11 Stock Picks From the World's Greatest Investors

We studied the strategies of Benjamin Graham, Warren Buffett and others to tailor portfolios that will let you emulate their gains.

Unfortunately, no single formula for selecting investments is guaranteed to beat the market averages. Life isn’t that easy. Still, over the past several decades, a few superb stock pickers have emerged. Nearly all of them have left paper trails, in the form of books and portfolios, and those trails are worth following.

Consider Benjamin Graham, coauthor of the classic 1934 text Security Analysis and author of The Intelligent Investor, a more readable book that was first published in 1949 and has been updated many times. Graham was a highly successful investor and the mentor of Warren Buffett, among others. Graham rejected stocks with high price-earnings ratios and demanded a “margin of safety” before he invested. Graham, who died in 1976, tried to find companies priced far below their intrinsic, or true, value (as he defined it).

Not even Buffett follows Graham’s extreme value strategy, but you can. The trick is to find companies with low P/Es and low ratios of price to book value (P/B), or net worth, on the balance sheet. Book value is not quite the same thing as Graham’s concept of intrinsic value, but it’s close enough.

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A good example of a Graham stock is Wesco Aircraft Holdings (symbol WAIR), a small company that provides supply-chain management services to the aerospace industry, making sure planes have the parts they need (stocks and funds I recommend are in boldface). Wesco’s P/E, based on analysts’ average earnings estimates for the year that ends in September 2016, is just 11, compared with 15 for Standard & Poor’s 500-stock index. And Wesco’s P/B is a mere 1.1, only 10% greater than its balance-sheet value. The S&P 500’s P/B is 2.7. (Go to http://finance.yahoo.com to get P/Es and P/Bs for individual stocks; look under “Key Statistics.”)

Wesco is also a component of the Graham portfolio devised by John Reese, a money manager who founded a Web site called Validea.com and runs a newsletter called The Guru Investor. I first wrote about Reese 12 years ago. At the time, he had just launched a software program, Validea, that attempted to imitate the investing styles of a dozen investing gurus, including Graham.

These are unofficial portfolios, based on the writings and actions of managers who played no part in their composition (and some, like Graham, who are not even alive). But according to Reese’s data, a portfolio of stocks Graham might have favored, constructed using Validea’s software, has returned an impressive 10.4% annualized from its inception on July 15, 2003, through September 30, compared with just 5.5% annualized for the S&P 500.

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Focus on sales.

Among Validea’s top-performing guru portfolios is one based on the style of Ken Fisher, a California money manager and author of 100 Minds That Made the Market (1993) and several other books. Fisher is fond of stocks with a low ratio of price to sales (P/S), a more consistent valuation indicator, he believes, than P/E. Validea’s Fisher portfolio has returned an annualized 8.5% since 2003, or 3 points more than the return of the S&P 500. Recent additions to the portfolio include Mueller Industries (MLI), a Memphis maker of heating and air-conditioning equipment. Mueller has a P/S, based on the previous 12 months’ revenues, of just 0.75; a ratio of less than 1.0 can indicate a potential bargain.

Another guru, James O’Shaughnessy, is the author of one of my favorite investing books, What Works on Wall Street. O’Shaughnessy looked at decades of data and concluded that the best strategy combines elements of value and growth: a low P/S plus consistent earnings growth over five years and strong price performance over the previous 12 months. The notion of finding companies with strong business performance whose stocks have performed well recently but are still cheap makes a good deal of sense. The record of Validea’s O’Shaughnessy portfolio is stellar: an annualized return of 7.4% since its inception in 2003, or an average of 1.9 percentage points more than the S&P over the same period. Among recent additions to the portfolio is a favorite of mine, Cracker Barrel Old Country Store (CBRL), the restaurant and gift-shop chain. Its P/S is 1.2.

O’Shaughnessy himself manages several funds that put his strategy into practice, most notably O’Shaughnessy All Cap Core A (OFAAX), with an annualized return of 12.2% over the past five years, an average of 1.2 percentage points per year behind the S&P 500. I don’t recommend All Cap Core because it levies a 5.25% sales charge, but I like its strategy. Its top holdings include Home Depot (HD) and insurer Travelers Cos. (TRV).

Validea Capital Markets, which manages money for institutions and wealthy individuals, late last year launched an exchange-traded fund called Validea Market Legends ETF (VALX). The fund holds stocks from each of 10 Validea portfolios. Its top holdings as of September 30 were Lending Tree (TREE), the online mortgage marketplace, tied with Bofi Holding (BOFI), a San Diego–based bank, followed by Abiomed (ABMD), a maker of medical devices. In the first nine months of 2015, the ETF surrendered 9.2%, trailing the S&P 500 by 3.9 percentage points.

I think the Validea ETF will turn out to be a solid long-term performer, but my guess is that because of the wide variety of styles represented in the portfolio, the fund will produce returns close to those of the S&P 500. More adventurous investors should settle on a single strategy.

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The easiest one to mimic is Buffett’s. All you have to do is buy shares of Berkshire Hathaway (BRK-B), his holding company, which owns some private companies outright (for example, insurer Geico and BNSF Railway) and others in part. You can find Berkshire’s publicly traded holdings—45 of them—at www.cnbc.com/berkshire-hathaway-portfolio. Berkshire owns multibillion-dollar chunks of such household names as American Express (AXP), Procter & Gamble (PG) and Wells Fargo (WFC). It also has stakes in less-well-known stocks, such as Chicago Bridge & Iron (CBI), a Netherlands-based construction and engineering firm.

Buffett is more willing than Graham was to forsake a margin of safety to own companies that generate powerful cash flow. Validea’s Web site calls Buffett’s strategy “Patient Investor.” He buys nothing with the intention of selling it. He doesn’t care about short-term price movements. And he wants a strong brand name that is capable of producing long-term growth. Buffett started Berkshire in 1964, after buying a failing textile company. Since then, an investment of $10,000 has grown to more than $100 million.

Of course, there are no guarantees that cribbing from the gurus will produce such lovely returns. What these experts teach us for certain is that stocks are excellent investments over the long term, meaning several decades. Buffett wrote in his most recent annual report that stock prices will always be more volatile than cash in the short term. Over the longer term, he added, bonds and cash are “far riskier investments than widely diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions.” Amen.

James K. Glassman, a visiting fellow at the American Enterprise Institute, is author, most recently, of Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. He owns none of the stocks mentioned.

James K. Glassman
Contributing Columnist, Kiplinger's Personal Finance
James K. Glassman is a visiting fellow at the American Enterprise Institute. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence.