What Happened To Warren Buffett’s Top 10 Holdings Of 2006?

Summary:

Of Warren Buffett’s Top 10 holdings at the end of 2006, he currently still holds 6 (KO, AXP, WFC, MCO, JNJ, & Wesco Financial). He did not reduce his position in just 4 of the Top 10 (KO, AXP, WFC, and Wesco Financial).

Warren Buffett is a long-term investor, but only in a select few businesses. Otherwise, he tends to buy and sell like everyone else. It is interesting to note that many of his transactions are swaps and do not trigger tax payments. Examples include his Gillette for Procter & Gamble swap, the Procter & Gamble for Duracell swap, and the Graham Holdings Company for a major TV station swap.

A few notable mistakes also stand out. Selling a sizable chunk of Moody’s at the end of 2010 was not a good move. The partial sale of Anheuser-Busch just before a new buyout offer was puzzling as well. I expected Warren Buffett to have more ‘insider knowledge’ – especially in the Anheuser Busch deal – than he has demonstrated over the last decade. Warren Buffett is known to buy excellent stocks. His sell timing does not appear to be nearly as remarkable as his buy timing.

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Full article:


Warren Buffett has a reputation as a buy and hold investor. One of his most well known quotes is:“My Favorite Holding Period is Forever”

In practice, Warren Buffett does not always hold forever. This article shows what happened to the top 10 stock positions in Berkshire Hathaway’s (BRK-A, BRK-B) portfolio at the end of 2006. Warren Buffett has held fewer stocks than you may think for the long run. Berkshire Hathaway’s top 10 stocks in the 4th quarter of 2006 were:

1. Coca-Cola (KO)
2. American Express (AXP)
3. Wells Fargo (WFC)
4. Procter & Gamble (PG)
5. Moody’s (MCO)
6. Wesco Financial
7. Anheuser-Busch (BUD)
8. Johnson & Johnson (JNJ)
9. ConocoPhillips (COP)
10. Graham Holdings Company (GHC)

10. Graham Holding Company

Graham Holdings Company is better known by its previous name, The Washington Post. The company changed its name in 2013 when Jeff Bezos purchased The Washington Post paper for $250 million. The Graham Holdings Company owns Slate, education publisher Kaplan, several large market television stations, and internet service provider Cable One.

Warren Buffett has a long history with the Washington Post. He started purchasing shares in 1973. Warren Buffett held the stock over 40 years before finally exiting in 2014, after the paper was purchased by Jeff Bezos of Amazon (AMZN). Warren Buffett did not outright sell his shares, but instead exchanged them for WPLG, Miami’s ABC affiliated television station. In addition, Berkshire Hathaway received shares of itself that were owned by Graham Holdings Company, as well as cash.

9.  ConocoPhillips

Warren Buffett recently sold Berkshire Hathaway’s ConocoPhillips stock completely. By the end of 2006, ConocoPhillips was Berkshire Hathaway’s 9th largest holding. Buffett continued to add shares as oil prices soared in 2007 and 2008. Warren Buffett purchased ConocoPhillips during the idea of ‘peak oil’.

Now, Warren Buffett has completely exited his position in ConocoPhillips (as well as his position in ExxonMobil, XOM) just as oil prices have fallen precipitously. Warren Buffett is obviously a fantastic investor; perhaps the greatest of all time. He is still fallible, however. Buying oil stocks during high oil prices, and selling during low oil price is not sound investing. I believe Warren Buffett’s poor timing in his ConocoPhillips and ExxonMobil trades could go down as one of the worst in his investment career. Only time will tell. In total, Warren Buffett held ConocoPhillips under 10 years.

8.  Johnson & Johnson

Johnson & Johnson first appeared as one of Berkshire Hathaway’s top holdings in 2006. Warren Buffett has slowly sold off stock in Johnson & Johnson. He sold off shares during the Great Recession in 2008 and 2009 to fund other purchases.   He purchased shares in 2010, then has continued selling in 2012, 2013, and 2014. It is interesting to see Warren Buffett add to and reduce his stake in Johnson & Johnson.

Johnson & Johnson stock was relatively flat from 2006 until 2012. From 2012 to now, the stock price has grown from $65 per share to $100 per share. Warren Buffett appears to be reducing his stake in the company as the share price rises.

7.  Anheuser-Busch

Warren Buffett was squeezed out of his Anheuser-Busch position in 2008 as the company was acquired by InBev. Interestingly, Warren Buffett sold prematurely. He exited about half of his position on rumors of a takeover. The rumored acquisition price was $65 per share. Warren Buffett sold over half of his holdings between $61 and $62 a share. Shortly after, InBev acquired Anheuser-Bush for $70 a share.

