Buying a Buffett Portfolio

The securities that I like best right now are an outstanding group of businesses that together should, over time, offer an investor nice income with capital growth; further, and importantly, an investor can own these businesses fractionally, knowing that if Mr. Market gets more pessimistic, he can simply buy more stock as the price drops. Indeed, it is actually beneficial for a long term investor to live through a pessimistic market that will give the buyer a better price to aquire more ownership in the businesses.

This group of businesses will provide a nice variety of stable earnings gained from a diversified group of franchises. Each franchise is based on a good idea and has a talented manager at the helm. These businesses have a history of delighting customers, holding costs down and improving products and services. Each business has a wide moat, and hopefully is widening its moat as I write.

I really investors are lucky these days; we are able to buy companies that are wonderful businesses, as confirmed by Warren Buffet , at reasonable prices. One doesn't really need to look further than Berkshire's stock portfolio to find great businesses to acquire; some of the companies in Berkshire's portfolio can actually be purchased for less than Berkshire's acquisition cost.

I like for purchase the following companies: Berkshire Hathaway (BRK.A) (BRK.B), American Express (AXP), The Coca-Cola Company (KO), Conoco Phillips (COP), Kraft Foods (KFT), Moody's (MCO), The Procter and Gamble Company (PG), U.S. Bancorp (USB), Wal-Mart (WMT) and Wells Fargo (WFC).

These companies are not masquerading as the cream of the crop - they are the cream of the crop.

I will give a very brief thesis on each, with confidence that my real reason for liking them is that Mr. Buffet likes them.

• Berkshire is great here. A key Berkshire watcher places fair value for Berkshire at $157,000. Berkshire currently is about 25% off its high and continues to be a stronghold of excellent businesses that are well managed. The key, though, is that these managers are honest and work hard for shareholders.
• American Express is a wonderful franchise and can be bought now in the thirties, having traded as high as $66 per share. Recessions give opportunities to aquire great companies on the cheap as Mr. Market is gloomy. This is one of those opportunities. Also, a noted Buffet watcher recently advocated Buffet taking American Express out completely. Hmmm…
• Coca-Cola nicely rounds out the beverage portion of this portfolio. Returns on equity over the last several decades, I believe, hovers over 40%.
• Conoco Phillips is Warren's energy company and energy is, well, needed. The dividend is sweet, too.
• Kraft is my favorite investment now. This business is loaded with consumer monopoly type brands that people love and they are able to raise prices. You can buy some KFT for less than Berkshire payed.
• Moody's is one of two companies in their space. They have a huge market share and you can  now get in inexpensively because of recent short term mistakes.
• Procter and Gamble is maybe the best consumer products company in the world.
• U.S. Bancorp is one of the two best run banks in the world. When the poor operators go, the best take the market share.
• Wells Fargo is the other best run bank in the world. It is managed conservatively and doesn’t go out looking to raise capital by diluting shareholders. These guys generate capital. They have made returns on equity over 20% for years and operated well during this recent debacle. They will gain share.
• Wal-Mart is the king of retailers and recently signed Martha Stewart. They are the low cost operator and people now want to keep costs down.

Disclosure: Author holds long positions in BRK.B, PG, AXP, KFT, MCO, USB, WMT and WFC  

Comments

[1worldcurrency:]

wells Fargo will gain share of what, exactly? Writedowns?

2008 Jul 31 04:51 AM

[CT Programmer:]

Wells Fargo will gain share of depositors, which historically for banks have been the cheapest source of money that they then re-invest in loans and such. Depositors are significantly cheaper than borrowing in the money markets. All banks are hurt in varying degrees by the financial and mortgage crisis, but not all banks will emerge from it in the same proportion of the pie as going in. However, having said that, I think financials have rallied lately but are due for another hit when all these auto and credit card loans start defaulting at much higher rates, as well as the commercial real estate market (which has been barely treading water) starts to collapse like the housing market did. It ain't over yet.

2008 Jul 31 07:25 AM

[Steve Alexa...:]

This is how I like to invest as well. I use the Magic Formula stock screen - the point of the strategy is to find good companies (high return on capital) at low prices (high earnings yield). Then check out the long term moat characteristics to make sure a stock is not a flash in the pan. You definitely have some excellent companies there, but a stock does not have to be owned by Berkshire to have these characteristics. Look at some of the smaller caps as well, even Buffett has said that these offer the greatest gains for the individual investor.

Steve
magicdiligence.com

2008 Jul 31 11:07 AM

[Jake2:]

How about mixing in a little T. Boone Pickins with this, just to spice things up?

2008 Jul 31 12:14 PM

[User 236971:]

I am wondering how much you can trust and listen to the advice in this article, if the author does note even spell the name of "Procter & Gamble" correctly - isn't that funny?

2008 Aug 02 05:46 PM

[gordo:]

Im wondering if youre an idiot to imply that buying these businesses is a bad idea because I mis spelled a word

2008 Aug 02 06:41 PM

[mkreisel:]

Where are BNI, PKX, SNY, and Tesco PLC missing from your list? They are all major Buffett positions.

2008 Aug 03 09:01 PM

[gordo:]

well I chose the companies that are more within my circle of understanding ... I probobly should have included bni because I do get the economics there...I just believe there is more value in say kft right now ... with kft you are buying shares below berkshires cost where as with bni you would be paying a hefty premium to berkshires cost...but good point...

2008 Aug 03 10:23 PM

[jim collins:]

If I never hear the phrase "Mr. Market" again I'll be happy, it's like being treated like a retarded five year old. "Well, son, the market dropped because Mr. Market was grumpy today". Jesus Christ.

2008 Aug 05 08:45 PM