September Model Portfolio Review: Buffett-Munger Portfolio Outperformed 7.6% Year to Date

The third quarter was a tough month for investors. With worries of recession and the European debt crisis, the market lost 14.3% in the third quarter. For the year, S&P 500 lost 10%.


Among all GuruFocus value strategies, the Buffett-Munger portfolio lost 2.4% year to date, outperforming the market by 7.6%. Since inception in January 2009, this portfolio gained 50.16%, about doubling the return of S&P 500’s 25.26% in the same period. All numbers do not include dividends. A number of stocks in this portfolio are still in positive territory for the year, including First Cash Financial Services Inc. (FCFS, Financial), Exponent Inc. (EXPO, Financial), Church & Dwight Co. (CHD, Financial).


Portfolio of Undervalued Predictable Companies underperformed the market slightly this year. But since inception in January 2009, this portfolio has gained 64.9%, more than the 50.16% of the Buffett-Munger portfolio’s 50.16% and S&P500’s 25.26%. This portfolio models the predictable companies that are sold at the largest discount relative to intrinsic value. This is the screener for these stocks.


Two other value strategies, predictable companies that are sold at historical P/S and P/B ratios, outperformed the S&P 5000 slightly for the year. Since inception in January 2010, the portfolios gained 6.16% and 9.2%, respectively, while the S&P 500 gained just over 1%.


Two model portfolios that performed especially well are the portfolios of Top 25 Historical High P/S Ratio Companies and Top 25 Overvalued Predictable Companies. These are high qualities that are sold at historical high valuations. We thought that these companies would decline more during market corrections. But they actually hold much better than the market average. Therefore, they cannot be used at hedges, as we originally planned.


Among all value strategies, the Buffett-Munger model portfolio has performed the best year to date. "Buffett-Munger Screener" can be used to find companies with high-quality business at undervalued or fair-valued prices:

1. Companies that have high Predictability Rank, that is, companies that can consistently grow their revenue and earnings.
2. Companies that have competitive advantages. They can maintain or even expand profit margins while growing their businesses.
3. Companies that incur little debt while growing business.
4. Companies that are fair valued or undervalued. We use PEPG as indicator. PEPG is the P/E ratio divided by the average growth rate of EBITDA over the past five years.

From the back testing study from 1998-2008 we have found strong correlations between the Predictability of Businesses and the long-term return of stocks. The group of undervalued highly predictable companies performed the best. This group had an annualized gain of 20%, while the market just averaged 2.7% a year.


For details, go to: What Worked in the Market from 1998-2008? Part II. Under-Valued Predictable Companies and Buffett-Munger Screener.


This is a summary of the four value strategies mentioned above:

1. Buffett-Munger screener: Invests in predictable companies that have low debt, consistent profit margin, and traded at low PE to growth ratios.
   
   
2. Undervalued Predictable Companies: Invests in predictable companies that are undervalued based on DCF model.
   
   
3. Historical low P/S: Companies that have high predictability rank, but traded at historical low P/S ratios.
   
   
4. Historical low P/B: Companies that have high predictability rank, but traded at historical low P/B ratios.
   
   

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