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WHAT ARE WE LOOKING FOR?

"Right now, what would be your best investment pick?"

The question, put to me yesterday by a 13-year-old kid on a school tour, was a delicate one indeed. I offered him some vague thoughts on strategy and asset classes, but he wasn't going to be satisfied with that. This kid wanted specifics - names, numbers.

It was a little taste of what must happen to Warren Buffett every day.

While investors are always happy to listen to the Sage of Omaha's investing philosophy, what they ultimately want is to get inside the investing legend's head.

BEING WARREN BUFFETT

Taking up residence inside Mr. Buffett's brain, a la Being John Malkovich, is obviously impossible, but investor website Validea.com has done the next-best thing.

Using Mr. Buffett's investing strategy outlined in Buffettology, a book penned by his ex-daughter-in-law, Mary Buffett, Validea has built a model portfolio of stocks that would fit Mr. Buffett's approach. The Patient Investor Portfolio, as it is called, is one of Validea's 11 "guru portfolios," patterned on the strategies of some of the most famous stock-pickers of the past 60 years.

The strategy is based on long-term investing in the extreme; Mr. Buffett is famous for holding stocks for decades.

Validea has identified six key financial criteria to meet Mr. Buffett's standards: Stable, predictable and growing earnings; healthy balance sheets; higher-than-average return on equity; higher-than-average return on total capital; modest capital-spending requirements; and strong returns on retained earnings.

Once a stock meets those criteria, Mr. Buffett then tests its initial rate of return (the trailing 12-month earnings per share divided by the stock price) against long-term U.S. government bond yields.

WHAT DID WE FIND?

Much like the stock performance of Mr. Buffett's holding company, Berkshire Hathaway Inc. (down 37 per cent in the past 12 months), the Patient Investor portfolio has suffered over the past year, losing 33 per cent. But over the past three months, the portfolio is the top performer among Validea's 12 guru portfolios, with a rate of return of 5.8 per cent.

Since the portfolio was created five years ago, it has posted annualized losses of 3.4 per cent, a bit better than the 5.5-per-cent annualized losses on the S&P 500.

dparkinson@globeandmail.com

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Validea Patient Investor Model Portfolio
Guru $ Price Market cap Relative Dividend Long-term
Company name Ticker score Mar. 30 ($-mil) strength P/E PEG yield EPS growth
Garmin Ltd. GRMN-Q 100% 21.02 4,212 37 6 0.2 3.3% 35%
Imperial Oil IMO-A 100% 35.38 30,315 71 10 0.5 0.9% 22%
Pre-Paid Legal Svc. Inc. PPD-N 100% 28.89 323 72 6 0.3 n/a 22%
ITT Educational Svc. Inc. ESI-N 100% 124.75 4,780 99 24 0.8 n/a 32%
Fastenal Co. FAST-Q 100% 31.87 4,734 73 17 0.7 2.1% 23%
Mobile Telesystems MBT-N 100% 29.63 11,171 40 6 0.3 n/a 23%
Infosys Technologies INFY-Q 100% 25.87 14,814 75 12 0.3 1.6% 40%
Wipro Ltd. WIT-N 99% 7.12 10,366 66 16 0.5 2.6% 30%
Balchem Corp. BCPC-Q 99% 23.28 426 92 23 1.1 0.5% 21%
Expeditors Int'l EXPD-Q 99% 27.78 5,904 67 20 1 1.1% 20%
Colgate-Palmolive Co. CL-N 99% 58.79 29,412 78 16 1.4 3.0% 12%
Mettler-Toledo Int'l MTD-N 96% 50.70 1,706 55 9 0.3 n/a 26%
Exxon Mobil Corp. XOM-N 93% 68.63 339,144 82 8 0.4 2.3% 20%
Fossil Inc. FOSL-Q 93% 16.06 1,069 55 8 0.4 n/a 18%
Ross Stores Inc. ROST-Q 93% 36.40 4,709 96 16 1 1.2% 16%
Forest Laboratories Inc. FRX-N 93% 21.40 6,455 56 8 0.7 n/a 12%
General Dynamics Corp. GD-N 93% 42.34 16,346 52 7 0.3 3.5% 20%
China Mobile Ltd. CHL-N 93% 42.89 171,946 60 11 0.4 3.8% 25%
Bed Bath & Beyond BBBY-Q 93% 24.40 6,337 84 14 1.1 n/a 12%
ITT Corp. ITT-N 93% 38.42 6,985 77 9 0.6 2.1% 16%
SOURCE: WWW.VALIDEA.COM

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