio to keep returns high. But businesses that meet Buffett's high standards are difficult to find, so he's asked his shareholders to keep their eyes peeled. Buffett wrote that he's eager to hear from any company that meets the following five criteria:
- At least $75 million in pre-tax earnings.
- Demonstration of consistent earnings power.
- Good returns on equity (ROE) while employing little or no debt.
- Management in place.
- Simplicity (if there's lots of technology, we won't understand it).
A master list for the master
Now, Buffett, for his part, is looking for private businesses he can buy whole-hog. But because none of us is likely to make a multibillion-dollar acquisition anytime soon, here are five publicly traded names that pass Buffett's sniff test:
|
Company |
Industry |
EBT* |
5-Year |
ROE |
Long-Term |
Insider |
|---|---|---|---|---|---|---|
|
Rollins |
Facilities |
$105 |
19.2% |
29.1% |
$0 |
58.6% |
|
Heartland Express |
Trucking |
$121 |
12.7% |
18.2% |
$0 |
60.6% |
|
Urban Outfitters |
Apparel Retail |
$201 |
38.6% |
19.9% |
$0 |
28.7% |
|
Erie
Indemnity |
P&C Insurance |
$322 |
12.0% |
20.5% |
$0 |
20.0% |
|
Under Armour |
Apparel Retail |
$89 |
65.8% |
21.2% |
$9.3 |
35.0% |
All promising businesses. But the story doesn't end here; Buffett named a sixth criterion: an offering price.
Price may be the most important of all. If you know anything about Buffett, then you know that he made his fortune not by buying great companies, but by buying great companies at great prices. After all, as shareholders of Under Armour over the past six months know, if you pay too much to own even the best companies, your returns will suffer.
Pay for greatness
What would Buffett pay for these five stocks? It's hard to say. The master keeps his specific valuation methods close to the vest.
That said, I'm sure all five of these stocks are on the radars of Fool co-founders David and Tom Gardner in their Motley Fool Stock Advisor investing service.
And that's not surprising. Like Buffett, David and Tom look to buy shares of great companies at great prices. And like Buffett's, their track record is impressive. Stock Advisor is ahead of the market, 58% to 19%, since the service's 2002 inception.
If you'd like to look at the stocks David and Tom are recommending today, join Stock Advisor free for 30 days. There's no obligation to subscribe, and you'll immediately have access to more than 100 recommendations that are worth your consideration.
This article was first published on May 7, 2007. It has been updated.
Tim Hanson owns shares of Berkshire Hathaway. Berkshire Hathaway is a Motley Fool Inside Value and Stock Advisor selection. Under Armour is a Rule Breakers pick. The Motley Fool owns shares of Berkshire Hathaway. Like Rudie, the Fool's disclosure policy can't fail.
