A World of Winners, Warren's Way

S&P's latest screen tracking the Sage of Omaha's investing criteria finds 55 attractive names from around the globe

by David Braverman and Michael Kaye, CFA

With investments in industries as various as railroads, retailers, insurers, and ice-cream stands, Warren Buffett has made his reputation as the "world's greatest investor" by taking the longer view—buying quality stocks with good earnings power and hanging on through bull and bear markets. While Buffett has made the occasional misstep during the last few decades, over his career he has parlayed some well-chosen core holdings into an unparalleled performance record—not to mention an enormous personal fortune (see BusinessWeek.com, 6/29/07, "How Buffett Bounces Back").

The stock of Buffett's company, Berkshire Hathaway (BRKA) has topped the broader market thus far in 2007. Longtime Berkshire holders are sitting on impressive gains. Berkshire's book value per share has grown at a compounded annual rate of more than 20% over the last 39 calendar years. If you had invested $10,000 in Berkshire in January, 1968 (the shares closed at $20.50 on the last trading day of that month), your holding would be worth more than $50 million today.

How does he do it? Author Robert Hagstrom tried to compile Buffett's key investing strategies in his 1994 best-seller, The Warren Buffett Way: Investment Strategies of the World's Greatest Investor. With Hagstrom's book as a source, we at S&P Quantitative Services have put together a stock screen that picks companies using criteria similar to the legendary investor's growth-oriented style. S&P updates this screen on a semiannual basis, during February and again in August.

We have been running this screen for more than 12 years. Since its inception on Feb. 13, 1995, through July 31, 2007, the screen has had an annualized return of 15.69% vs. 9.28% for the Standard & Poor's 500-stock index. Year-to-date through July 31, 2007, the Buffett screen stocks outperformed the market, returning 7.69% vs. the 2.61% gain for the S&P 500 (all results are price appreciation only).

Here's how the screen portfolio has stacked up against the S&P 500 since inception:

*—From inception Feb. 13.

^a—Through July 31.

It should be noted that these are not necessarily stocks that Buffett has bought or ever personally plans to buy. The list reflects only the criteria that Buffett has emphasized in the past.