Since the 2008 financial crisis, and what is also now known as the “Great Recession”, the world of investing has been bombarded with a continuous refrain. “Things are different now,” it goes; “the old rules don’t apply.” There is a lot of talk going on that says we are experiencing a “new normal” and that there are a lot of new investment paradigms springing up around long-term investing and value investing. We have been told that equities are dead as well. Many people believe that the old ways of investing and earning money just aren’t going to pay off any longer.
This particular Warren Buffett style guru strategy says differently. John Reese, founder and CEO of validea.com, put together a portfolio at the beginning of 2009, that is completely based off of the value centric approach of Warren Buffett, where he shows us that his portfolio has gained over 104% as of August 8. That is about double the 55% gain in the S&P 500 return since that time. The portfolio gained about 10% last year even though the broader market was very flat, and it is up a total of 16.1% this year which is roughly 5% better than the S&P.
Reese says that he has done nothing to change his Buffett style model since the financial crisis began. His portfolio was capable of gaining such incredible returns by using value investing. Value investing is a way for you to identify strong companies, and buy their shares when the valuations are very attractive. He was able to base his approach by the information that he learned in the book Buffettolgy, which was written by Warren Buffett’s former daughter-in-law named Mary Buffett. He worked very closely to her for quite some time.
John Reese says that this is one of his more stringent strategies, as he looks back upon information over the last decade. This strategy is to look for companies whose earnings per share have grown consistently on a 10 year basis, and who also have had ROIs of a 15% gain over a 10 year span. This shows that they have what is known as a “durable competitive advantage,” which is something that we know Buffett regularly seeks with all of his investments. This particular type of investing model also chooses companies that are financed conservatively, and they have to have high enough annual earnings where they would be able to pay off all of their long-term debt between 2 to 5 years.
Just like Warren Buffett himself, John Reese’s Buffett style strategy tries to find companies with strong management, and you look for companies that were able to keep their return on retained earnings. The metric is to pay close attention to how much a company’s earnings per share has increased over a ten-year period, and then divided by how much the company has retained of those earnings, which means they haven’t paid them out as dividends, during that particular time.. Essentially this will show you the amount of return that management is capable of generating while still holding onto those profits.
Warren Buffett is obviously the greatest value investor of all time, and it’s very critical to his buying strategy that the price must be right in order for him to make a purchase. So John Reese’s strategy requires him to look at the earnings yield of the company, and it needs to be a lot higher than the yield that you would gain if you were to put your money in treasury bonds.
Buffett has always told people that the smart time to buy is when people are afraid, and John Reese has done that precisely with his Buffett style portfolio, which is why he knows that he has been able to put up such incredible returns over the last few years. During September of 2009, he picked up Coach Inc. There were a lot of fears that the US consumer was no longer healthy, so luxury goods were not the typical type of stocks that many people were buying. But this particular Buffett style strategy showed that Coach’s track record for the long-term, as well as the shares being dirt cheap, made it a steal and the shares have gone up 90% since then which is incredible.
John Reese believes that his Buffett style investing model and success proves beyond the shadow of a doubt that value investing and the fundamentals of investing correctly haven’t changed at all. If you put your money in companies with a good balance sheet, as well as a long success history, and you buy their shares at a low price, then the approach is perfect and it’s never going to change. It might not work for the short term, but this is a long-term strategy, and if you follow the tenets that Buffett always speaks then you should also create strong returns.