6.  Wesco Financial

In 2011, Berkshire Hathaway acquired 100% of Wesco Financial. The company had owned about 80% of Wesco for over 30 years before completing the final purchase of the company. Wesco Financial is an example of a ‘forever’ Warren Buffett stock.

5.  Moody’s

Berkshire Hathaway first acquired Moody’s in 2001. Berkshire Hathaway built up a 20% stake in the company. Moody’s operates in the oligopolistic ratings market, along with Standard & Poor’s rating service and Fitch rating services.

Warren Buffett reduced his holdings from 20% of the company down to 12% in 2010. The timing could not have been worse. From the end of 2010 to now, Moody’s stock has more than tripled. In addition, the company has paid dividends through that time as well. Warren Buffett continued to trim his Moody’s position in 2013.

4.  Procter & Gamble

Warren Buffett did not directly buy shares in Procter & Gamble. He purchased shares of Gillette in 1989. In 2005, Gillette was acquired by Procter & Gamble. In the process, Warren Buffett acquired about 100 million shares of Procter & Gamble. He reduced his holdings by about 50% in 2009 in Procter & Gamble to free up cash for other investments.

At the end of 2014, Warren Buffett decided to exchange his shares of Procter & Gamble for the company’s Duracell division. In the move, Procter & Gamble ‘recapitalized’ Duracell with over $1 billion in cash.

The Top 3:
Wells Fargo, American Express, & Coca-Cola

Warren Buffett first purchased American Express in 1964. He has now held the stock for over 50 years. If that is not a long-term investment, I don’t know what is.

Warren Buffett first invested in Coca-Cola in 1988. He has continued to hold and invest in the soda company over the last 26 years.

Wells Fargo shares were first purchased by Warren Buffett in 1989. Since then, he has continued to load up on the bank as it has expanded across the U.S.

These 3 investments currently make up Berkshire Hathaway’s core holdings. Together, American Express, Wells Fargo, and Coca-Cola account for over 50% of his portfolio. His other large holding is IBM (11%+ of total portfolio), which was purchased more recently, during the Great Recession.

Final Thoughts

Of Warren Buffett’s Top 10 holdings at the end of 2006, he currently still holds 6 (KO, AXP, WFC, MCO, JNJ, & Wesco Financial). He did not reduce his position in just 4 of the Top 10 (KO, AXP, WFC, and Wesco Financial).

Warren Buffett is a long-term investor, but only in a select few businesses. Otherwise, he tends to buy and sell like everyone else. It is interesting to note that many of his transactions are swaps and do not trigger tax payments. Examples include his Gillette for Procter & Gamble swap, the Procter & Gamble for Duracell swap, and the Graham Holdings Company for a major TV station swap.

A few notable mistakes also stand out. Selling a sizable chunk of Moody’s at the end of 2010 was not a good move. The partial sale of Anheuser-Busch just before a new buyout offer was puzzling as well. I expected Warren Buffett to have more ‘insider knowledge’ – especially in the Anheuser Busch deal – than he has demonstrated over the last decade. Warren Buffett is known to buy excellent stocks. His sell timing does not appear to be nearly as remarkable as his buy timing.

By Ben Reynolds of Sure Dividend

  Saturday, February 21, 2015 

http://www.talkmarkets.com/content/stocks--equities/what-happened-to-warren-buffetts-top-10-holdings-of-2006?post=59343

Is buy and hold dead? Jason Zweig shares his unique perspective, concluding that one should look at it differently.

The Wall Street Journal's Jason Zweig shares his unique perspective on buy and hold investing, concluding that one should look at it differently. 


Is buy and hold dead?
I don't think it is right. 
That is exactly what people say right before buy and hold comes back to life.  
Nobody says that when the Dow was over 14,000 when buy and holding was a dangerous idea.
They only started saying this when the Dow was nearer 8,000. 
But it is cheap now and it is inconceivable that buy and hold is a bad idea at Dow 8,000 than at Dow 14,000.


What about the idea of the market being in a long term bear market that could go on for years, like from 1966 to 1982?
Anytime you buy, it is going to take you years to get back to where you were and people should invest more actively.
We may enter at a protracted period when the returns from the market are below average, that doesn't mean that more active trading in and out of stocks are going to increase your returns. 
Though the trading costs are lower now than before, the costs are still real. 
If you can buy and hold through a protracted period of low returns, the flip side to this is, you are buying at lower market valuation than before. 
People who bought and held from 1966 to 1982, or from 1929 to 1940s and 1950s, did quite well.
It was the people who only held who suffered. 
If you are going to retire, you had a big problem. 
But if you are younger, buying and holding is a spectacular idea.


