As the market approaches rich valuation, a lot of value investors and value strategies struggle. The portfolio that stands out is the Buffett-Munger model portfolio. Year to date S&P500 gained 14.9%, Buffett-Munger model portfolio has gained 18.2%. The overall performance since inception in 2009 is 92.6%, outperforming the S&P 500 by 32.5%.
The strategy for Buffett-Munger portfolio is what we used in our backtesting study. This strategy focuses on high quality companies traded at reasonable prices. To learn more, please go to:
· What worked in the market? Part I
· What worked in the market? Part II
· What worked in the market? Part III
Among the four value strategies, Buffett-Munger top 25 idea portfolio has shown the lowest volatility and the most consistent performances. It has outperformed the S&P 500 every single year since incepted in 2009. The other three portfolios underperformed slightly in 2011. They have more than made up their underperformances of 2011 this year.
All of these portfolios are rebalanced just once a year. During the Jan. 2012 rebalance, 13 out of the 25 stocks in Buffett-Munger portfolio are replaced. So the annual turnover is slightly above 50%. Among the best performers this year BioReference Laboratories Inc. (BRLI) gained 81.6%; Express Scripts Inc. (ESRX) gained 41%. The 37% gain of WalMart stock has also contributed to the overall performance of the portfolio.
The outperformance of these strategies is achieved by focusing on high quality companies that are traded at fair or undervalued prices. Thus we believe that the portfolios carry smaller risk than the general market. This is clearly shown in the performance of the positions in the portfolio. It is almost always the case that the outperformance is driven by the universal outperformance of all the positions. Even for the positions that underperformed, the underperformances of these positions are usually small.
This is just what we expected when we developed the Concept of Business Predictability. By investing the companies that have consistent and predictable revenue and earnings growth traded at fair prices, we will avoid the losers, and the winners will take care of themselves.
Although all these strategies, we like the Buffett-Munger portfolio the most. As mentioned above, this portfolio invests in the top 25 stocks in the Buffett-Munger screener and rebalanced once a year. The reasons are:
1. These companies are of high quality. They can grow their revenues and profits consistently.
2. These companies can maintain and even grow their profit margins over time. They have the “moat” that prevents others to enter their market.
3. They incur little debt while growing business
4. They are at the low end of their historical valuations.
They may not have the market momentum with them, and they may face headwinds which bring the valuations low. But if business continues to grow, we believe it is safer to invest in these companies. Indeed, these companies have outperformed the market every year since inception.
These companies also outperformed the market by wide margins over long period of time in our backtesting. For details, go to: What Worked In The Market From 1998-2008? Part II. Under-Valued Predictable Companies And Buffett-Munger Screener.
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