Berkshire Hathaway Inc. (BRK.A), The Washington Post Company (WPO): How to Invest Like Warren Buffett

Published on August 7, 2013 at 12:45 pm by SA in Hedge Funds

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Buffett and Berkshire Hathaway Inc. (NYSE:BRK.A) bagged those gains by taking major stakes in large and stable businesses such as The Washington Post Company (NYSE:WPO), Salomon Brothers and The Coca-Cola Company (NYSE:KO). These firms shared a few key traits: They all produced prodigious cash flow, and they all had a fairly wide competitive moat around them.

Buffett’s focus on value means he can still generate upside even when the broader market fails to rise. For example, from 2007 through 2011, the S&P 500 lost 1% of its value — but shares of Berkshire Hathaway Inc. (NYSE:BRK.A) rose an impressive 42%, according to GuruFocus.com.

Buffett’s $34 billion acquisition of railroad operator BNSF in early 2010 is emblematic of his bold style. He was one of the first major investors to realize that railroad firms had been making badly needed infrastructure investments that would eventually lead to robust growth and solid cash flow. BNSF generated $6 billion in operating cash flow in 2012 for Berkshire Hathaway Inc. (NYSE:BRK.A), and a slate of current investments to improve the railroad’s network is expected to lead to higher freight volumes and higher cash flow in the years to come.

Warren Buffett’s Portfolio: What’s He Holding Now?
Though Berkshire Hathaway now has stakes worth hundreds of millions of dollars in many companies, the firm has more than $10 billion in just a handful of top holdings.

Berkshire’s Current Portfolio

DaVita HealthCare Partners Inc (NYSE:DVA), which operates a national chain of dialysis centers, has been an increasing focus for Buffett in recent quarters, leading some to conclude that he’ll eventually seek to acquire the entire company. Buffett also tends to keep buying more stock of companies he already owns — as long as they remain attractively priced in relation to cash flows. Wells Fargo & Co (NYSE:WFC), DirecTV (NYSE:DTV) and Wal-Mart Stores, Inc. (NYSE:WMT), for example, have become larger components of his portfolio in recent quarters.

If history is any guide, Buffett and his team of analysts at Berkshire are getting close to making some sort of major move: Every few years, the company makes a major acquisition that deepens the foundation of cash flow. In 2009, Berkshire paid more than $40 billion to acquire railroad firm BNSF. Since then, solid cash flow has rebuilt Berkshire’s short-term cash balance back up to $48 billion. That money is just itching to go to work, setting the stage for yet more gains for Warren Buffett’s portfolio.

Action to Take –> If you’d like to follow Buffett’s approach but find it challenging to find the right companies that meet his criteria, you can buy shares of exchange-traded funds (ETFs) that tend to hold stocks with strong cash flow. For example, health care providers (such as DaVita HealthCare Partners Inc (NYSE:DVA), Buffett’s current favorite) often generate strong cash flow and trade for reasonable cash flow multiples. The iShares Dow Jones US Health Care(ETF) (NYSEARCA:IHF) is a solid choice and carries a reasonable 0.46% expense ratio. Insurers are also always a favorite of Buffett’s, and the SPDR S&P Insurance ETF (NYSEARCA:KIE), is a solid choice, with a reasonable 0.35% expense ratio.

P.S. — Warren Buffett is the ultimate buy-and-hold investor. Famously, his preferred investing horizon is “forever.” If you’re seeking Buffett-like returns, you should look at a special group of securities we call “Forever Stocks” — stocks solid enough to buy, forget about and hold… forever. To learn more about these stocks — including some of their names and ticker symbols — click here.

– David Sterman

The article How to Invest Like Warren Buffett originally appeared on StreetAuthority and is written by David Sterman.

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

Warren Buffett’s Top 5 Stocks

Buffett’s firm, Berkshire Hathaway, holds dozens of stocks. But these five make up 75% of its portfolio… worth $65 billion. Click here to get Buffett’s top 5 stocks plus his 16 latest buys, FREE.

Warren Buffett’s Top 5 Stocks

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