The track record of master investor Warren Buffett inspires envy: 40-plus years of greater than 20% annualized returns. It's that performance that has helped him build a more than $50 billion fortune -- among the largest in the world -- while doing 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 is something you can do.
The blueprint
Of course, Buffett historically has tried to keep 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 in order to keep returns high. But businesses that are up to 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 firm that meets the following five criteria:
- At least $75 million in pre-tax earnings.
- Demonstrated consistent earnings power.
- Businesses earning good returns on equity while employing little or no debt.
- Management in place.
- Simple businesses (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 |
Earnings |
5-Year |
Return on Equity |
Long-Term Debt |
Insider Ownership |
|---|---|---|---|---|---|---|
|
Stryker |
Health-care equipment |
$1,254 |
23% |
21% |
$0 |
28% |
|
Paychex |
Data processing |
$770 |
13% |
31% |
$0 |
10% |
|
Garmin |
Consumer electronics |
$753 |
42% |
41% |
$0 |
35% |
|
bebe stores |
Apparel retail |
$118 |
22% |
17% |
$0 |
12% |
|
American Eagle |
Apparel retail |
$663 |
33% |
31% |
$0 |
15% |
While these are all promising businesses, the story doesn't end here. That's because Buffett also named a sixth criterion: an offering price.
Price may be the most important criterion of all. If you know anything about Buffett, then you know that he made his fortune not simply by buying great companies, but by buying great companies at great prices. After all, as shareholders of Cisco Systems
Pay for greatness
So 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, three of these stocks -- Garmin, bebe stores, and American Eagle -- are current recommendations 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, their track record is impressive. Stock Advisor is ahead of the market 82% to 37% 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. Click here for more information.
This article was first published on May 7, 2007. It has been updated.
Tim Hanson owns shares of Berkshire Hathaway, but no other companies mentioned. Berkshire Hathaway and Microsoft are Motley Fool Inside Value recommendations. Berkshire is also a Stock Advisor recommendation. Like Rudie, the Fool's disclosure policy can't fail.
