), is down about 1%, compared to an 11.7% gain for the Standard & Poor's 500-stock index.
A hedge-fund manager might lose sleep (and worry about his job) for underperforming the 500 in the short term -- especially amid a strong advance for the market benchmark. But Buffett, perhaps the ultimate buy-and-hold investor, has always taken the long view -- buying quality stocks with good earnings power and hanging on through bull and bear markets.
And the long view has looked pretty good to Berkshire shareholders. During the last few decades, Buffett has parlayed some well-chosen core holdings into an unparalleled performance record (not to mention an enormous personal fortune). Berkshire's book value per share has grown at a compounded annual rate of more than 20% over the last 37 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 $35 million today.
BY THE BOOK. While an individual investor would face some pretty long odds in duplicating the Sage of Omaha's track record, his approach is well worth studying. Robert Hagstrom's 1994 best-seller, The Warren Buffett Way: Investment Strategies of the World's Greatest Investor, sought to enumerate Buffett's investing criteria.
With Hagstrom's book as a source, we at Standard & Poor's have put together a stock screen that picks companies using criteria similar to those that fit Buffett's growth-oriented style (like BusinessWeek and BusinessWeek Online, Standard & Poor's is a division of The McGraw-Hill Companies). S&P updates this screen on a semiannual basis: during February and again in August.
Over the years, the screen has put in a pretty good performance itself. Since its inception on February 13, 1995, through July 31, 2003, it had an average annual return of 16.8%, vs. 8.9% for the S&P 500. (All performance figures are before dividends and transaction costs.)
Here's how the screen portfolio has stacked up against the 500 since inception:
*From inception Feb. 13.
Many of the stocks from the last update, in February, are still on hand in this edition. The screen continues to feature quite a few health-care and financial shares, as companies in these sectors typically feature high margins and high return on equity -- key criteria for Buffett. A number of technology stocks are on the list as well.
And now for our disclaimer. It should be noted that these are not necessarily stocks that Buffett has bought or ever personally plans to buy. For example, the screen doesn't remove tech stocks, although Buffett tends to avoid such issues (his mid-2002 investment in Level 3 Communications being a notable exception). The list reflects only the criteria that Buffett has emphasized in the past.
The full criteria for this screen:
1. Owner earnings (
cash flow less
capital expenditures) above $20 million
Net margins of at least 15% for the trailing 12 months
Return on equity of at least 15% the previous quarter and in every year for the last three years
Retained earnings that have grown less than the
market capitalization, on an absolute basis, in the last five years
5. Looking five years into the future, projected cash flow per share greater than the current market price for each stock (discounted to the present using the 30-year Treasury yield)
6. Market capitalization of $500 million or more
The current version of the screen uncovered 30 stocks:
Promising Growth Stock portfolio -- August, 2003
Apollo Group (APOL
Barr Laboratories (BRL
Block (H&R) (HRB
Brown & Brown (BRO
Check Point Software (CHKP
Doral Financial (DRL
Eaton Vance (EV
FactSet Research (FDS
Federated Investors (FII
First Data (FDC
First Health Group (FHCC
Forest Labs (FRX
International Game Technology (IGT
Johnson & Johnson (JNJ
Lincare Holdings (LNCR
Occidental Petroleum (OXY
Patina Oil & Gas (POG
Price (T. Rowe) (TROW
Renaissance Learning (RLRN
RenaissanceRe Holdings (RNR
SEI Investments (SEIC
SLM Corp. (SLM
Waters Corp. (WAT
Braverman is senior investment officer for Standard & Poor'sS&P analyst Numer de Guia contributed to this article