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Tapping the stock-picking wisdom of Warren Buffett and Peter Lynch

Warren Buffett sings with University of Nebraska cheerleaders during the Berkshire Hathaway annual shareholders meeting in Omaha, in this May 5, 2012, file photo.

LANE HICKENBOTTOM/REUTERS

What are we looking for?

In January, we ran a screen combining the stock-picking methods of investing legends Warren Buffett and Peter Lynch. Our theory was that two heads – especially these two heads – would be better than one.

Let's check in on the portfolio to see whether we were right.

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The screen

We used the "guru stock screener" from Validea Canada. (Globe Investor has a joint venture with Validea.ca, a premium Canadian stock screen service.)

Specifically, we searched for stocks that met the criteria of both the "P/E Growth Investor" screen, which is based on Mr. Lynch's methodology, and the "Patient Investor" screen, which seeks to emulate the stock-picking prowess of Mr. Buffett.

The methodology

The P/E Growth Investor screen uses the PEG ratio, among other criteria, to choose stocks.

The PEG, which Mr. Lynch used when he was managing Fidelity's Magellan Fund until his retirement in 1990, takes the P/E ratio and divides it by the earnings growth rate. Generally, the lower the PEG, the more attractive the stock is from a valuation standpoint.

Mr. Buffett looks for stocks with solid earnings growth and low P/E ratios, among other criteria.

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Using the results of the screen, we set up a hypothetical $90,000 portfolio with equal $10,000 investments in each of the nine stocks.

The results

From the inception date on Jan. 18 through Oct. 2, seven of the nine stocks rose, led by a 48.5-per-cent gain in Alimentation Couche-Tard.

Over all, the portfolio posted an advance of 11.6 per cent, excluding dividends.

That crushed the S&P/TSX composite index, which rose about 0.5 per cent, excluding dividends, over the same period. We'll check back again in a few months to see how the portfolio is faring.

Remember that a stock screen is just a first step in the investing process. Be sure to research individual companies thoroughly before you invest.

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About the Author
Investment Reporter and Columnist

John Heinzl has been writing about business and investing since 1990. A native of Hamilton, he earned a master's degree from the University of Western Ontario's Graduate School of Journalism and completed the Canadian Securities Course with honours. More

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