But when people said to buy and hold, they do not mean, buy once and then do not put another dime in, and wait for it to go up. 
They mean buying steadily, not trying to decide  where you think the bottom has bottomed, but keep buying at lower prices regularly.
Maybe we should not talk about investing. Instead use the term savings. 
If you think of putting money into the financial market in the form of savings, you don't expect to get your returns right away.  
You expect to get it over time and certainly that tricks people up. 
Certainly, the returns had been terrible recently and if it is going to pay off, you must give it time.

https://www.youtube.com/watch?v=Z48xR-TBL-8

Bull Markets in Calendar Days

http://money.cnn.com/2014/03/06/investing/bull-market-five-years/index.html?iid=Lead

Buy & Hold Investing? Give It Time

Uploaded on 18 Feb 2009
The Wall Street Journal's Jason Zweig shares his unique perspective on buy and hold investing, concluding that one should look at it differently.


Is buy and hold dead?
I don't think it is right.
That is exactly what people say right before buy and hold comes back to life.  
Nobody says that when the Dow was over 14,000 when buy and holding was a dangerous idea.
They only started saying this when the Dow was nearer 8,000.
But it is cheap now and it is inconceivable that buy and hold is a bad idea at Dow 8,000 than at Dow 14,000.

What about the idea of the market being in a long term bear market that could go on for years, like from 1966 to 1982?
Anytime you buy, it is going to take you years to get back to where you were and people should invest more actively.
We may enter at a protracted period when the returns from the market are below average, that doesn't mean that more active trading in and out of stocks are going to increase your returns.
Though the trading costs are lower now than before, the costs are still real.
If you can buy and hold through a protracted period of low returns, the flip side to this is, you are buying at lower market valuation than before.
People who bought and held from 1966 to 1982, or from 1929 to 1940s and 1950s, did quite well.
It was the people who only held who suffered.
If you are going to retire, you had a big problem.
But if you are younger, buying and holding is a spectacular idea.

But when people said to buy and hold, they do not mean, buy once and then do not put another dime in, and wait for it to go up.
They mean buying steadily, not trying to decide  where you think the bottom has bottomed, but keep buying at lower prices regularly.
Maybe we should not talk about investing.
Instead use the term savings.
If you think of putting money into the financial market in the form of savings, you don't expect to get your returns right away.  
You expect to get it over time and certainly that tricks people up.
Certainly, the returns had been terrible recently and if it is going to pay off, you must give it time.

Buffett's Investing Wisdom - The Best Holding Period

When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. -- Warren Buffett

What do Procter & Gamble (NYSE: PG), Coca-Cola, and Wal-Mart (NYSE: WMT) have in common? If you said that all three are in Berkshire Hathaway’s portfolio, you’d be correct. If you said all three are up more than 1,000% over the past three decades, you’d also be correct. Finally, if you said that at some point during that 30-year span, each of the stocks lost more than 30% of its value in a relatively short period of time… well, you’d be correct there, too.

Although the attraction of fast riches in the stock market can have a strong pull, real investing wealth is built over decades, not months or even years. And if you’re curious what “real investing wealth” means, consider that a $10,000 investment in Wal-Mart 30 years ago would be worth roughly $600,000 today. But there were at least five periods over that stretch when Wal-Mart’s stock fell more than 20% over the course of a year. An investor with a quick trigger finger and a lack of long-term focus might have been shaken out at any one of those times and missed out on the truly great gains made possible from owning for the whole period.

If we look at the stocks in Berkshire Hathaway’s portfolio today, it’d be hard to argue that Coca-Cola is anything but a company worth owning for that “forever” timeframe. Sure, the stock isn’t particularly cheap (see the previous quote if that concerns you), and it’s faced headwinds lately in the form of a lousy European economy and a lackluster soda market in the U.S. But when you think bigger picture in the form of the company’s brand -- it was ranked the No. 1 global brand in 2012 by brand expert Interbrand -- its strong market position in its established markets, and continued growth opportunity in emerging markets, it’s obvious there’s still good reason to own Coke stock for the next year, five years from now, and 20 years from now.

