A Legion of Disciples
Fund managers put their own spin on Buffett's strategy
Even though Warren Buffett has been influencing investors for decades, Legg Mason portfolio manager Robert Hagstrom had never heard of him until 1984 when he was 28 years old and training to be a stockbroker. Reading Berkshire Hathaway's annual reports "was one of those episodes in life where that which was mysterious became much clearer," says Hagstrom, who has since written several investing books, including The Warren Buffett Way. "What [Buffett] did was basically put flesh on stocks which previously to me were just ticker symbols and numbers."
Hagstrom echoes the thoughts of a generation of portfolio managers who apply Buffett's philosophy to their own line of work. Some are more Buffettesque than others. You have the "purists" who load up on Berkshire stock and generally use Buffett's methods as an investment guidebook. Then you have the "tweakers" who put their own special twist on Buffett's stockpicking formula. Finally, there are the "radicals" who apply Buffett's techniques in ways he would never do.
The purists. The seeds of Buffett's wisdom took root in David Carr early, after being planted by his business partner's uncle, a Columbia University classmate of the famed investor. He gave Carr and a partner Berkshire Hathaway annual reports and news articles about Buffett when they were teens in the late 1970s. So when they set up Oak Value Capital Management in 1986, one of the first stocks the duo bought was Berkshire Hathaway, at less than $2,000 a share. Now more than 8 percent of the $142 million Oak Value fund is in Berkshire stock. Oak Value's 24 holdings also include Buffett favorites like American Express. "Buffett is a blueprint [for how] to approach our tasks on a day-to-day basis," Carr says.
Like a true Buffett disciple, Carr made visiting companies and meeting with execs a big part of his research during the fund's early days. Carr has been to Japan six times to scope out insurance company AFLAC's move there. His travel schedule has been tamed now that conference calls and corporate filings are available online. Still, Carr remains skeptical of Wall Street researchas is Buffettpreferring instead his own due diligence so that he can buy businesses at a 30 percent discount from what he thinks they are worth.
Berkshire stock also accounts for a big partsome 18 percentof the $4.4 billion Fairholme Fund. While owning so much of one stock may seem risky, Fairholme's comanager, Bruce Berkowitz, reminds investors that the team's top pick is really an amalgam of dozens of top-rated publicly traded stocks, insurance companies, and privately held businesses. Fairholme managers seek out companies led by executives whom they regard as Buffett-like in their integrity and intelligence. "We're very much focused on the jockey as much as the horse," Berkowitz says. This is a big reason that Fairholme's second-biggest position is in Canadian Natural Resources, an oil and natural gas company in which Murray Edwards, a billionaire whom many consider the Canadian Warren Buffett, is a major investor.
The fundwhich has generated average annual gains of 19.5 percent for the past five years, 5 points better than the S&P500also adheres to Buffett's notion of concentrating one's bets. Indeed, its top three holdings and cash account for more than 60 percent of the portfolio.