Warren Buffett is a hard man to outperform on the investment front.
Yet, that’s exactly the goal I set for myself and my subscribers in last month’s recommendation in my Alpha Investor Letter investment service.
My goal was to unearth a disciplined investment strategy that both focused on the U.S. stock market — and has outperformed Warren Buffett’s market-beating Berkshire Hathaway (BRK-B) over a longer time frame.
Much to my surprise, I found not one, but three such strategies.
Each of these U.S. stock market-focused recommendations uses investment strategies that have strongly outperformed the S&P 500 over the past year.
Even more impressively, all three have outperformed the investment prowess of Warren Buffett himself over the past five years. Granted, none of them rival the length of Buffett’s almost 50-year track record.
Warren Buffett Entertains Tessa Zolnikov, a University of Montana Graduate Business Student, at a 2011 Event about Investing.
Buffett-Beating Strategy #1: Corporate Spin Offs
The Guggenheim Spin-Off ETF (CSD) has delivered both S&P 500- and Berkshire Hathaway (BRK-B)-trouncing returns since its inception in May 2006.
More recently, CSD has outperformed the broader U.S. stock market significantly, with a 48.30% return over the past 12 months and a 32.59% return year-to-date. That compares with gains of 22.50% and 19.87%, respectively, for the benchmark S&P 500.
CSD mimics the Beacon Spin-off Index, which tracks companies spun off from a parent company within the past 30 months.
A “spin-off” can be the distribution of stock of a subsidiary company by its parent company’s shareholders. It can be also an equity “carve-out” or “partial initial public offering” in which a parent company sells a percentage of the equity of a subsidiary to public shareholders.
Spin-offs tend to be smaller, more focused companies, rather than large, diversified ones. That also means spin-offs fall into small- and mid-cap territory.
CSD has an excellent long-term track record of picking winners and of outperforming the S&P 500. And it has achieved this by running a concentrated portfolio. Three years ago, CSD had 40 holdings. Today, that number is just 27, and the average market cap of each holding is just $5.9 million.
CSD is highly concentrated, as the percentage of its funds allocated to its top ten holdings stands at 46.79%.
CSD charges 0.6% per year and has a beta of 0.94, making it slightly less volatile than the S&P 500.
So, buy the Guggenheim Spin-Off ETF (CSD) at market today and place your initial stop at $33.00.
Buffett-Beating Strategy #2: Share Buybacks
By investing in companies that have bought back their own shares, PowerShares Buyback Achiever Portfolio (PKW) has essentially doubled the return of the S&P 500 since its inception five years ago.
PKW boasts a 34.97% return over the past 12 months and a 30.03% return year-to-date, versus 22.50% and 19.87%, respectively, for the benchmark S&P 500.
PKW tracks the performance of the Mergent Buyback Achievers Index, which focuses on U.S. companies that have repurchased 5% or more of their outstanding shares in the previous 12 months.
With the U.S. economy returning to growth, companies are seeing profits rise and have been returning cash to shareholders in the form of share buybacks. Share buybacks reduce a company’s shares outstanding and increase its earnings per share. As a “tax-free” solution, companies view this as a better alternative to paying out dividends.
Nearly $260 billion in buybacks have been announced so far in 2013. More than 100 companies in the S&P 500 have bought back more than 4% of their shares in the past year alone. The technology, telecom and consumer discretionary sectors have been particularly active.
PKW invests in a widely diversified portfolio of 201 companies.
With the top ten holdings making up 35.69% of the portfolio, the company-specific risk on PKW is negligible.
PKW charges 0.71% per year. With a beta of 0.90, it is slightly less volatile than the S&P 500.
So buy PowerShares Buyback Achiever Portfolio (PKW) at market today and place your initial stop at $32.75.
Buffett-Beating Strategy #3: Investing in Initial Public Offerings (IPOs)
First Trust US IPO Index Fund (FPX) has outperformed both the S&P 500 and Berkshire Hathaway (BRK-B) since its launch over seven years ago. And it is not like IPOs have been particularly hot over that period.
FPX boasts a 45.77% return over the past 12 months and a 29.26% return year-to-date, versus 22.50% and 19.87%, respectively, for the benchmark S&P 500.
FPX tracks the IPOX-100 U.S. Index, which includes the 100 largest, typically best-performing and most-liquid IPOs in the IPOX Global Composite Index. The U.S. IPOX-100 Index historically has captured around 85% of total market capitalization created through U.S. IPO activity during the past four years.
The index sticks to some strict rules. No single stock can exceed 10% of the portfolio. Companies also must have a market capitalization of $50 million or more to be included. As a result, First Trust invests only in the largest IPOs and those that tend to offer the best risk-adjusted returns.
An IPO necessarily means a brand new stock. Of FPX’s top seven holdings, only Facebook (FB) is a true IPO. Other current holdings include spin-offs, or in the case of General Motors (GM), a company that has come back from bankruptcy.
The top ten holdings make up 48.87% of the portfolio.
FPX charges 0.60% per year and, with a beta of 1.12, is slightly more volatile than the S&P 500.
So, buy First Trust US IPO Index Fund (FPX) at market today and place your initial stop at $32.25.
The Bottom Line on These Three “Buffett-Beating” Strategies
Each of these diverse exchange -traded funds (ETFs) has generated terrific “Buffett-Beating” performances over the past five years.
That said, past performance is no guarantee of future results.
But as each ETF employs a disciplined and focused investment strategy based on sound, time-tested insights, they are as much “buy-and-hold”-style investments as any I have ever recommended in the Alpha Investor Letter.
To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.
P.S. Join me for the San Francisco Money Show, Aug. 15-17, at the San Francisco Marriott Marquis. There is no charge for this conference, but you do need to register. Call 1-800/970-4355, and mention code #031736.