What Stocks to Buy

  • The Intelligent Investor buys things that have done bad whose fundamentals are intact.

A very easy strategy to become a successful investor is to copy what the most successful investor in the world is doing. Warren Buffett and his partner Charlie Munger, along with their team of "Ivy League University Lieutenants" already did the work and research to find really good investments - companies with a Durable Competitive Advantage. And their work is public knowledge.

Mr. Buffet is working for the small investor for free. Just Google "Warren Buffett Recent Buys" or "Buffett's Top 10 Holdings", and a plethora of illustrious insights will appear. There is little need for the Intelligent Investor to do their own analysis and research. Warren Buffett and company already did it for everyone. If one is a beginner, it is in their best interest to copy first and understand later. When we copy the answers of an "A" student, we will be an "A" student too.

 

Buy and Hold a Company with a Durable Competitive Advantage

This easy strategy is good for beginning and experienced investors alike. As a guide, here are 5 rules to abide by and you have to follow all 5 rules in order for this strategy to work:

 

"An intelligent person hires people who are more intelligent than he is."

- Robert Kiyosaki

 

Buy What Warren Buffet Buys, Sell what he Sells

Picking stocks is like owning a winning basketball team. If one was the owner of a basketball team, they would want the best players and the best coaches in their team. By having the best players and coaches, winning the championships for several consecutive years comes naturally. When the Intelligent Investor owns the best companies in their portfolio, outperforming the S&P 500 is easy. Year after year, one will come out a winner.

Warren Buffet's stock picks are winners. He owns companies that have a Durable Competitive Advantage, companies that make a lot of money, grow very fast, and survive recessions. The Intelligent Investor buys the ones Mr. Buffet recently bought, not the ones he bought a long, long time ago. The stock picks he recently bought are the ones that are undervalued today. Cheaper stocks are the ones that will yield the most profit.

 

Example 1

As of June 2014, here are some of Warren Buffett's recent stock purchases and recent sells:

Recent Stock Purchases: IBM, Verizon, Walmart, Exxon Mobil, Wells Fargo, and Charter Communications.

Recent Sells: DirecTV, Starz, General Motors, and Dish Network.

 

Buy Stocks that Make it to his Top 10 Holdings

Warren Buffett's Top 10 Holdings are his star players. He invested billions of dollars in these companies because they are generating the most profit. In a winning basketball team, the top 10 players are the ones that are very highly paid. They are the ones that generate the best results. So if Warren Buffett purchases stock that make it to his Top 10 Holdings, the Intelligent Investor purchases them too. Because over the long run, those stock picks will most likely generate high investment returns.

No one is perfect. Occasionally, Mr. Buffett makes mistakes too. Some of his investments did not turn out well. These mistakes are typically made on his "side bets"; investments that are less than $1 Billion. This is the reason why the Intelligent Investor only invests in Buffett's Top 10 Holdings. We want to avoid his mistakes. When one invests in Warren Buffett's Top 10 Holdings, there is conviction the investment will turn out well.

 

Example 2

As of June 2014, here are Warren Buffett's Top 10 Holdings. Within those holdings, his recent purchases are Wells Fargo, IBM, Walmart, and Exxon Mobil.

Company Value Recent Purchase?
Wells Fargo $16 Billion Yes
IBM $14 Billion Yes
Coca-Cola $12 Billion
American Express $8 Billion
Walmart $5 Billion Yes
Proctor and Gamble $4 Billion
Exxon Mobil $4 Billion Yes
US Bank $3 Billion
DaVita $2 Billion
Moody's $2 Billion

 

"If I have seen further it is by standing on the shoulders of giants."

- Isaac Newton

 

Buy Only if the Price is Close to or Below Buffett's Average Price

After we've determined which of Warren Buffett's recent stock purchases are in his Top 10 Holdings, the next step is to see if the stock's current price is close to his average price. The Intelligent Investor will buy the stock only if the current stock price is close to or below Buffett's average price.

 

Example 3

Date of Current Stock Price: October 2014

Company Average Price Current Stock Price Close to/Below Buffett's Average Price?
Wells Fargo $45.40 $50 Yes
IBM $188.37 $180 Yes
Walmart $75.43 $72 Yes
Exxon Mobil $90.22 $92 Yes

 

Match the Weight to Match his Performance

Warren Buffett's investment portfolio performed at a whopping rate of 24% year over year in its lifetime. That's more than 3X the S&P 500's 7% rate. Not all investments perform the same. Some performs better than others. The big performers are stock Mr. Buffett made large investments in. However, we shouldn't sacrifice diversification of our portfolio for performance. We shouldn't place all of our money in 1 stock - that would be foolish. So to match Mr. Buffett's performance, we simply match the weight of his most recent stock purchases in his Top 10 Holdings.

 

Example 4

An easy way to match the weight is this:

  • If Warren Buffett invests $16 Billion in Wells Fargo, the average investor may invest $16 Thousand, and the small investor may invest $16 Hundred.
  • If he invests $14 Billion in IBM, the average investor may invest $14 Thousand, and the small investor may invest $14 Hundred.
  • If Mr. Buffett invests $5 Billion in Walmart, the average investor may invest $5 Thousand, and the small investor may invest $5 Hundred.
  • If he invests $4 Billion in Exxon Mobil, the average investor may invest $4 Thousand, and the small investor may invest $4 Hundred.
Company Warren Buffett Average Investor Small Investor
Wells Fargo $16 Billion $16 Thousand $16 Hundred
IBM $14 Billion $14 Thousand $14 Hundred
Walmart $5 Billion $5 Thousand $5 Hundred
Exxon Mobil $4 Billion $4 Thousand $4 Hundred

 

Example 5

If we ever come across more money, we could always increase our stake in proportion by multiplying it with a factor. In this example, the average investor multiplies by a factor of 2, and the small investor by a factor of 3.

Average Investor Factor = 2
Small Investor Factor = 3

Company Warren Buffett Average Investor Small Investor
Wells Fargo $16 Billion $16 x 2 = $32 Thousand $16 x 3 = $ 48 Hundred
IBM $14 Billion $14 x 2 = $28 Thousand $14 x 3 = $42 Hundred
Walmart $5 Billion $5 x 2 = $10 Thousand $5 x 3 = $15 Hundred
Exxon Mobil $4 Billion $4 x 2 = $8 Thousand $4 x 3 = $12 Hundred

 

"I choose a lazy person to do a hard job. Because a lazy person will find an easy way to do it."

- Bill Gates

 

Repeat Every 3 Months

Berkshire Hathaway's 13-F Filing contains Warren Buffett's recent stock buys and sells. It is published for the Securities Exchange Commission every 3 months.

One in February.
Another in May.
Third in August.
Last in November.

Once it is published, many websites regurgitate the juicy information in an easy to read, easy to find format that many copy cat's can use. So let's save up our money, our disposable income and just Google it all over again.

 

Closing Thoughts

Stocks are the highest yielding assets over any other asset class. Warren Buffett's portfolio averages 24% year over year in its lifetime. The S&P 500 averages around 7%. No other asset class yields this much profit over its lifetime. Not real estate, not gold, nor oil. It's no wonder stocks are Buffett's favorite investment. It's no wonder he invests billions and billions of dollars in stocks instead of real estate, gold, or oil. If done correctly, investing in stocks is a path to enormous amounts of wealth. For this reason, stocks are the Intelligent Investor's favorite type of investment.

 

My Financial Analysis of Stocks

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