The Key Stocks & 4 Reasons Why Buffett-Munger’s Model Portfolio Gained 16.1% Year-To-Date

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The model portfolio of Buffett-Munger screener has gained 16.1% until September 4. Focusing on predictable, high-quality companies, GuruFocus Value Strategies continue to outperform. 

As the market approaches rich valuation, a lot of value investors and value strategies struggle. The portfolio that stands out is the Buffett-Munger model portfolio. Year to date the S&P 500 has gained 11.7%, Buffett-Munger model portfolio has gained 16.1%. The overall performance since inception in 2009 is 89.3%, outperforming the S&P 500 by 33.8%.

The strategy for the Buffett-Munger portfolio is what we used in our backtesting study. This strategy focuses on high-quality companies traded at reasonable prices. To learn more, please go to:

· What worked in the market? Part I 
· What worked in the market? Part II 
· What worked in the market? Part III 

Among the four value strategies, the Buffett-Munger top 25 idea portfolio has shown the lowest volatility and the most consistent performances. It has outperformed the S&P 500 every single year since inception in 2009. The other three portfolios underperformed slightly in 2011. They have more than made up their underperformances of 2011 this year.

All of these portfolios are rebalanced just once a year. During the January 2012 rebalance, 13 out of the 25 stocks in Buffett-Munger portfolio are replaced. So the annual turnover is slightly above 50%. Among the best performers this year BioReference Laboratories Inc. (BRLI) gained 68%, and Express Scripts Inc. (ESRX) gained 41%. The 36% gain of Walmart (WMT) stock has also contributed to the overall performance of the portfolio. 

The outperformance of these strategies is achieved by focusing on high-quality companies that are traded at fair or undervalued prices. Thus we believe that the portfolios carry smaller risk than the general market. This is clearly shown in the performance of the positions in the portfolio. It is almost always the case that the outperformance is driven by the universal outperformance of all the positions. Even for the positions that underperformed, the underperformances of these positions are usually small.

This is just what we expected when we developed the Concept of Business Predictability. By investing in the companies that have consistent and predictable revenue and earnings growth traded at fair prices, we will avoid the losers, and the winners will take care of themselves.

Of all these strategies, we like the Buffett-Munger portfolio the most. As mentioned above, this portfolio invests in the top 25 stocks in the Buffett-Munger screener and is rebalanced once a year. The reasons are:

1. These companies are of high quality. They can grow their revenues and profits consistently.
2. These companies can maintain and even grow their profit margins over time. They have the “moat” that prevents others from entering their market.
3. They incur little debt while growing business.
4. They are at the low end of their historical valuations.

They may not have the market momentum with them, and they may face headwinds which bring the valuations low. But if business continues to grow, we believe it is safer to invest in these companies. Indeed, these companies have outperformed the market every year since inception.

These companies also outperformed the market by wide margins over long period of time in our backtesting. For details, go to: What Worked In The Market From 1998-2008? Part II. Undervalued Predictable Companies And Buffett-Munger Screener.

GuruFocus premium membership is needed to access the details of the portfolios and screeners. We also publish a monthly Buffett-Munger newsletter which features the picks from the Buffett-Munger Screener. If you are a premium member, you can download this for free. If you are not a Premium Member, we invite you for a 7-day Free Trial.