When it comes to finding an outstanding business with outstanding managers, Berkshire Hathaway itself would almost certainly need to make the list of companies worth owning for forever. To be sure, Warren Buffett won’t always be the CEO of the company, but the way he’s built the business has ensured that there are many great managers running its many wholly-owned businesses. And with a highly diversified and high-quality business mix that includes everything from The Pampered Chef and Dairy Queen to GEICO and NetJets, the company has many avenues for growth the casual observer may not appreciate. If that’s not enough, consider that there’s a team of investors -- not only Warren Buffett, but his hand-selected protégés Todd Combs and Ted Weschler -- that is expertly investing in publicly-traded stocks using all of the wisdom just discussed here.


Ref:  Warren Buffett's Greatest Wisdom

Buffett's Investing Wisdom - Buy Wonderful Companies

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. – Warren Buffett

Interestingly enough, Buffett’s mentor, Benjamin Graham, was quite fond of jumping at fair companies trading at wonderful prices. Graham termed this “cigar butt” investing -- as in, he was looking for discarded cigars that still had a few good puffs left in them. In Buffett’s pre-Berkshire days, he ran with this page from Graham’s book. To be sure, Berkshire Hathaway itself looked a lot like a cigar butt when Buffett bought it -- at the time it was a bedraggled textile business that was markedly unprofitable.

Through his career, though, Buffett realized that the real money wasn’t in puffing on dirty cigar butts. Instead, the big profits in investing come from finding well-run companies that dominate their industries and hanging onto those companies for a long time. Of course, Buffett isn’t one to pay any crazy price for a stock, though, so part of the investment process is determining what a fair price is for the stock and looking for an opportunity to buy the stock at that price.

Costco (Nasdaq: COST) is a great example of a company that dominates its industry. Sure, there are other warehouse-shopping clubs out there, but in terms of quality of operations and management, none stack up. And Buffett -- and even more so his right-hand man, Charlie Munger -- are not shy about professing their admiration for the low-price giant. The problem for investors is that it’s highly unlikely we’ll see shares of Costco trade at true bargain levels unless something dramatically changes the quality and outlook for the company.

In a similar vein, Visa (NYSE: V) and MasterCard (NYSE: MA) are among a very small, very dominant group in the growing and highly profitable credit card industry. As the nature of the global payment system continues to move rapidly away from cash and toward cards and electronic payments, both of these payment-network operators stand to rake it in. Just like Costco, though, investors looking for a “blue light” special on Visa or MasterCard shares will likely find themselves with their hands in their pockets as long as the major growth and success continue.

It’s not just academic to say that investors who balk at a premium price for these companies missed out. Over the past five years, the S&P 500 is up 35%. Costco is up 93%. As for Visa and MasterCard, they’ve tacked on an amazing 162% and 127%, respectively. And investors that bought those companies five years ago weren’t buying on the cheap. In 2008, Costco fetched an average price-to-earnings multiple of 23.5, while Visa and MasterCard sported respective multiples of 53 and 45.

Today, the stocks of all three of these companies still sport higher-than-average earnings multiples. But all three are also still top-notch businesses with stellar growth and profit potential.


Ref:  Warren Buffett's Greatest Wisdom

Intrinsic value of Great Businesses: What's the business actually worth? Think long-term.

Company OPX

52 week high:  $52.99  (April 2010)  Market cap $960 million
52 week low:  $33.33 (July 2010)  Market cap $ 625 million
Variance:  35.2%


1.  Is the market really suggesting that this business was worth $960 million in April 2010, but only $625 million the following July?

2.  Yes, this is exactly what the market is suggesting.

3.  What's the business actually worth?

4.  Because it ought to be obvious that a fast-growing company cannot be worth $625 million and $960 million at roughly the same time.  

5.  Our goal as investor is to buy $960 million businesses when the market's charging $625 million.
6.  If you think these things don't happen, be assured:  They happen all the time.

7.  It is even better when we can buy a $500 million business for $300 million and watch the company grow into a $3 billion business.  

8.  It is this effect - the fact that great businesses make themselves more valuable over time - that keeps us from selling a $500 million business when its market cap increases to $600 million.

9.  After all, the $500 million valuation is based on our own analysis, and mathematically speaking, it's our single point of highest confidence in a range of values we believe the company could be worth.

10.  It might be substantially more.  

11.  If you're disciplined enough to only buy companies when they are priced at the low end of your range of potential values, your returns over time are almost guaranteed to satisfy.

12.  Holding a company when it's in the higher end of your range of values leaves you somewhat susceptible to a stock drop, given the lower margin of safety.  

13.  But if you have properly identified the company as a superior generator of wealth, the biggest mistake you might ever make is selling it because its shares are a few dollars too high.

