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Happy Birthday Warren Buffett! Here’s How to Invest Like the Oracle of Omaha

warren buffett stock portfolio
Warren Buffett likely needs no introduction to some. Briefly, he’s the chairman and CEO of Berkshire Hathaway, widely considered the most successful investor of the 20th century, and consistently ranks as one of the top few wealthiest people in the world.

How to Invest Like Warren Buffett: Learn Value Investing

If you want to learn how to invest like Warren Buffett, you’ll need to understand value investing.

Value investing is an investing discipline based on the ideas that Benjamin Graham and David Dodd began teaching at Columbia Business School in the late 1920s. Buffett was a student of Graham’s in the 1950s.

The essence of value investing is buying stocks that the stock market has priced less than their intrinsic values. Hence, they are a “value,” based on some form of fundamental analysis. The discount of the stock price to the intrinsic value is what Graham called the “margin of safety.”

Value investors arrive at intrinsic values in various ways. Commonly used metrics include book value, earnings and cash flow. Thus, a value investor would consider the price of the stock to one (or more) of these metrics, such as Price-to-Book, Price-to-Earnings, Price-to-Cash Flow, etc.

Buffett’s investing philosophy in a nutshell:

“The basic ideas of investing are to look at stocks as business, use the market’s fluctuations to your advantage, and seek a margin of safety.”

Wondering How to Get in on Warren Buffet Stock Picks?

Because he’s been so successful over such a long period of time, Buffet is easily the most followed investor. There are two ways to get in on Warren Buffett’s stock picks:

1. Buy Berkshire Hathaway Stock

Berkshire Hathaway (BRK.A, BRK.B) is the US-based multinational conglomerate holding company of which Buffett is the principle shareholder, chairman and CEO. Berkshire owns some companies outright (a well-known example is Dairy Queen), while it also invests in the stock of other public companies.

During the “Lost Decade” for stocks, 2000-2010, Berkshire returned 76% vs. a loss of 11.3% for the S&P 500.

As of August 7, the 1-year return was 25.7%. The stock has a beta of .49, meaning the stock price is only half as volatile as that of the overall market.

2. Buy the Stocks Buffet Holds or Buys

A couple caveats here: Firstly, just because the stocks were deemed good buys — or “values” — when Buffett bought them doesn’t necessarily mean they are good buys at current prices. Secondly, even Buffett makes mistakes, so some of his buys might have been mistakes to begin with — he’s called his ConocoPhillips stock purchase a mistake.

So, while reviewing Buffett’s holdings provides a good pool of potential stock investments, you’ll need to conduct further analysis.

10 Biggest Stock Holdings of Berkshire Hathaway

The holdings are as of the first quarter 2012. Berkshire just released second quarter results, but stock transaction data for the quarter won’t be released for about another two weeks. Regardless, there should be little change in the top 10 holdings. The values of holdings and 1-year stock returns are as of August 7.

1. Coca-Cola (KO)

  • Holding Value: $15.95 billion
  • Shares: 200,000,000
  • Stake: 8.4%

Is there any reader not familiar with the Coca-Cola company? However, it’s likely lesser-known that, besides its Coke brands, it also produces and sells such brands as vitaminwater and Minute Maid.

The stock returned 26% over the past 1-year period. Operating and profit margins are 23% and 18%, respectively. There was no fizz in last quarter’s numbers — revenue growth was 2.7%, while earnings were flat. P/E (forward) is 18.3. It has a solid 26% return-on-equity (ROE), a 0.53 beta (stock price is only 53% as volatile as the overall market), and a dividend yield of 2.6%.

2. Wells Fargo (WFC)

  • Holding Value: $13.39 billion
  • Shares: 394,334,928
  • Stake: 7.44%
  • Increased holdings by 10.63 million shares (+3%) since the previous reporting period.

Wells Fargo provides banking service primarily in the US.

The stock returned 50% over the past 1-year period. Operating and profit margins are 38% and 22%, respectively. Last quarter’s revenue increased 5%, while earnings grew 17% — a nice widening of margins. P/E (forward) is 9.2. It has a beta of 1.3 (stock price is 30% more volatile than market) and a dividend yield of 2.6%

3. IBM (IBM)

  • Holding Value: $12.87 billion
  • Shares: 64,395,700
  • Stake: 5.36%
  • Increased holdings by 489,769 shares (+1%) since the previous reporting period.

Big Blue provides information technology (IT) products and services worldwide.

The stock returned 22% over the past 1-year period. Operating and profit margins are 21% and 15%, respectively. Last quarter’s revenue decreased 3%, while earnings grew 6% — so margins widened, a positive. P/E (forward) is 12. It has a fat 74% ROE (though debt load increases a company’s ROE, so IBM’s fairly sizable debt load makes this number better than it would otherwise be), a beta of 0.67 and a dividend yield of 1.7%.

