Investing by copying Warren Buffett's style

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Need someone to help you pick stocks? Warren Buffett's available.

Owning shares of Berkshire Hathaway is almost like being an investor in a mutual fund run by Mr. Buffett. Berkshire's B-class shares trade under the symbol BRK.B on the New York Stock Exchange and they traded in the $3,400 (U.S.) as the final leg of 2009 approached.

But let's remember that Mr. Buffett is the chief executive officer of his own personal holding company, not a manager of other people's money. His investing decisions are strategic and designed for long-term advantage, rather than the short-term performance considerations that guide so many mutual funds. But what if Mr. Buffett was more accessible to the everyday investor? What if we could translate his stock-picking criteria into something that could be used to screen North American stocks? That way, we could draw up a list of Buffett-approved stocks. Stocks he might buy, in other words.

In fact, it's possible to choose stocks the Buffett way through a U.S. website called Validea.com. Validea has distilled the stock-picking techniques of a number of what it calls "guru" investors into screens that it applies on U.S.-listed stocks, including cross-listed Canadian companies. Validea includes Mr. Buffett in its list of gurus, and it agreed to share its list of stocks that might appeal to him.

Validea calls Mr. Buffett "the patient investor," and notes that he has never actually disclosed his stock-picking theories in written form. As a result, Validea has had to approximate his strategy based on the book Buffettology, written by is former daughter-in-law. Some key points:

Mr. Buffett's long-term approach can be seen in the fact that he has held some of his investments for decades, and that he has been quoted as saying Berkshire's favourite holding period is "forever."

Mr. Buffett doesn't try to capitalize on small day-to-day stock market movements.

Mr. Buffett focuses on a company's business operations in the belief that firms with strong franchises and good long-term prospects are likely to have shares that rise considerably over time.

To provide a long-term perspective on a company, Validea says its Buffett screening process goes as far back as a decade into a company's history. The criteria included in Validea's screening include the predictability of earnings, debt levels, return on equity (how well the company deploys money put up by investors), free cash flow (how much a company has left over after paying what it owes and needs to sustain its business) and the use of share repurchases (buying back shares, which can help boost the share price). Since the Buffett model portfolio was set up almost six years ago, the annualized return has been 2.7 per cent in U.S. dollar terms. Modest, yes, but much better than the 0.7-per-cent return of the S&P 500.

The one NYSE-listed Canadian stock that makes Validea's Buffett list is Imperial Oil , which earns a "pass" grade on every selection criteria. Several other stocks on the list are ones that Buffett already owns. They include Coca Cola Co. , the world's largest beverage company; Becton Dickinson & Co. , a manufacturer of medical supplies; Johnson & Johnson , a producer of health care and medical products; and Wal-Mart , the world's largest retailer. Other well-known stocks on the Validea list include General Dynamics , 3M Co. and Equifax . For a complete list of Validea's Buffett-approved stocks, see the chart at the end of this story.

For more Buffett buying ideas, check out Berkshire Hathaway's quarterly disclosures to U.S. regulators. At the end of September, Berkshire's holdings included Exxon-Mobil , Republic Services , Travelers Cos. , Wells Fargo , American Express and Eaton Corp. . Mr. Buffett's quarterly investment decisions are well documented in the financial press, so it's easy to keep track of what he's doing. Lots of investors scrutinize these choices for ideas on what stocks to buy.

Validea's Buffett-Approved Stocks