14.  If you bough company OPX back in December 1987, for example, your shares rose 75%, from $23 to $40 in about two months.

15.  That's great return - but over the next 20 years, the stock has risen another seven times in value - tax free.

16.  Ultimately, it is nearly impossible to manage superior long-term results by focusing on short-term aims.

17.  Company OPX has evolved from a regional small cap into one of the most important retailers in the world, generating spectacular returns for shareholders in the process.

What Is Warren Buffett's Investing Style?

May 23 2011

If you want to emulate a classic value style, Warren Buffett is a great role model. Early in his career, Buffett said, "I'm 85% Benjamin Graham." Graham is the godfather of value investing and introduced the idea of intrinsic value - the underlying fair value of a stock based on its future earnings power.

But there are a few things worth noting about Buffett's interpretation of value investing that may surprise you.

1.  First, like many successful formulas, Buffett's looks simple.
2.  But simple does not mean easy.
3.  To guide him in his decisions, Buffett uses 12 investing tenets, or key considerations, which are categorized in the areas of business, management, financial measures and value (see detailed explanations below).
4.  Buffett's tenets may sound cliché and easy to understand, but they can be very difficult to execute.
5.  Second, the Buffett "way" can be viewed as a core, traditional style of investing that is open to adaptation.
6.  Even Hagstrom, who is a practicing Buffett disciple, or "Buffettologist," modified his own approach along the way to include technology stocks, a category Buffett conspicuously continues to avoid.
7.  One of the compelling aspects of Buffettology is its flexibility alongside its phenomenal success.

Business
1.  Buffett adamantly restricts himself to his "circle of competence" - businesses he can understand and analyze.
2.  As Hagstrom writes, investment success is not a matter of how much you know but rather how realistically you define what you don't know. 
3.  Buffett considers this deep understanding of the operating business to be a prerequisite for a viable forecast of future business performance.
4. After all, if you don't understand the business, how can you project performance?
5.  Buffett's business tenets each support the goal of producing a robust projection. 
6.  First, analyze the business, not the market or the economy or investor sentiment. 
7.  Next, look for a consistent operating history. 
8.  Finally, use that data to ascertain whether the business has favorable long-term prospects.

Management
1.  Buffett's three management tenets help evaluate management quality.
2.  This is perhaps the most difficult analytical task for an investor.
3.  Buffett asks, "Is management rational?" 
4.  Specifically, is management wise when it comes to reinvesting (retaining) earnings or returning profits to shareholders as dividends?
5.  This is a profound question, because most research suggests that historically, as a group and on average, management tends to be greedy and retain a bit too much (profits), as it is naturally inclined to build empires and seek scale rather than utilize cash flow in a manner that would maximize shareholder value.
6.  Another tenet examines management's honesty with shareholders.
7.  That is, does it admit mistakes? 
8.  Lastly, does management resist the institutional imperative? 
9.  This tenet seeks out management teams that resist a "lust for activity" and the lemming-like duplication of competitor strategies and tactics.
10.  It is particularly worth savoring because it requires you to draw a fine line between many parameters (for example, between blind duplication of competitor strategy and outmaneuvering a company that is first to market).

Financial Measures
1.  Buffett focuses on return on equity (ROE) rather than on earnings per share.
2.  Most finance students understand that ROE can be distorted by leverage (a debt-to-equity ratio) and therefore is theoretically inferior to some degree to the return-on-capital metric.
3.  Here, return-on-capital is more like return on assets (ROA) or return on capital employed (ROCE), where the numerator equals earnings produced for all capital providers and the denominator includes debt and equity contributed to the business.
4.  Buffett understands this, of course, but instead examines leverage separately, preferring low-leverage companies. 
5.  He also looks for high profit margins.

6.  His final two financial tenets share a theoretical foundation with EVA.
7.  First, Buffett looks at what he calls "owner's earnings," which is essentially cash flow available to shareholders, or technically, free cash flow to equity (FCFE).
8.  Buffett defines it as net income plus depreciation and amortization (for example, adding back non-cash charges) minus capital expenditures (CAPX) minus additional working capital (W/C) needs. 
9.  In summary, net income + D&A - CAPX - (change in W/C). 
10.  Purists will argue the specific adjustments, but this equation is close enough to EVA before you deduct an equity charge for shareholders.
11.  Ultimately, with owners' earnings, Buffett looks at a company's ability to generate cash for shareholders, who are the residual owners.

12.  Buffett also has a "one-dollar premise," which is based on the question:
13.  What is the market value of a dollar assigned to each dollar of retained earnings? 
14.  This measure bears a strong resemblance to market value added (MVA), the ratio of market value to invested capital.

