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Number Cruncher

Checking in on Buffett-inspired portfolio Add to ...

What are we looking for?

Back in August, we created a hypothetical $100,000 portfolio of Canadian stocks using a screen that emulates the strategy of Warren Buffett. Let’s check in to see how the portfolio is doing.

The screen

Validea Canada’s “Patient Investor” screen is based on the book Buffettology, written by Mr. Buffett’s former daughter-in-law, Mary Buffett.

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The screen “is the only one of our strategies that is not taken directly from the writings of the guru himself, as Buffett has yet to write about his investment strategies” in detail, Validea says.

Globe Investor has a joint venture with Validea.ca, a premium Canadian stock screen service.

The Buffett methodology

Mr. Buffett aims to buy solid businesses at “fair” prices and often holds stocks for decades, Coca-Cola and American Express being two examples. He summed up his investing philosophy in his 1996 letter to Berkshire shareholders: “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, 10 and 20 years from now.

“Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

The results

The 10 stocks in the table are those that scored highest, as of Aug. 24, 2011, based on the book’s interpretation of Mr. Buffett’s strategy. One stock that stands out is Sino-Forest Corp., which was suspended from trading a day after we ran the screen. This underlines a key drawback of stock screens: They’re good at crunching numbers, but terrible at picking up nuances such as allegations of fraud swirling around the company.

That said, we’ve left Sino-Forest on the list so as not to distort the results. If and when the stock starts trading again, we fully expect the price to plunge.

As for the other companies, when we ran the screen most of the stocks had a price-to-earnings ratio of less than 20, which is consistent with Mr. Buffett’s desire not to overpay for a stock. Also in keeping with his methodology, most have a history of consistent earnings growth. (Validea’s “long-term EPS growth” number is actually an average of the three-, four- and five-year annualized growth rates, to smooth out the effects of one exceptionally good or bad year.) From inception on Aug. 24 through Jan. 17, the portfolio is up 3.1 per cent, excluding dividends. Over the same period the S&P/TSX composite index is down 0.9 per cent.

Follow on Twitter: @johnheinzl

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