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Warren Buffett, widely regarded as one of the most consistent and successful investors of all time, has been repeatedly beating the S&P for the past couple decades. He attributes his success to several major principles such as a margin of safety, investing in businesses that he understands, and focusing on free cash flow and businesses with a wide moat. In essence, one should buy simple and good businesses at cheap prices.

Buffett invests mainly through his company Berkshire Hathaway (BRK.A). It is widely known that he achieved around 20% annualized returns before the 1990s. With his company becoming much larger and more talent crowding onto Wall Street, he has since found it much harder to achieve good investment results (both were cited by Buffett as reasons). Nevertheless, his simple yet stringent investing criteria have served him well. Let's look at his performance in the past 10 years.

Let's start by looking at Berkshire Hathaway's current top ten holdings (as of 3/31/2011):

Ticker

Name

Portfolio %

KO COCACOLA COMPANY 24.75%
WFC WELLS FARGO & CO. 20.27%
AXP AMERICAN EXPRESS COMPANY 12.78%
PG PROCTER & GAMBLE COMPANY 8.82%
KFT KRAFT FOODS INC. 6.16%
JNJ JOHNSON & JOHNSON 4.71%
COP CONOCOPHILLIPS 4.34%
WSC WESCO FINANCIAL Corp. 4.14%
WMT WALMART STORES INC. 3.79%
USB U.S. BANCORP 3.40%

Additionally, Buffett added a new holding, Mastercard (MA), recently.

All of these companies have durable businesses. They are all easy to understand. They derive their cash flow through their wide moat operations. All of them share another common financial characteristic: consistently high (10% to 20+%) return on equity (ROE). ROE is one of the several favorite yardsticks Buffett uses to measure a company. High ROE means the company is efficient in capital allocation (to most profitable business). Combined with low debt (thus, avoid high ROE achieved by high leverage), consistently high ROE shows how stable and profitable a company's underlying business is.

For example, his recent additon, MasterCard, has been exceptionally stable and consistent other than an off year in 2008. As a credit card processing company, MasterCard has performed well compared other such businesses. Other than a down year in 2008, its consistent Return on Equity of 20-50% in the last few years is comparably higher to one of its competitor, VISA, which ranges anywhere from 7% - 12%. MasterCard's current P/E ratio of 19.29 is also above VISA's 17.55. American Express Company, another company in Buffett's portfolio, has also been quite consistent, with a generally unvarying Return on Equity % in the positive double digits.

Likewise, Buffett's other holdings are doing well. Wells Fargo Company has been performing exceptionally in recent years despite the financial crisis. Its Return on Equity has been positive for the last decade, compared to another financial institution such as Citigroup Inc., which has recently faltered quite a bit since the crash in 2008.

With the right entry points (purchase prices), it is thus possible to hold these exceptional businesses for a long time to enjoy their double digit profit/cash returns.

The following table shows Berkshire Hathaway's portfolio returns, compared with two diversified portfolios of ETFs in a Six Core Asset ETFs plan that includes US Equities (VTI), Real Estate (VNQ), Emerging Markets (VWO), Commodities (DBC), International Equity (VEU), and Bonds (BND). The Six Core Asset ETFs SAA invests equally in five ETFs (since this is an equity portfolio, no allocation to BND) and rebalanced monthly (if necessary) while the Six core Asset ETFs TAA tactically invests in several of these six ETFs at any time.

Port-

folio

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Ann-

ual Ret-

urn

TAA

2.31

1.11

24.87

11.81

10.44

31.52

33.71

-4.81

25.66

13.39

14.30

SAA

2.31

-10.24

29.79

12.27

15.3

26.47

13.45

-37.15

36.05

18.32

8.40

Buffett

-6.2

10

21

10.5

6.4

18.4

11

-9.6

19.8

13

8.97

S&P

-11.9

-22.1

28.7

12

4.91

15.79

5.61

-37

26.5

15.1

1.53

From the above table, it is clear that Buffett's portfolio delivered outstanding performance. Compared with a buy and hold diversified Six Core Asset ETFs SAA, Buffett only lost a fraction in the severe 2008 crisis. It is remarkable that a buy and hold all stock portfolio can beat a diversified portfolio of ETFs with much lower volatility and higher return. Long term or retirement investors definitely can follow the great investor to help strengthen their portfolios.

Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Disclosure: Author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Warren Buffett's Stock Holdings: A Portfolio Performance Review