This stock looks potentially appealing, despite its recent flat revenue growth. It has some solid financial stats and promising future prospects (in artificial intelligence involving its “HAL” robot and data analytics). Apparently Buffett thinks so, too — he only began buying this stock in 2011.

4. American Express (AXP)

  • Holding Value: $8.74 billion
  • Shares: 151,610,700
  • Stake: 13.02%

American Express provides banking and credit card products, as well as travel-related services worldwide.

The stock returned 36% over the past 1-year period. Operating and profit margins are 24% and 17%, respectively. Last quarter’s revenue grew 3%, while earnings were flat. P/E (forward) is 12.3. It has a beta of 1.8 and a dividend yield of 1.4%.

5. Procter & Gamble (PG)

  • Holding Value: $4.85 billion
  • Shares: 73,254,136
  • Stake: 2.71%
  • Decreased holdings by 3.5 million shares (-5%) since the previous reporting period.

P&G is a global consumer products company.

The stock returned 15% over the past 1-year period. Operating and profit margins are 18% and 13%, respectively. Last quarter’s revenue decreased 3% while earnings grew 45% — so margins widened, a positive. P/E (forward) is 16. It has a beta of 0.44 and a dividend yield of 3.4%.

6. Kraft Foods (KFT)

  • Holding Value: $3.19 billion
  • Shares: 78,017,165
  • Stake: 4.33%
  • Decreased holdings by 9.02 million shares (-10%) since the previous reporting period.

Kraft Foods manufactures and sells packaged food products worldwide.

The stock returned a tasty 25% over the past 1-year period. Operating and profit margins are 14% and 7%, respectively. Last quarter’s revenue decreased 4%, while earnings grew 5%. P/E (forward) is 15. It has a beta of 0.53 and a dividend yield of 2.8%.

7. Wal-Mart (WMT)

  • Holding Value: $3.46 billion
  • Shares: 46,708,142
  • Stake: 1.14%
  • Increased holdings by 7.67 million shares (+20)) since the previous reporting period.

Wal-Mart operates discount stores under the Wal-Mart name and warehouse club stores under the Sam’s Clubs name. It’s been making further headway into the financial services arena in recent years.

The stock returned 55% over the past 1-year period. Operating and profit margins are 6% and 3.5%, respectively. Last quarter’s revenue grew 8.5%, while earnings grew 10%. P/E (forward) is 14. It has a beta of 0.41 and a dividend yield of 2.2%.

8. US Bancorp (USB)

  • Holding Value: $2.28 billion
  • Shares: 69,039
  • Stake: 3.61%

U.S. Bancorp provides banking and financial services in the US.

The stock returned 57% over the past 1-year period. Operating and profit margins are 43% and 30%, respectively. Last quarter’s revenue grew 9%, while earnings grew 18% — so margins widened, a positive. P/E (forward) is 11. It has a beta of 1.0 and a dividend yield of 2.4%.

9. Johnson & Johnson (JNJ)

  • Holding Value: $1.98 billion
  • Shares: 29,018,127
  • Stake: 1.06%

Johnson & Johnson is a global health care products company.

The stock returned 16% over the past 1-year period. Operating and profit margins are 25% and 13%, respectively. Last quarter’s revenue decreased 1%, while earnings dropped 50% — so margins narrowed, a negative. P/E (forward) is 12.5. It has a beta of 0.55 and a dividend yield of 0.6%.

A red-flag on this one is the good number of quality control issues over the recent couple years.

10. ConocoPhillips (COP)

  • Holding Value: $1.64 billion
  • Shares: 29,100,937
  • Stake: 2.25%

ConocoPhillips is involved in the exploration, production and transportation of crude oil, natural gas, natural gas liquids, liquefied natural gas and bitumen throughout the world.

The stock returned 25% over the past 1-year period. Operating and profit margins are 9% and 5%, respectively. Last quarter’s revenue decreased 17%, while earnings dropped 33%. P/E (forward) is 10. It has a beta of 1.1 and a dividend yield of 4.7%.

I’d stay away from this one. It has a 5-year PEG of -5, meaning analysts expect negative earnings growth over the next five years.

And here’s a bonus…

11. DirectTV (DTV)

  • Holding Value: $1.14 billion
  • Shares: 22.999,600
  • Stake: 3.51%
  • Increased holdings by 2.65 million shares (+13%) since the previous reporting period

DirectTV provides digital TV primarily via satellite in the US and Latin America.

The stock returned 18% over the past 1-year period. Operating and profit margins are 17% and 9%, respectively. Last quarter’s revenue growth was 10%, while earnings grew 1% — so margins narrowed, a negative. P/E (forward) is 9.5. It has a beta of 0.96.

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