If you're struggling to pick stocks in today's market, ask yourself: What would Warren do? istockphoto By Kathy Kristof, Contributing Editor August 7, 2015 Picking stocks, always a tricky prospect, has gotten a lot tougher lately. A prolonged bull market has brought U.S. stocks near record highs, stretching price-earnings ratios and depressing dividend yields, which makes it harder to find a bargain. At the same time, economic uncertainties abound, with overseas markets in turmoil, the Federal Reserve waffling on the direction of U.S. interest rates, low oil prices hobbling the energy industry and the strong dollar wreaking havoc with earnings at big multinational concerns. See Also: The World's Greatest Stocks Yet whenever investors are feeling particularly perplexed, they have a simple option. They can ask: What would Warren do? Thanks to the regularity of quarterly Securities and Exchange Commission filings, anyone with Internet access and enough curiosity to dig through mandatory 13F forms, which provide details about the holdings of institutional investment managers such as Buffett, can see what the world's most renowned investor owns. And by tracking back through older filings, it's possible to figure out what Buffett has been buying and selling in his $132 billion stock portfolio at Berkshire Hathaway (symbol BRK-B), the company he heads. Of course, you shouldn't imagine that you'll make a fast buck emulating Buffett, says David Kass, a professor of finance at the University of Maryland's business school, who studies Buffett and is a Berkshire shareholder. Buffett is usually looking for out-of-favor companies that are selling at a discount to their intrinsic value. He expects those bets to pay off in a matter of years—sometimes decades. Still, if you're willing to get rich slowly, there's no better mentor than Buffett. Standard & Poor's 500-stock index has returned a respectable 9.9% annualized since 1965, when Buffet took control of a textile manufacturer called Berkshire Hathaway. But Berkshire's book value (assets minus liabilities), Buffett's preferred measure of his company's performance, has climbed an annualized 19.4%. And Berkshire's A shares (BRK-A), which go back to 1965, have done even better, soaring from roughly $15 to an astonishing $215,421, for a gain of 21.6% annualized. "Investors with patience could do very well following his lead," says Kass. Advertisement If you want to emulate Buffett, you have two reasonable ways to go. You can invest in Berkshire Hathaway, which gives you a piece of every stock in Buffett's portfolio as well as the company's vast conglomeration of subsidiaries, ranging from See's Candies to insurer Geico. The other option is to buy the stocks that Buffett buys and to sell them when he's getting out. So, for those taking that approach, what has Buffett been buying? 6 Stocks Buffett Is Buying One stock to consider is Wells Fargo (WFC, $57.95). With $1.7 trillion in assets, Wells is the nation's fourth-largest banking company. Buffett has owned the stock for decades and consistently adds to his position. In the first quarter of 2015, Buffett hiked his Wells Fargo stake by 6.8 million shares, giving Berkshire a total of 470.3 million shares, which are worth $27.3 billion at today's share price. That makes Wells Fargo Berkshire's biggest holding. (Share prices and related data are as of July 21.) Although the past few years have presented a challenging environment for banks, Wells has managed to eke out steadily rising profits despite slipping revenue over the past two years. Now, with the economy gaining steam, the prospects for all banks appear to be improving. That's mainly because banks earn the bulk of their money on the spread between the cost of deposits and the amount they can charge for loans. When interest rates start rising, banks can immediately charge more for loans, but the interest they pay on deposits rises slowly because customers typically are not quick to pull their savings or switch checking accounts for a slightly richer rate elsewhere. Wells Fargo is particularly well-positioned for a rising-rate environment, says RBC Capital analyst Joe Morford. The company has a steady deposit base and plenty of cash to lend, and it has seen strong demand for commercial loans. Additionally, it is expanding its profitable credit card and investment management businesses. Advertisement The Kraft Heinz Co. (KHC, $80.22) was formed by the recent merger of Kraft Foods and H. J. Heinz Holdings, creating the fifth-largest food dynasty in the world. Berkshire now owns one-fourth of the company. Buffett is watching closely over that $25 billion investment by serving on the board, as are two other top Berkshire executives. Three other positions on the board are held by top-level executives at 3G Capital, a valued partner in