In the 1950s, Warren Buffett began his first investment partnership with $105,000 from eight partners and $100 of his own money. Eager to outperform and passionate about his new role, Buffett began what would become one of the most legendary investment records of all time. During the life of the partnership, 1956-1969, Buffett never had a down year.
|
Year |
Buffett Partnership Return % |
Dow Jones Industrial Average |
|---|---|---|
|
1957 |
10.4% |
8.4% |
|
1958 |
40.9% |
38.5% |
|
1959 |
25.9% |
19.9% |
|
1960 |
22.8% |
(6.3%) |
|
1961 |
45.9% |
22.2% |
|
1962 |
13.9% |
(7.6%) |
|
1963 |
38.7% |
20.6% |
|
1964 |
27.9% |
18.7% |
|
1965 |
47.2% |
14.2% |
|
1966 |
20.4% |
(15.6%) |
|
1967 |
35.9% |
19% |
|
1968 |
58.8% |
7.7% |
|
1969 |
6.8% |
(11.6%) |
10,000 pages, page by page
Buffett's yearly partnership results are staggering. He never suffered a down year and never underperformed the Dow Jones Average. Those two data points alone illustrate Buffett's innate ability to allocate capital.
During Buffett's time, Moody's (MCO -1.07%) published huge manuals that were the ultimate stock market resource. Buffett's search strategy was simple. As Buffett told me, "I took those manuals and went through each one of them page by page. All 10,000 pages." As Buffett continued, "some of the best investments were found near the end of those manuals. All the good stuff is in the back." Buffett employed an intense search strategy, to say the least. At the time, Moody's offered the most exhaustive database for publicly traded securities.
Fast-forward to today. The number of publicly listed securities in U.S. has mushroomed since the 1950s. While Moody's still publishes its stock manuals (now under the Mergent name, since that division was sold off), the Internet also gives enterprising investors a wide array of search resources at their disposal. With so many options, it's critical to develop a good search strategy in order to create an effective and efficient investment program. Rather than give you a fish, I think it more prudent to teach you to catch your own.
Image source: Getty Images.
Casting for stock screeners
Unlike Buffett, who had to look at every single company in a thick manual, today we are quite fortunate to have the ability to screen for stocks. Simply define some parameters of interest and within seconds you will have a list of potential candidates. While most of us are all familiar with screens provided by Yahoo! (NASDAQ: YHOO) and others, there are some great pre-existing stock screens that are excellent sources of ideas. I will share three with you.
- Magic Formula (http://www.magicformulainvesting.com/)
This may very well be one of the most underrated stock screeners, and it's absolutely free. Created by Joel Greenblatt, author of The Little Book that Beats the Market, "magic formula" stocks consider two variables when screening for stocks -- return on investing capital and earnings yield. Over time, businesses that create long-term value earn more than their cost of capital. So each day, the magic formula gives you the 25, 50, or 100 stocks that have the highest pre-tax return on capital, along with a high pre-tax earnings yield. This list is a wonderful source of ideas, and it helped Mohnish Pabrai find his multibagger pick Pinnacle Airlines (NASDAQOTH: PNCLQ). - GuruFocus (http://www.gurufocus.com/)
The idea behind GuruFocus is quite simple. This site simply reports the buying and selling of today's top investors. Again, this site should be viewed as a good source of ideas and nothing more. Still, why not have the world's best investors do some research for you? It's about the easiest and most efficient form of due diligence you can perform. Checking whether several money managers own the same stock could lead you to a potential winner. In investing, no one can punish you for being a copycat. - Value Line (VALU -0.85%)
Widely regarded for its independent weekly stock surveys, Value Line also has some wonderful prescreens available on its website. Aside from the popular "100 Best Rated Stocks" screen, Value Line also has a screen for "Bargain Basement Stocks," "Widest Discounts from Book Value," and "Low P/E" stocks, just to name a few.
The key to developing a sound search strategy is knowing where to look for promising ideas. With more than 10,000 publicly traded stocks in the U.S. alone, investors need a logical, intelligent method for finding promising investments. Without a source of quality ideas, there are no investments to be made.
Further Foolishness:
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