Validea’s Warren Buffett strategy, also known as our “Patient Investor” strategy, is inspired by the investment principles of Warren Buffett, as interpreted from the book Buffettology by Mary Buffett. This strategy aims to emulate Buffett’s long-term, value-based approach to investing. Below are the key criteria and principles that define this strategy:

Key Criteria

1. Earnings Predictability:
   • Consistent annual earnings per share (EPS) growth over the past 10 years with no losses. This ensures the company has a stable and predictable earnings history.
2. Return on Equity (ROE):
   • A 10-year average ROE of at least 15%, with each individual year above 10%. This indicates that the company is efficient in generating profits from shareholders’ equity.
3. Return on Total Capital (ROTC):
   • A 10-year average ROTC of at least 12% for non-financial firms. This measures the company’s efficiency in using its capital to generate profits.
4. Free Cash Flow:
   • Positive free cash flow, which indicates that the company is not overextending itself financially and has the ability to generate cash after accounting for capital expenditures.
5. Use of Retained Earnings:
   • Management should earn at least a 12% return on retained earnings. This shows that the company is effectively reinvesting its profits to generate additional earnings.
6. Debt:
   • Long-term debt should be no more than five times annual earnings. This criterion ensures that the company is not overly leveraged and can manage its debt obligations comfortably.

Investment Approach

• Long-Term Horizon: The strategy focuses on buying stocks with the intention of holding them for an extended period. This aligns with Buffett’s philosophy of favoring a “forever” holding period for strong businesses.
• Business Focus: Instead of reacting to short-term market fluctuations, the strategy emphasizes understanding and investing in companies with solid business fundamentals and good long-term prospects.
• Valuation: Once a company meets the fundamental criteria, the strategy looks to buy stocks at attractive prices based on long-term valuation metrics. Validea calculates the expected annual return using both earnings-based and book value-based approaches, requiring a minimum expected return of 12%.

Here are the top ten highest scoring stocks for August 2024 for Validea’s Patient Investor strategy based on Buffett. Despite Buffett’s continued sale of Apple, it remains the top stock on our list. This could be an indication that his sale of the stock is more related to the large portion of his portfolio it became or general concern about the market than to issues with its fundamentals.

Further Research

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