several Buffett ventures. That gives Buffett and friends a slight majority of the board. With brands ranging from Planter's and Oscar Meyer to Maxwell House, the new company's focus over the next several months will be on integrating operations. Stifel Research analyst Christopher Growe says the merger will save the combined company at least $1.5 billion in annual operating costs and give Kraft Heinz the ability to make more acquisitions in the future. It is also likely to make Kraft Heinz one of the most profitable food companies in the world. Pundits are not sure what to make of Buffett's rapidly growing position in International Business Machines (IBM, $163.07), which on July 20 reported its 13th consecutive quarter of declining revenues. Buffett first invested in the venerable computer, software and technology-consulting company in 2011, picking up 63.9 million shares for $10.9 billion, which works out to about $170 a share. See Also: 6 Great Stock Picks for an Aging Bull Market The stock, which plunged nearly 6% on the day after release of second-quarter results, now trades for barely more than 10 times estimated 2015 earnings, far less than the overall market's price-earnings ratio of 18. Advertisement Even so, IBM is no bargain, says Ivan Feinseth, an analyst with Tigress Financial Partners, a New York City investment banking concern. "It's cheap, but there's a reason for that," he says. "If you are not moving ahead in technology, you are falling behind. And IBM has missed out on a lot of the key trends that happened in tech." But Buffett just keeps buying and says he's not fazed by the stagnating share price. That's because when the stock languishes, IBM buys back its own shares cheaply. Last year, Berkshire picked up another 11.2 million IBM shares, raising his stake to 79.6 million shares, worth about $13 billion. When asked about IBM at Berkshire's annual meeting this year, vice-chairman, Charlie Munger, said that the company is extremely adaptable and that both he and Buffett are optimistic about its prospects. As for Wall Street's skepticism, "if people weren't so often wrong, we wouldn't be rich," he said. Buffett is also a longtime owner of American Express (AXP, $78.95). Berkshire's stake in Amex is worth nearly $12 billion but Buffett hasn't been a recent buyer. Berkshire has been picking up shares in competitors Visa (V, $72.02) and MasterCard (MA, $96.71). Over the past year, Berkshire's stake in MasterCard grew by 1.2 million shares, to 5.2 million shares, which are worth a bit more than $500 million. Berkshire also raised its stake in Visa, to 9.9 million shares, which are valued at $713 million today. However, Kass says these purchases were likely not orchestrated by Buffett. Instead, he attributes them to Todd Anthony Combs, a 44-year-old former hedge fund manager who is investing a piece of Berkshire's portfolio. Combs owned MasterCard in Castle Point Capital, a hedge fund that he ran, says Kass. Combs was likely looking for opportunities to get back into credit-card stocks when he started managing money for Buffett in 2010. Should the wisdom of these investments be discounted because they weren't made by Buffett? Not at all, says Kass. "The market may give them less weight, but I don't," he says. Advertisement Combs and Ted Weschler, another former hedge fund manager who is now part of Berkshire's investment team, outperformed Buffett in both 2012 and 2013, according to Berkshire company statements. Berkshire didn't reveal the relative performance of its investment managers in 2014, but Kass is convinced the newer team members are doing well. "Buffett has been an exemplary investor for 30 years, but Weschler and Combs are exceptional investors, too." Weschler was probably responsible for Berkshire buying into Charter Communications (CHTR, $185.27), and both he and Combs claim credit for Berkshire's stake in DirecTV (DTV, $92.54). Both companies are now involved in separate mergers that have helped propel their stock prices over the past two years. Shares in DirecTV, which is being acquired by AT&T (T, $34.57), are close to the buyout price and, thus, have little appeal. But Charter, which is in the process of buying Time Warner Cable (TWC, $188.53) and the majority of privately held Bright House Networks, are worth snapping up, says Canaccord Genuity analyst Gregory Miller. The two acquisitions give momentum to Charter's plan to transform itself from a rural cable provider to a nationwide force in video and broadband services. Miller is convinced that the company will win the requisite regulatory approvals. Charter has been on a roll since hiring CEO Thomas Rutledge away from Cablevision Systems in 2011, Miller says, adding that he's confident that this management team is capable of delivering "meaningful additional value" to shareholders.