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Craig Thomas

The Guru Fundamentals

January 26, 2006
Untitled Document

by Craig Thomas

Much has been written about how Warren Buffett and the likes choose their stocks. They must use similar methods, as many of them have close portfolio's. So what is the common thread? Could it be as simple as fundamentals? Perhaps.

If one were to analyze what holdings the guru's have, a pattern emerges. The 3 basic fundamentals (ROE, ROA, Net Profit) are of the most importance in selecting a company.

Example Given:

Moody's (MCO)

Industry: Diversified Financials

Although Moody's is 11th out of 11 within the industry in revenue, it's rankings in the 3 Fundamentals are an impressive 2-1-1 . MCO is presently owned by 5 Guru's making it one of the top holdings.

In fact, several of the most common holdings have that common thread. Obviously there are other factors, but it cannot be a coincidence that these fundamentals play such a large role in stock determination.

Also common amongst the Guru's is favoring strong 10 year EPS growth and the Total return to investor %. The bulk of their portfolio's contain companies that are strong in all five categories. It seems the 'future forecasts' and 'growth' stocks are reserved for the bottom end of the portfolio's, often taking up only 1 or 2% of its total.

As you try to determine an intrinsic value of a company, remember these 5 basic categories. Fundamentals should be the foundation of any proper valuation.

Guru Diversification

Ben Graham writes that the Value Investor portfolio should contain a limited # of companies and says the right number of different companies to own is 10-30. Buffett says "diversification is a protection against ignorance".

So why do so many of our Guru's own 30-100 stocks each? Even Buffett has 37.

The answer is that every person has different needs and ambitions. There is not a formula or a 'correct' number of stocks to own. You have to think for yourself and build your own set of values.


Craig Thomas graduated from Davenport University in 1993 and has been a financial analyst since. He is recognized by the investing community as a successful small-cap locator and has an equal following for his work on achieving accurate intrinsic valuations of the larger caps. Mr. Thomas authored 'The Ultimate Sales Weapon' in 2001, which described the Sales and Marketing methods of industry leaders and how these methods fuel growth. He is presently the owner of NYSE Consultants, a research firm in Michigan .

Rating: 2.5/5 (4 votes)


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