What Would a Young Warren Buffett Buy Today?

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It's always fascinating to look at a stock's historical performance and fantasize about buying in early.

Let's say you had $1,500 in 1990. You were a huge fan of computers. You felt confident investing in that space. Even though Apple was in the doldrums, relatively speaking, you decide to invest it all anyway.

By 2013, that $1,500 would be worth $100,000.

That's a spectacular investment. It didn't require a huge amount of cash up front. It didn't require a "hot tip" or hours of research.

It just required belief in a company on which you're bullish. That, and, patience.

In a very limited sense, that's how Warren Buffett operates. He buys what he understands. He buys companies in position to be profitable long-term. He emphasizes strong leadership.

He makes no apologies for advocating boring investment strategies. 

Yet you can't argue with his record. He's the "investor of the century" -- and there are few rivals to contest that designation.

What would "Young Warren" do?

A recent article in MarketWatch pondered this notion. What would happen if we teleported "Young Warren" to present day? Which stocks would he buy? It's an interesting thought experiment.

It makes sense to frame the question in this way. After all, Buffett is 84. He's a multi-billionaire. What makes sense for him doesn't make sense for most investors. We don't have his near-unlimited capacity for risk. We don't have his ability to swallow large companies.

At his most recent Berkshire Hathaway annual shareholders meeting, Buffett said he's only interested in buying very large firms. Smaller firms don't move the needle. So his strategy is dictated by Berkshire's immense dimensions.

Yet what if he were still looking at the minnows rather than whales? What would he do?

Unfortunately, "Older Warren" isn't telling. So we have to make our best guesses. That's not a terribly difficult assignment. Buffett is candid. He's doesn't play it close to the vest. 

We now also have a formula. It aims to replicate his historical returns.

Whether it's useful is another matter.

The Buffett formula 

The National Bureau of Economic Research and AQR Capital Management conducted an interesting study. That study aimed to create a formula to replicate Buffett's returns over the last half century.

The formula is fairly complex. Yet there are a few basic traits for which to look. Stocks with low historical volatility. Stocks with low price to book ratios. Stocks of high quality firms that are profitable and growing. Companies that fit these terms tend to be conservative. That means you can tilt your portfolio toward them. 

So which stocks are relatively safe, cheap and of high-quality?

Here are a few that Marketwatch suggests:

  • American Eagle 
  • American Vanguard
  • GameStop
  • Kohl's
  • Rent-A-Center
  • Scholastic

These stocks have below average price to book ratios. They're also profitable. They're better than average with regard to dividend ratios.

Are they all good bets? That's highly debatable. GameStop is a video game retailer. That's a business model that seems ripe for disruption. Streaming technology has already created havoc in the music and film arena. It's possible that video games may be retailed and rented online. Netflix, anyone?

Kohl's is a retailer vulnerable to larger economic conditions. It lacks innate competitive advantages. That's a major concern for Buffett.

What would Warren think?

So is this the "golden formula" that allows us to predict what Young Warren would buy? Hardly. Buffett has his own ideas about these stocks. Yet it is a good yardstick for identifying broad traits that make some stocks successful.

It's also an interesting tool for trying to determine the stocks Buffett might pursue if he weren't confined to the mega-cap arena. Yet it's far from perfect.

As mentioned above, Buffett is a believer in durable competitive advantages. It's one of his key criterion for investing. The formula does not factor in these advantages. Don't have a proper "moat"? Then Buffett's interest is likely to be tepid.

Buffett has other preferences. He avoids tech stocks. He restricts his investments to businesses he feels competent to analyze. He focuses on value.

Should you invest like Buffett?

Are you a billionaire? No? Then forget it. He's operating in rarified air. Yet you can follow the broad principles he espouses.

Doing so is likely to have far more value than following a formula designed to mimic his returns.

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