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Buffett-Munger Portfolio Gained 5% Year-To-Date

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Gixene   Saturday, 12/03/11 07:43:41 AM
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Buffett-Munger Portfolio Gained 5% Year-To-Date

Dec. 1, 2011

After a tough third quarter and a good October, the stock market is about mixed for the year. S&P500 lost a little less than 1% for the year, without counting dividend. It is time to review the performances of our value strategies.

Among all GuruFocus value strategies, Buffett-Munger portfolio gained 4.97% year to date, outperforming the market by 5.8%. Since incepted in Jan. 2009, this portfolio has outperformed the S&P500 every year. It gained 61.41%, while S&P 500 gained 38.05% in the same period. All numbers do not include dividends. The high quality of this portfolio contributed to the performances. Companies such as First Cash Financial Services Inc. (FCFS), FactSet Research Systems Inc (FDS), Church & Dwight Co. (CHD) contributed to the performance of the portfolio. World Acceptance (WRLD), one of the most controversial positions, gained more than 247%. Overall, the portfolio shows low risk, as many more stocks are up than down. Among the stocks that went down, the maximum loss is only 12%.

Portfolio of Undervalued predictable companies underperformed the market this year, it is down 4.79%. But since incepted in Jan. 2009, this portfolio has gained 78.22%, more than the 61.41% of Buffett-Munger portfolio and S&P500’s 38.75%. This portfolio models the predictable companies that are sold at the largest discount relative to its intrinsic value. This is the screener for these stocks. The underperformances are caused by the financials such as Hudson City Bancorp (HCBK) and Manulife financial (MFC). Small bank Southern Missouri Bancorp Inc. (SMBC) gained 25% for the year, even when most of the banks did poorly this year.

Two model portfolios that performed especially well are the portfolios of Top 25 Historical High P/S Ratio Companies and Top 25 Overvalued Predictable Companies. These are high qualities that are sold at historical high valuations. We thought that these companies would decline more during market corrections. But they actually hold much better than the market average. Therefore, they cannot be used at hedges, as we originally planned. We will study more about these strategies. The indication seems to be that market trend is working here.

Among all value strategies, the Buffett-Munger model portfolio has performed the best year to date. "Buffett-Munger Screener" can be used to find companies with high-quality business at undervalued or fair-valued prices:

Companies that have high Predictability Rank, that is, companies that can consistently grow their revenue and earnings.
Companies that have competitive advantages. It can maintain or even expand its profit margin while growing its business
Companies that incur little debt while growing business
Companies that are fair valued or under-valued. We use PEPG as indicator. PEPG is the P/E ratio divided by the average growth rate of EBITDA over the past 5 years.

From the back testing study from 1998-2008 we have found strong correlations between the Predictability of Businesses and the long-term return of stocks. The group of undervalued highly predictable companies performed the best. This group had an annualized gain of 20%, while the market just averaged 2.7% a year.

For details, go to: What Worked In The Market From 1998-2008? Part II. Under-Valued Predictable Companies And Buffett-Munger Screener.

These are the summary of the four value strategies mentioned above:

1. Buffett-Munger screener: Invests in predictable companies that have low debt, consistent profit margin, and traded at low PE to growth ratios.

2. Undervalued Predictable Companies: Invests in predictable companies that are undervalued based on DCF model.

3. Historical low P/S: Companies that have high predictability rank, but traded at historical low P/S ratios.

4. Historical low P/B: Companies that have high predictability rank, but traded at historical low P/B ratios.


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