In the world of stock market investing, arguably the most highly regarded strategist is Warren Buffett. His famous buy-and-hold approach is especially well suited for today's market, where volatility and uncertainty reign. Those wondering how to deal with the market's gyrations (and not be overcome with fear) should pay attention to Buffett's approach.
Back in 2003, when I was creating a series of computerized strategies that mirrored the investment approaches of well-known market gurus, I included Buffett's. Since he has not written a book describing his thinking, I relied on Buffettology, written by Buffett's ex-daughter-in-law, Mary Buffett.
The strategy has been an undeniable winner. Since I have been following it, its return has totaled 145.7%, outperforming the S&P 500 during the same time period by 48.3%. Put another way, this strategy has outperformed the market by about 50%.
The strategy focuses on fundamentals, such as looking for earnings that are stable and continually expanding, modest debt, higher-than-average returns on equity total capital and modest capital expenditure requirements. Also required is the company having a strong market position with a durable competitive advantage.
In addition, unique among my guru strategies, this Buffett-based strategy projects what the investor's annual return might be over the next decade if he or she buys the stock today.
Ross Stores (ROST) is a current Buffett-strategy favorite. This is the largest off-price apparel and home fashion chain in the country, according to the company, and operates 1,259 stores in 33 states. The company has a strong brand name, earnings per share that have increased in each of the past 10 years, modest debt and high returns on equity and total capital. And the strategy predicts the investor will enjoy 18.9% annual returns over the next decade.
Rollins (ROL) is another company that earns respect from my Buffett-based strategy. The company provides pest control services and protection, and operates under a variety of brand names, including widely known Orkin. A strong brand, 10 years of steady earnings increases and a projected 12.4% annual return to investors are among the reasons the strategy is high on this company.
Westinghouse Air Brake Technologies (WAB), also called Wabtec, gets good grades from my Buffett strategy. The company manufactures locomotives, as well as a broad range of parts for locomotives, freight cars and passenger transit vehicles. With roots dating back nearly 150 years, Westinghouse has a strong market position, earnings per share that have increased in nine of the past 10 years, a reasonable debt level, solid returns on equity and total capital, and a projected annual return to investors of 14.7%.
These are solid companies. They are not trendy or particularly risky. As such, they are companies that fit well in nearly everyone's portfolio.