How You Can Re-Create Buffett's Past Investments in Your Own Portfolio

History does not repeat itself, but it often rhymes.

Investors who take Mark Twain's aphorism to heart will discover that, while Warren Buffett's past acquisitions are impossible to replicate, there are often companies with similar characteristics that are freely available for all to invest in. Buffett's acquisitions of GEICO, Benjamin Moore, and Fruit of the Loom have taken those companies off the market, but Progressive (NYSE: PGR  ) , Sherwin-Williams (NYSE: SHW  ) , and Hanesbrands (NYSE: HBI  ) share many characteristics with Buffett's purchases. Investors who recognize the similarities can build their own Berkshire Hathaway of sorts in their personal portfolio.

Everything Buffett loves about GEICO can be had in Progressive
Buffett was so in love with GEICO that he invested 75% of his net worth in the stock in 1950. Buffett understood that GEICO was not just any insurance company. It was able to offer the cheapest auto insurance policies in the industry because it marketed directly to customers instead of going through agents, which charge a hefty commission.

Back then, it marketed only to government employees, who tended to be more responsible and have better driving records than the average citizen. The combination of low-cost marketing and targeting only the safest drivers enabled GEICO to make a profit on its insurance policies -- something most insurance companies are not able to do.

At the time of Buffett's original investment, direct marketing was a revolutionary concept in the insurance world. In 2014, however, GEICO has competition in the form of Progressive. Like GEICO, a significant portion of Progressive's policies -- 44% -- originate from direct-to-consumer advertising. The other 56% comes from its agent network, which underwrites policies according to Progressive's strict guidelines.

This formula has enabled Progressive to generate enormous profits on its policies. Over the last decade, its average combined ratio was 90.9. This means that Progressive makes a 9.1% profit margin on the policies it sells. On the other hand, most insurance companies just try to break even on policies and make money by investing the premiums before claims are paid out.

Source: SEC Filings.

Progressive sells for 2.2 times book value, or a little less than 15 times earnings if it earns a 15% return on equity. The company has historically earned higher than a 15% return on equity and will continue to do so as long as its combined ratio does not increase. Therefore, investors can buy a Buffett-approved business at a good price.

Sherwin-Williams has even better prospects than Benjamin Moore
Buffett paid $1 billion in 2000 to buy paint manufacturer Benjamin Moore. Over the last 10 years, Benjamin Moore earned $1.5 billion in profits -- a 15% annual return on investment. By comparison, Sherwin-Williams generated $6.2 billion over the last decade and can be bought for $20 billion. But there is good reason for the high price.

Benjamin Moore and Sherwin-Williams sell through a network of retail stores that bear their name. Sherwin-Williams has a network of 3,520 specialty paint stores, most of which are located in the United States. It is the world's third-largest coatings manufacturer and the No. 1 architectural paint brand. Its paint stores produce 66% of its total profits, while another 17% of its profits come from bulk sales to third-party resellers.

Luckily for investors, Sherwin-Williams is every bit as resilient as Benjamin Moore. Despite the housing bust, Sherwin-Williams has compounded free cash flow per share at approximately 9.9% per year over the last 10 years. This is primarily due to the company's pricing power, which has allowed it to keep its gross margin within a tight range; over the last eight years, its gross margin has stayed between 42.5% and 46%. 

Source: Morningstar.

Sherwin-Williams looks expensive at 29 times earnings, but its pricing power and historical growth rate may make it a great investment at a lower price.

Buffett bought Fruit of the Loom; you can buy Hanesbrands
In 2001, Buffett bought a bankrupt Fruit of the Loom for $835 million. At the time of the deal, Buffett said he bought the company because of its strong brand.

As it turns out, brands mean quite a lot in the underwear market. Market research firm NPD Group says that 62% of men's underwear consumers are loyal to their favorite brand. That is a good thing for Hanesbrands, which has up to 50% market share in the mass-retail channel. Innerwear represents more than 90% of Hanesbrands' profits. At the time that Buffett purchased the company, Fruit of the Loom had a one-third share of men's and boys' underwear in all channels.

Hanesbrands' and Fruit of the Loom's large market shares -- protected because of consumers' brand loyalty -- enable the companies to generate stable gross margins. Investors have to pay a hefty 18 times earnings for Hanesbrands, but the company's strong brand and foothold in the men's underwear market may justify the price.

Bottom line
Investors cannot go back in time and buy GEICO, Benjamin Moore, and Fruit of the Loom before Buffett gets to them, but they can look for similar companies that are still traded on the open market. Progressive, Sherwin-Williams, and Hanesbrands share the qualities that Buffett likes about their Berkshire counterparts. Wise investors would keep an eye on these companies and pull the trigger when they are cheap.

Buffett's tips for individual investors
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.


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