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Investing

Investing Like Buffett and Graham

The managers of Oak Value aim to achieve excellence by following the examples of Warren Buffett and Benjamin Graham.

Many investors claim to emulate the investing techniques of Warren Buffett and Benjamin Graham, the father of security analysis. But few do it as thoroughly as the team that runs Oak Value, a small, no-load fund run by a small company based in Durham, N.C. "Investing in good businesses, with good management, purchased at attractive prices," reads the fund's motto, posted at www.oakvaluefund.com.

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The marks of Buffett and Graham are all over Oak Value Capital Management. The fund's quarterly shareholder letters contain numerous Buffettisms. And Larry Coats, one of the fund's managers, sprinkles his description of its strategy with Buffett and Graham references (other members of the investing team include Christy Phillips and David Carr Jr., the firm's co-founder; the other co-founder, George Brumley III, died in a 2003 plane crash).

And, guess what. Buffett's Berkshire Hathaway occupies the top spot in Oak Value's 24-stock portfolio, accounting for nearly 10% of assets. In fact, Berkshire has been one of the fund's tenants since its 1993 inception. Over the years, its weighting in the fund (symbol OAKVX) has varied from 1.5% to nearly 12%. "Right now, we believe Berkshire warrants a 10% holding," says Coats. "But it's not a museum piece. There is a price at which we would reallocate capital." (Translation: he'd sell the stock if it got too pricey.)

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Oak Value holds both classic value stocks, including insurers, and growthier fare, such as eBay and Microsoft, a recent addition. Like Buffett, the managers are buy-and-hold investors who gravitate toward understandable businesses with sustainable cash flows and strong management teams. The fund's turnover is 30%, meaning that on average it holds stocks for a bit more than three years.

From its inception through April 24, the fund returned an annualized 12%, an average of one percentage point more than the Standard & Poor's 500-stock index. It held up relatively well during the 2000-02 bear market, during which it surrendered 19%, far less than the 35% drop experienced by the average U.S. stock fund (and the S&P 500's 47% loss).

Oak Value has also had some lean years. In 2005, for example, it lost 1%, trailing the index by six percentage points. And its 8% gain in 2004 lagged the index by three points. Coats says the fund's lackluster showing during this stretch resulted largely because it avoided energy stocks, whose performances, he says, are too closely tied to the price of oil and gas.

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But over the past year through April 24, the fund gained 19%, four percentage points more than the S&P 500. "Quality has begun to matter again," says Coats. "Part of our performance lately can be attributed to the fact that the market is more aligned with what we do."

Also boosting performance, Coats says, was an overhaul of the fund's research department several years ago. Previously, he says, the team of analysts was more like a craft guild. "They were good analysts in their own right but didn't have the effectiveness and productivity of a team," he says. The department's reconfiguration included several analyst changes, as well as the creation of a research database. "It's easy as value managers to become complacent with the companies we own," Coats says. "We realized that we should be learning more and more about a lot of businesses every day, and there should be more competition for the capital in the portfolio."

The fund, which contains $148 million in assets, requires an initial minimum investment of $2,500. It charges 1.29% a year for expenses.

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