Warren Buffett is one of the most famous investors of all time, and for good reason. This blog (and the rest of the internet) has plenty of articles dedicated to the Oracle of Omaha and his investing career that has spanned longer than some people’s entire lifetimes.
But alas, I am not here today to regale Buffett once more. This time, I have taken some of Warren’s investment philosophies and actively translated them into a portfolio of 10 high quality stocks.
I think that even Buffett himself would be happy owning this portfolio!
Vintage Value Investing Portfolio
Allow me to introduce the Vintage Value Investing Portfolio. As I mentioned before, this is a value investing portfolio that is specifically designed to emulate Warren Buffett’s style of investing.
Warren Buffett’s value investing principles differ very much from his mentor Ben Graham. Instead of buying companies at a deep discount (like Graham did), Warren developed his own method of investing. This is known as Quality Investing.
Here is what Buffett is looking for specifically when buying a company’s stock:
An business to that is easy to understand
Consistent earnings growth
High returns and margins (ROIC, ROA, ROE, etc.)
An economic moat
A fair price
Notice the last bullet: “a fair price”. A fair price is not necessarily a bargain price. This is the key when investing like Buffett. Instead of buying bargain price stocks, he buys stocks that are trading at fair value and simply lets them compound for years, or even decades.
Additionally, it’s not good enough that these companies have performed well in the past. As we all know, past performance is never indicative of future returns.
In this portfolio, I have identified economic moats and tailwinds for each company. Economic moats are what protects the business from competition, while the tailwinds are what will propel the company to future success.
Stock Characteristics and Valuation Method
In order to find these high quality companies, I screened for stocks that have the following characteristics:
Consistent increasing annual equity per share (or book value)
Higher than average Return on Equity (ROE) over long time periods (>15%)
An earnings yield greater than 3%
All of the companies we want to own for long time periods must be ones that can offer shareholders long-term compounding growth. That compounding only comes from a business that can predictably increase its assets faster than its liabilities without diluting shareholder value.
The valuation method I used to value the stocks in this portfolio is the Equity Bond method. I already wrote an article explaining this method in detail, so be sure to check it out.
Here is the basic premise of the Equity Bond method:
By viewing the earnings yield of a stock the same as we would the yield of a bond, we buy the stock now at a fair price and allow the company to reinvest those earnings each year to increase our yield.
The main difference between the Equity Bond and a normal bond is that the Equity Bond gets to appreciate the longer you hold it, whereas the normal bond has a fixed yield over time.
This is why we screened and selected stocks that have high ROE and solid earnings yields. These companies will continue to compound our investment at high rates over the years.
Accidentally Beating the Market
When I was constructing this portfolio, I had no idea what its performance would look like, let alone if it would beat the market. Funny enough, it beat the S&P 500 by a good margin.
Quick Disclaimer: Proving past performance means just about nothing, so take these results with a huge grain of salt. Anyone can easily show you how awesome a portfolio would have performed in the past, but few can show you one that will do well in the future (including myself).
Here is the 10 year performance of the VVI Portfolio vs S&P 500 with a lump sum investment of $10,000.
What’s even more impressive is the portfolio saw no negative returns over the past decade either.
To be clear, I’m not showing these statistics just to brag. The S&P 500 still turned out to be an amazing investment over the past decade. This just goes to show that buying a select few high quality stocks really can increase your annual returns and reduce your risk by a significant amount.
How To Use This Portfolio
As you can see from the charts above, all you had to do was buy and hold these stocks for 10 years to see an annual return of almost 20%. What I cannot simulate is how an investor would use this portfolio over that time.
Through individual buying, selling, weighting, or rebalancing, you theoretically could have a higher annual return. However, through unnecessary portfolio tinkering, you could also drive yourself to lower returns.
There are multiple methods of portfolio management. Some investors prefer the dollar cost average method, while some prefer amassing a lump sum and investing all at once.
Additionally, some investors prefer equally weighted portfolios while some prefer to weigh by market capitalization. Some (like Buffett) don’t weigh or balance portfolios at all!
Do Your Own Thing
I can’t tell you how to manage your portfolio much like I can’t tell you how to live your life; it’s yours to manage.
All you need to remember is this: whenever/however you decide to buy a stock, make sure you are at least buying at a fair price. Overpaying for a stock is the sure-fire way to lackluster returns.
Who This Portfolio is For
The VVI Portfolio was constructed for investors who want a simple portfolio that they can easily keep up with, while at the same time ensuring that they are getting a wonderful company at a fair price.
This portfolio is not designed for “trading”. It’s not even designed for a yearly profit. This portfolio is curated for long-term compounding.
Opinion: This portfolio would be ideal for a retirement account, like a Roth IRA.
I also designed the portfolio to contain businesses that are easy to understand. Most of these companies are very well known. It is highly likely that you are even a customer of these businesses yourself!
A portfolio with more than 10 – 12 holdings usually does not offer more diversification. Any more than that, and you run the risk of not being able to keep up with all your holdings.
Keeping the portfolio to 10 stocks ensures that the investor is getting the benefits of both diversity and concentration. It’s the happy medium between the two.
For reference, here is the sector/industry breakdown of the holdings. The goal was to provide portfolio diversification with a range of businesses in different sectors/industries, rather than add additional holdings.
Lastly, each stock has been selected because they are (at the time of writing) selling at a fair price. Each stock will have the valuation method displayed to show (if held for the long term) the projected annualized returns.
Get the Portfolio
You can get the breakdown of the portfolio in the PDF below. I wanted to provide this portfolio for free so investors could see the power of compounding by selecting a few high quality stocks, just like Buffett.
Last but not least, you can get this portfolio for free by signing up with our affiliate, M1 Finance. I have already written a review on the brokerage, which you can find here.
To summarize, M1 Finance is a free brokerage firm that allows you to invest into companies utilizing fractional shares. You can divide your portfolio into a “pie” and easily determine your allocation and weighting. It is a great brokerage for buy- and-hold investing, which this portfolio is primed for.
All you need to do to get the portfolio is sign up with M1 Finance, and add the portfolio to your account. It’s that simple.
I hope you enjoyed this article, as well as the Vintage Value Investing Portfolio. I plan to provide updates to this portfolio’s performance on a quarterly basis. The links for the updates will be listed below as they arrive.
None of the writers or contributors for VVI are registered investment advisors, broker/dealers, securities brokers, or financial planners. The information of this article is provided for informational and educational purposes only.
The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.
None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The company is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.