Value
1.  Here, Buffett seeks to estimate a company's intrinsic value. 
2.  A colleague summarized this well-regarded process as "bond math." 
3.  Buffett projects the future owner's earnings, then discounts them back to the present.
4.  Keep in mind that if you've applied Buffett's other tenets, the projection of future earnings is, by definition, easier to do, because consistent historical earnings are easier to forecast.

5.  Buffett also coined the term "moat," which has subsequently resurfaced in Morningstar's successful habit of favoring companies with a "wide economic moat."
6.  The moat is the "something that gives a company a clear advantage over others and protects it against incursions from the competition."
7.  In a bit of theoretical heresy perhaps available only to Buffett himself, he discounts projected earnings at the risk-free rate, claiming that the "margin of safety" in carefully applying his other tenets presupposes the minimization, if not the virtual elimination, of risk.

The Bottom Line
1.  In essence, Buffett's tenets constitute a foundation in value investing, which may be open to adaptation and reinterpretation going forward.
2.  It is an open question as to the extent to which these tenets require modification in light of a future where consistent operating histories are harder to find, intangibles play a greater role in franchise value and the blurring of industries' boundaries makes deep business analysis more difficult.

http://www.investopedia.com/articles/05/012705.asp

Berkshire Hathaway's Acquisition Criteria: Telling it like it is.

Berkshire Hathaway's Acquisition Criteria: Telling it like it is

Take a look at the following set of "acquisition criteria," straight from the 2006 Berkshire Hathaway Annual report. Straight, clear, to the point - and never before have we seen anything like this - including the commentary - in a shareholder report.

ACQUISITION CRITERIA

We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:

1. Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units).
2. Demonstrated consistent earning power (future projections are of no interest to us, nor are "turnaround" situations).
3. Businesses earning good returns on equity while employing little or no debt.
4. Management in place (we can't supply it).
5. Simple businesses (if there's lots of technology, we won't understand it).
6. An offering price (we don't want to waste our time or that of the seller by talking, even preliminary, about a transaction when price is unknown).

The larger the company, the greater will be our interest. We would like to make an acquisition in the $5-20 billion range. We are not interested, however, in receiving suggestions about purchases we may make in the general stock market.

We will not engage in unfriendly takeovers. We can promise complete confidentiality and a very fast answer - customarily within five minutes - as to whether we're interested. We prefer to buy for cash, but will consider issuing stock when we receive as much in intrinsic business value as we give. We don't participate in auctions.

Warren Buffett's Bear Market Maneuvers

In times of economic decline, many investors ask themselves, "What strategies does the Oracle of Omaha employ to keep Berkshire Hathaway on target?" The answer is that the esteemed Warren Buffett, the most successful known investor of all time, rarely changes his long-term value investment strategy and regards down markets as an opportunity to buy good companies at reasonable prices. In this article, we will cover the Buffett investment philosophy and stock-selection criteria with specific emphasis on their application in a down market and a slowing economy. (For more on Warren Buffett and his current holdings, sign up for our Coattail Investor newsletter.)

The Buffett Investment PhilosophyBuffett has a set of definitive assumptions about what constitutes a "good investment". These focus on the quality of the business rather than the short-term or near-future share price or market moves. He takes a long-term, large scale, business value-based investment approach that concentrates on good fundamentals and intrinsic business value, rather than the share price. (For further reading, see Warren Buffett: The Road To Riches and What Is Warren Buffett's Investing Style?)

Buffett looks for businesses with "a durable competitive advantage." What he means by this is that the company has a market position, market share, branding or other long-lasting edge over its competitors that either prevents easy access by competitors or controls a scarce raw-material source. (For more insight, see Competitive Advantage Counts, 3 Secrets Of Successful Companiesand Economic Moats Keep Competitors At Bay.)

Buffett employs a selective contrarian investment strategy: using his investment criteria to identify and select good companies, he can then make large investments (millions of shares) when the market and the share price are depressed and when other investors may be selling.

In addition, he assumes the following points to be true:

• The global economy is complex and unpredictable.
• The economy and the stock market do not move in sync.
• The market discount mechanism moves instantly to incorporate news into the share price.
• The returns of long-term equities cannot be matched anywhere else.

Buffett Investment ActivityBerkshire Hathaway investment industries over the years have included:

• Insurance 
• Soft drinks 
• Private jet aircraft
• Chocolates 
• Shoes
• Jewelry 
• Publishing
• Furniture 
• Steel
• Energy 
• Home building

The industries listed above vary widely, so what are the common criteria used to separate the good investments from the bad?

