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Warren Buffett, chairman of Berkshire Hathaway, speaks on the sale of the Omaha World-Herald company to Berkshire Hathaway Wednesday Nov. 30, 2011 in Omaha Neb. (JEFF BUNDY/The Associated Press)
Warren Buffett, chairman of Berkshire Hathaway, speaks on the sale of the Omaha World-Herald company to Berkshire Hathaway Wednesday Nov. 30, 2011 in Omaha Neb. (JEFF BUNDY/The Associated Press)

Invest like Buffett: Learn not to tinker, and other guru-inspired tips Add to ...

John Reese is CEO of Validea.com and Validea Capital, and portfolio manager for the National Bank Consensus funds. Globe Investor has a distribution agreement with Validea.ca, a premium Canadian stock screen service. Try it.

And the winner is ...?

In early August, my Validea Canada Guru Portfolios – inspired by such great investors as Warren Buffett, Peter Lynch, Martin Zweig and Benjamin Graham – hit their four-year anniversaries.

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The leader of the pack thus far: my Warren Buffett-inspired portfolio, which is up 17.1 per cent annualized versus 7 per cent for the S&P/TSX composite. Not far behind have been the Momentum Investor portfolio (not based on a guru), up 16.4 per cent annualized, and the Benjamin Graham-inspired portfolio (based on the writings of Mr. Buffett’s mentor), up 15.4 per cent annualized.

On a broad level, the Canadian portfolios’ collective performance has been quite similar to that of the U.S. portfolios I’ve been tracking since 2003. Since their inception, the 12 individual guru Canadian portfolios (those that pick stocks using a single guru’s approach) have, on average, gained 9.1 per cent annualized compared with 7 per cent for the S&P/TSX. The 12 U.S. counterparts have averaged 9.9-per-cent annualized gains compared with 6.4 per cent for the S&P 500 since their inceptions, which range from 2003 to 2005.

A closer look reveals some interesting differences between the U.S. and Canadian portfolios, though. For one thing, the Canadian Buffett-based portfolio has had a big leg up on its American counterpart. While my Buffett-based U.S. portfolio has outpaced the S&P 500, it’s done so by a much more modest margin since its late-2003 inception (7.6 per cent to 6 per cent) than the Canadian Buffett portfolio has. My U.S. Momentum Investor portfolio, meanwhile, has been in the middle of the pack over the long term, though its strong performance since the start of 2011 (up about 119 per cent) indicates that both the U.S. and Canadian markets have been good arenas for momentum plays over the past few years.

The Canadian market has been more fertile ground for contrarian strategies, if my models are any indication. My David Dreman-inspired contrarian model has returned 13.6 per cent annually in Canada since inception (including about 34 per cent in 2014), while my Joseph Piotroski-based model – another bottom-feeder – has had far more success north of the border over the past few years as well. (Mr. Dreman is founder of Dreman Value Management; accounting guru Prof. Piotroski is currently at the Stanford University Graduate School of Business.)

The different performances of some portfolios in the U.S. and Canada are likely due to a mixture of differing market conditions and simple chance – these are all 10-stock portfolios, so any one portfolio can have a fair amount of stock-specific anomalies affecting it.

But looked at collectively, I think the long term results demonstrate that following the strategies of investing greats, like Warren Buffett and Peter Lynch, in a disciplined, systematic fashion can give you a leg up in whatever market you’re dealing with. There are some crucial points to keep in mind if you’re using such models, though. A few of the most important:

Use proven models – and don’t tinker

Just because a strategy appears to make sense doesn’t mean it will work in practice. Stick to strategies that have proven track records of success, and don’t tinker with them by adding your own variables or vetoing some of their scarier-seeming picks. While sticking with historically successful models is no guarantee of future success, I think it stacks the odds in your favour.

Buy and sell at regular intervals

Emotion is the great enemy of the investor, and it leads to a number of behavioural biases that affect buy and sell decisions – investors hold on to losers too long because they don’t want to lock in a loss; sell winners that are still attractive because it feels like they’ve had their run and are due to fall; ditch good stocks when bad short-term news hits and end up selling low. Buying and selling only at regular intervals helps keep emotion at bay.

Stick with it

Every strategy – even those developed by wildly successful investors – goes through down periods. If you ditch a good approach when short-term declines occur, you’ll end up selling low and miss out on the bargains that are created by the declines.

It might seem like successful investing requires some sort of sixth sense or God-given ability. But remember what Mr. Buffett has said: “Success in investing doesn’t correlate with IQ once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble.”

Stick to the numbers, use a disciplined system, and think long term, and you stand a good chance of staying out of trouble and succeeding where so many others fail.

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