Admittedly, the title of today's article is a little deceptive.

One could just as easily say, "Hit Homeruns like Babe Ruth." Unfortunately, simply replicating the hitting mechanics of one of baseball's greatest players will not give anyone the ability to slam a 95 MPH fastball nearly 530 feet -- which, incidentally, is how far the Babe's final homerun is estimated to have traveled.

Similarly, just reading about the investing methodologies of Warren Buffett -- the Babe Ruth of the financial world -- is not going to give anyone the ability to make millions in the stock market overnight. Knowing Buffett's investing approach is one thing -- putting it into practice is a different matter entirely.

Countless investors have tried to emulate his style, but there is still only one Warren Buffett.

However, none of this is to imply that Buffett's accumulated wisdom should not be learned -- and applied. Following in his footsteps might not make you a billionaire, but it could certainly help your portfolio hit a few homeruns in the years ahead.

The Early Years
For those who are not familiar with Buffett's illustrious career and meteoric rise to fame, a brief recap might be in order.

Warren Buffett was born in Omaha, Nebraska on August 30th, 1930. It didn't take long for the man who would one day be known as the "Oracle of Omaha" to show a strong entrepreneurial spirit and a remarkable aptitude for money and finance. At the age of eleven, he was already working in his father's brokerage firm.

That same year, Buffett made his first stock market investment, purchasing three shares of Cities Service Preferred for $38 per share. Buffett then held fast when the stock plunged (something older and more experienced investors have trouble doing), and eventually sold it at $40 for a modest gain. However, the shares eventually skyrocketed to around $200 -- perhaps ingraining the buy-and-hold philosophy that has since defined Buffett's career.

After high school, Buffett studied at the University of Pennsylvania's prestigious Wharton School of Business. Later, he attended graduate school at Columbia and was taught by none other than Benjamin Graham -- considered by many to be the "father of value investing." Buffett excelled under the tutelage of his new mentor, and years later would eventually be hired to work at Graham's Wall Street firm.

With Buffett's net worth steadily rising, it was in 1956 that he moved back to Omaha and convinced seven family members and friends to invest in Buffett Associates (later known as Buffett Partnership Limited). From a humble beginning with just over $100,000 in assets, the partnership would enjoy tremendous returns under his leadership, racking up a gain of +1,156% during the first decade alone.

Naturally, this stellar performance attracted many subsequent investors, and the partnership thrived during the bull market of the late 1960's (making $40 million in 1968 alone). However, citing a lack of quality investment ideas, Buffett chose to dissolve the partnership the following year. Those original investors who stuck with him from 1956 to 1969 were richly rewarded, earning extraordinary annual returns of around +30% during that period.

Over the next year, Buffett liquidated nearly all of the portfolio's holdings. One of the few exceptions was Berkshire Hathaway -- a small textile company that Buffett had begun buying seven years earlier at $8 per share (at the time, the firm had $16.50 per share in working capital). The partnership would eventually become Berkshire's largest shareholder, and Buffett quickly assumed control of the company -- naming himself Chairman. At this point, his personal net worth was already in excess of $25 million.

The rest, as they say, is history.

Buffett proved to have a magical touch when it came to allocating Berkshire's capital, and the company's investment portfolio (and shares) zoomed higher through the years -- trouncing the major averages by a wide margin. By the early 1980's, Berkshire's stock had climbed to $750 per share and Buffett himself had already become a household name. But he was just getting started.

Despite losing nearly one-fourth of its value in the great Bear Market crash of 1987, Berkshire rebounded quickly and soared to approximately $7,500 per share by early 1990.

Towards the end of the decade, Berkshire shareholders watched from the sidelines as tech stocks raced higher and higher. Never one to invest in a complicated business he couldn't understand (and sticking to his philosophy of being fearful when others are greedy), Buffett avoided the tech sector entirely.

As a result, Berkshire began to lag the broader markets, causing some people to mistakenly claim that its aging chief had lost his touch. Other critics (many of them daytraders) asserted that buy-and-hold value investing itself was an outdated concept. However, all of this talk was silenced several years later when the tech-driven bubble came crashing down -- completely vindicating both Buffett and his investing approach.

Last Friday, Berkshire Hathaway shares closed at the astounding price of $91,750 -- making the personal net worth of its chairman somewhere in the neighborhood of $44 billion. Those who followed Buffett's lead and invested $10,000 in Berkshire Hathaway in 1965 would be sitting on a cool $51 million as of last year.

This almost inconceivable track record of success has made Warren Buffett the world's second richest individual and has secured his status as one of the most legendary investors of all time.

Buffett's Key Investing Principles
Fascinating though Buffett's biography may be, there are bigger questions that need to be answered. Most importantly: What type of companies does Buffett invest in, and as an investor, how can you profit from his approach?

Unfortunately, there is no simple answer to that question. Looking back over the past five decades, Buffett has made money on small companies and large companies, stocks and bonds, domestic and foreign firms -- and even outright speculation on foreign currency and commodities futures contracts.

