The Buffett Philosophy

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Baby Buffett Portfolio: His 6 Best Long-Term Picks

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The Buffett Philosophy

Warren Buffett is a proponent of value investing, which looks to find

stocks that are undervalued compared to their intrinsic value. Financial

metrics like price/book (P/B), price/earnings (P/E), return on equity (ROE)

and dividend yield carry the most weight on the Buffett scales. In addition,

he seeks out companies that have what he calls "economic moats" - high

barriers to entry for a competitor who may wish to invade the market and

erode profit margins.

Read: 1. Nike, Inc.

1. Nike, Inc.

The Nike (NYSE:NKE) name is synonymous with high-performance shoes,

but the company has expanded far beyond just footwear and is now a



leader in apparel, sporting goods, and just about anything else for the

athletically inclined. Nike is No.1 in just about every market it participates

in, leading to high profit margins. Nike also has a strong balance sheet,with nearly $4 billion in cash and barely any debt to speak of. This

company is also making big inroads in China and other developing

economies, and has one of the strongest and most recognizable brands in

the world.

Read: 2. Burlington Northern Santa Fe Corp.

2. Burlington Northern Santa Fe Corp.

Buffett really believes in this company - so much so that put $34 billion on

it on November 3. This freight railroad operator either owns or leases

nearly 50,000 route miles of track in the United States and Canada.

Burlington Northern (NYSE:BNI) transports nearly everything that makes

an economy go, from consumer goods and autos to lumber, petroleum

and coal.

Railroad operators like BNI are considered "early cycle" beneficiaries of a

strengthening economy; when activity picks up after a recession,

transport companies tend to be among the first to see higher orders, sales

and earnings growth. Burlington Northern also sports a below-market

average P/E and a handy 2% dividend yield.



Read: 3. ConocoPhillips

3. ConocoPhillips

ConocoPhillips (NYSE:COP) is an integrated energy company participates

in all parts of the oil and gas industry, doing everything from drilling to

refining to end sales of refined products like gasoline, natural gas and

petrochemicals for industrial use.

Company shares were more than halved in the past 18 months, as the

global recession punished energy prices, and refining margins fell to theirlowest levels in over a decade. But a rebound in crude oil and some

prudent decisions by management to scale back spending have helped to

put a floor under the stock, which trades for barely 12 times earnings

while paying a nearly 4% dividend yield.

Read: 4. Costco

4. Costco



This operator of discount warehouses has been the definition of "slow

and steady" for decades. Operating under a strict philosophy of capping

profit margins so that customers get lower prices whenever Costco(Nasdaq:COST) does, the company has built a loyal following that borders

on religious. Members pay an annual fee to Costco for the right to shop at

the stores, and most Costco cardholders will tell you that they can save

more money than the membership cost in a single visit. Those

membership fees, meanwhile, drop like a rock to Costco's bottom line as

net income.

Costco sells mostly grocery items, produce and consumer goods, but you

can find just about anything in a Costco warehouse, including clothes,

electronics, seasonal goods, jewelry and home improvement items.

Read: 5. The Coca-Cola Company

5. The Coca-Cola Company

Buffett has owned the eponymous soft drink maker for decades, and it

has been one of his most successful holdings. Coca-Cola (NYSE:KO)

continues to grow around the world, following a unique strategy of selling

mainly syrup and concentrate to bottlers and restaurants, which then

formulate the finished products that you see in grocery stores and

restaurants.

While the U.S. market is somewhat saturated, the leading brand and high

profit margins make Coca-Cola a cash cow - a source of dependable

earnings, year in and year out. In addition, the company generates the



lion's share of sales overseas, and sports strong product growth rates in

emerging markets like India, where sales grew more than 25% in the past

year. Adding to the value proposition for this stock is a 3% dividend yield.

Read: 6. Procter & Gamble

6. Procter & Gamble

It's a safe parlor bet to say there's at least one Procter & Gamble

(NYSE:PG) product in every home in America. The company is a

consumer products Goliath, with brands like Tide, Bounty, Pampers, Head& Shoulders, Gillette, Olay, Crest, Oral-B, Down, Downy and Duracell

(whew!). P&G's long-term strategy is to only compete in markets where it

has a No.1 or No.2 market share, and pare off products when it can't

obtain that leadership position. Having a top market share allows PG to

easily raise product prices when the cost to produce items rises.

PG also has a 3% dividend yield and a low P/E multiple of 13 times

earnings - below the stock market average.



Read: The Bottom Line

The Bottom Line

There's no shame in being a coattail investor, especially when that coat

belongs to Warren Buffett. While all stock investing comes with some risk,

a basket of these six stocks is a diversified way to participate in an

economy that is by all accounts growing after the worst recession in

decades. These market leaders have high barriers to competition, are

fairly priced and, regardless of what short-term stock prices say, should

deliver long-term value to shareholders. As Buffett himself said, in the

short term the market is a voting machine, in the long term, it is a

weighing machine. Buffett has an uncanny ability to pick the stocks with

the greatest potential for growth, ensuring that the profit scale will always

tip in his favor.

The Buffett Philosophy

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