Buffett Investment Criteria

Berkshire Hathaway relies on an extensive research-and-analysis team that goes through reams of data to guide their investment decisions. While all the details of the specific techniques used are not made public, the following 10 requirements are all common among Berkshire Hathaway investments:

1. The candidate company has to be in a good and growing economy or industry.
2. It must enjoy a consumer monopoly or have a loyalty-commanding brand.
3. It cannot be vulnerable to competition from anyone with abundant resources.
4. Its earnings have to be on an upward trend with good and consistent profit margins.
5. The company must enjoy a low debt/equity ratio or a high earnings/debt ratio.
6. It must have high and consistent returns on invested capital.
7. The company must have a history of retaining earnings for growth.
8. It cannot have high maintenance costs of operations, high capital expenditure or investment cash flow.
9. The company must demonstrate a history of reinvesting earnings in good business opportunities, and its management needs a good track record of profiting from these investments.
10. The company must be free to adjust prices for inflation.

The Buffett Investment StrategyBuffett makes concentrated purchases. In a downturn, he buys millions of shares of solid businesses at reasonable prices. Buffett does not buy tech shares because he doesn't understand their business or industry; during the dotcom boom, he avoided investing in tech companies because he felt they hadn't been around long enough to provide sufficient performance history for his purposes.

And even in a bear market, although Buffett had billions of dollars in cash to make investments, in his 2009 letter to Berkshire Hathaway shareholders, he declared that cash held beyond the bottom would be eroded by inflation in the recovery.

Buffett deals only with large companies because he needs to make massive investments to garner the returns required to post excellent results for the huge size to which his company, Berkshire Hathaway, has grown. (To learn about the disadvantage of being confined to blue chip stocks, readWhy Warren Buffett Envies You.)

Buffett's selective contrarian style in a bear market includes making some large investments in blue chip stocks when their stock price is very low. And Buffett might get an even better deal than the average investor: His ability to supply billions of dollars in cash infusion investments earns him special conditions and opportunities not available to others. His investments often are in a class of secured stock with its dividends assured and future stock warrants available at below-market prices.

ConclusionBuffett's strategy for coping with a down market is to approach it as an opportunity to buy good companies at reasonable prices. Buffett has developed an investment model that has worked for him and the Berkshire Hathaway shareholders over a long period of time. His investment strategy is long term and selective, incorporating a stringent set of requirements prior to an investment decision being made. Buffett also benefits from a huge cash "war chest" that can be used to buy millions of shares at a time, providing an ever-ready opportunity to earn huge returns.

For further reading, see Think Like Warren Buffett and Warren Buffett's Best Buys.

July 12 2009

http://www.investopedia.com/articles/stocks/09/buffett-bear-market-strategies.asp?utm_source=coattail-buffett&utm_medium=Email&utm_campaign=WBW-6/12/2013-b

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WARREN BUFFETT- DON'T MAKE THIS TERRIBLE MISTAKE

Buy and Hold: Still Alive and Well

By Morgan Housel
August 7, 2012

Meet Bill. He invested $10,000 in an S&P 500 (INDEX: ^GSPC  ) index fund 10 years ago and checked his account balance for the first time yesterday morning. He's elated to see his investment is now worth $19,590 after all dividends were reinvested.

Bill knows a thing or two about market history. He knows that, historically, he earned a good return -- 7% a year, or close to average. He remembers that during that decade we endured two wars, a housing bubble, a collapse of the financial system, the worst recession since the Great Depression, 10% unemployment, a near shutdown of the government, a downgrade of U.S. debt, and Justin Bieber. Through it all, he managed to nearly double his money without lifting a finger.

"Buy and hold works wonders," he thinks to himself.

But then he starts reading market news. Almost without exception, he finds that commentators have declared buy and hold dead, using the last decade as proof.

Buy and Hold Is Dead (Again) is the title of one popular book. "Holding an index or mutual fund for decades will not work for today's investor as spikes in volatility and risk can quickly wipe out any gains," one article warns.

"The only way to make money in the equity market is to be nimble, and that means adopting a strategy that is not buy and hold," he reads. "Buy & hold is a relic of a bygone era when the economy was stable and consistent growth was the norm," another analyst laments.

"What are these people talking about?" Bill wonders. He spent the decade visiting his kids, taking trips to the beach, reading good books, and enjoying life -- and managed to double his money all the while. These professionals, it seems, spent the decade poring over financial news, trading obsessively, stressing themselves relentlessly, and they're bitter about the market.