Yet, while it is difficult to draw up a formulaic investing approach based on Buffett's past stock selections alone, his comments and actions have yielded some very valuable insights. At the same time, by analyzing the commonalities within Berkshire's portfolio, we can better determine the traits that Buffett searches for in a prospective investment.

With that in mind, we have distilled many of Buffett's core philosophies into the following checklist:

What makes the company stand out? Does the firm have a well-defined economic moat? Does it benefit from any sustainable competitive advantages? From a macroeconomic standpoint, how attractive are the fundamentals of the industry in which the company competes?
How unique is the business? Has the company found a way to differentiate its products, or does it sell commodity-like items with little pricing power? How strong are the firm's profit margins?
Does the firm generate strong returns on capital? Have returns on equity (ROE) been consistently higher than 15%? How about returns on invested capital (ROIC)? How do these key profitability metrics stack up against those of industry rivals?
Is the company financial healthy? Does the firm maintain a strong balance sheet, or is it highly leveraged? Is it generating sufficient cash flows to adequately service and pay down its outstanding debt obligations? How capital intensive is the business?
Can management be trusted? Do leaders candidly admit mistakes? Are the incentives of a company's managers aligned with the interests of rank and file shareholders? Does the stock have relatively high insider ownership? Has the firm made rational decisions with its retained earnings? Is management committed to delivering long-term shareholder value, or does it destroy value by employing tactics designed to meet arbitrary short-term earnings targets and appease Wall Street analysts?

When searching for Buffett-like stocks, you should ask yourself each of the questions listed above. Those that fail to qualify in all five categories are probably better left untouched.

Before nailing down your portfolio, though, keep in mind that stock selection is only part of the bigger picture. When weighing the investment criteria above, do so in conjunction with these five time-tested Buffett tenets that have formed the foundation for his success:

Stick with what you know. With investments in well-known firms like Coca Cola, Gillette, and Wal-Mart, Buffett believes in owning established companies with recognizable brands and easily understood business models. Those who invest in companies they don't understand may not spot potential problems until it's too late.
Avoid cloudy earnings visibility. When it is difficult to accurately forecast future cash flows, it becomes nearly impossible to calculate fair value with any degree of precision. Not surprisingly, Buffett shuns hot IPO's, risky technology companies, rapidly changing industries, and young firms that have not yet proven they can successfully navigate a challenging operating cycle.
Diversification is for beginners only. Buffett believes strongly that intelligent investors should focus on their best investment ideas and maintain concentrated portfolios. (Not surprisingly, over three-fourths of Berkshire's assets are tied up in just eight companies.)
Invest for the long term. With a preferred holding period of "forever," Buffett clearly is a big practitioner of buy-and-hold investing.
Don't buy a share, buy a business. Buffett stresses the difference between being a trader and an investor. Resist the temptation to track day-to-day price fluctuations. If a company's business fundamentals are improving, then it will eventually be reflected in the share price.

As a rule, Buffett places a premium on the importance of experienced and trustworthy management. He also looks for mature, well-run companies with high returns on capital and sustainable competitive advantages. In many cases, his actions go against conventional Wall Street thinking, but then again, marching along with the herd has never made anyone stand out from the crowd.

Of course, it goes without saying that while Buffett is always on the lookout for fundamentally sound companies, he is equally concerned with valuation. Similar to our mission here at Half-Priced Stocks, Buffett has made a fortune by finding quality companies that are trading significantly below the discounted value of their future cash flows. 

In His Own Words
Rather than attempt to explain many of his core beliefs, it is far easier to simply let Buffett speak for himself -- his statements seldom need further elaboration:

"It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."
"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
"We're perfectly willing to trade away a big payoff for a certain payoff."
"If you don't feel comfortable owning something for ten years, then don't own it for ten minutes."
"The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values."

"The speed at which a business' success is recognized is not that important as long as the company's intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: it may give us the chance to buy more of a good thing at a bargain price."

Putting it all Together
Because he has consistently displayed an uncanny ability to turn almost anything he touches into gold, Buffett's moves are closely scrutinized, and his comments can move the markets. Every year, thousands of investors read Berkshire Hathaway's shareholder letters and annual reports looking for clues.

This begs the question -- exactly which individual companies does Buffett currently hold in his portfolio at Berkshire Hathaway? Thanks to form 13-F (which all public companies must file quarterly with the SEC), we can answer that question definitively.

The following is a list of Berkshire Hathaway's 20 largest positions (out of 38 total) as of last quarter . . . 

Important Note:  Throughout the remainder of this article, editors Nathan Slaughter and Paul Tracy provide a closer look at Warren Buffett's current stock holdings, as well as an in-depth analysis of several additional companies that meet many of Buffett's stringent investment criteria. However, in order to view the remainder of this article, you'll need to subscribe to our value investing newsletter -- Half-Priced Stocks. After you subscribe you'll receive immediate access to this full article, as well as our monthly Half-Priced Stocks newsletter and a host of additional premium content. Please visit one of the following links to continue . . .

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