Bill knows why they're bitter. They didn't double their money. They likely lost money. Most traders do -- a fact he's well aware of. The only people who think buy and hold is dead, he realizes, are those frustrated with their inability to follow it.  

Bill is fictitious, but the numbers and analyst quotes here are real.

Going back to the late 19th century, the average subsequent 10-year market return from any given month is about 9% a year (including dividends). If you rank the periods, the time from August 2002 to August 2012 sits near the middle of the pack. What we've experienced over the last decade has been pretty normal, in other words. This goes against the thousands of colorful buy-and-hold eulogies written in the last few years, but it has the added benefit of being accurate.

And even it understates reality. The S&P 500 is weighted toward the market cap of its components, a quirk that skewed it toward some of the most overvalued companies in the last decade. An equal-weight index -- one that holds every company in equal amounts and provides a better view of how companies actually performed -- returned more than 140% during the decade.

Why have so many declared buy and hold dead? I think it's all about two points.

First, if Bill started investing just two years earlier, his returns through today would be dismal. 2000 was the peak of the dot-com bubble; 2002 was the depth of its aftershock recession. Bill started investing when stocks were cheap, setting him up for good returns today. The majority of today's investors, who likely began investing during the insane late '90s, have fared far worse.

But that doesn't prove buy and hold is dead. It just proves that the deluded interpretation of it -- that you can buy stocks any time at any price and still do well -- is wrong. But it was always wrong. It just became easy to forget during the '90s bubble. For as long as people have been investing it's been true that if you pay too much for an asset, you won't do well in the long run. If you buy the S&P 500 at 30 or 40 times earnings, as people did in the late '90s, you're going to fail. If you do like Bill and wait until it's closer to its historic average of 15-20 times earnings (or even better, lower), you'll do all right. Nothing about the last decade has changed that. The '90s, not the 2000s, were the fluke.

Second, most people know that buy and hold means holding for a long time, like 10 or even 20 years ("Our favorite holding period is forever," says Warren Buffett.) But, in an odd mental twist, they use volatility measured in months or even weeks to reason that it doesn't work.

The market suffered all kinds of schizophrenic turns over the last decade. Since 2002, there have been 401 days of the Dow Jones (INDEX: ^DJI  ) rising or falling more than 1.5%, and 83 days of it going up or down more than 3%. These can be emotionally devastating for investors following daily market news, watching their wealth surge and crash before their eyes.

But Bill didn't even know about them. He was too busy enjoying his sanity at the beach. He knew he was investing for the long haul, and that he bought at a decent price. Why should he care what stocks do on a daily, monthly, or even yearly basis? While others tumbled through manias and panics, Bill's blissful ignorance was one of his greatest advantages -- as it is for most buy-and-hold investors.

Naysayers of buy-and-hold investing lose track of this to an almost comical degree. The "flash crash" of 2010 sent stocks plunging for 18 minutes before rebounding. Last week'ssnafu by market-maker Knight Capital caused a handful of companies to log some funny quotes for half an hour. These events should be utterly meaningless to long-term investors. Yet the number citing them as proof that buy and hold no longer works is astounding.

Jason Zweig of The Wall Street Journal quoted an investor last week dismayed with the Knight Capital fiasco. "You could buy and hold a company for 15 years and then have everything you've built up disappear in five minutes," he said. The same fear was echoed two years earlier during the Flash Crash.

Folks, accept some frank advice: If you measure your portfolio in five-minute intervals, you shouldn't be investing. If you think business value is "lost" by a few misquoted trades, you shouldn't be investing. Value is created when a business earns profit, allocates it wisely to its owners, and compounds year after year. An errant stock trade doesn't make a company less valuable any more than misplacing your birth certificate for 18 minutes makes you less alive.

"There's no such thing as a widows-and-orphans stock anymore," Zweig's investor complains.

Sure there is. Ask Bill.

http://www.fool.com/investing/general/2012/08/07/buy-and-hold-still-alive-and-well.aspx

Also read:

*****Long term investing based on Buy and Hold works for Selected Stocks

http://myinvestingnotes.blogspot.com/2010/03/long-term-investing-based-on-buy-and_08.html

Buy and hold until fundamentals change is safe for selected stocks.

http://myinvestingnotes.blogspot.com/2010/06/buy-and-hold-until-fundamentals-change.html

The Death Of Buy & Hold Strategy

http://malaysiafinance.blogspot.com/2012/08/the-death-of-buy-hold-strategy.html