The model portfolio of Buffett-Munger screener has gained 16.1% until September 4. Focusing on predictable, high-quality companies, GuruFocus Value Strategies continue to outperform. 

As the market approaches rich valuation, a lot of value investors and value strategies struggle. The portfolio that stands out is the Buffett-Munger model portfolio. Year to date the S&P 500 has gained 11.7%, Buffett-Munger model portfolio has gained 16.1%. The overall performance since inception in 2009 is 89.3%, outperforming the S&P 500 by 33.8%.

The strategy for the Buffett-Munger portfolio is what we used in our backtesting study. This strategy focuses on high-quality companies traded at reasonable prices. To learn more, please go to:

· What worked in the market? Part I 
· What worked in the market? Part II 
· What worked in the market? Part III 

Among the four value strategies, the Buffett-Munger top 25 idea portfolio has shown the lowest volatility and the most consistent performances. It has outperformed the S&P 500 every single year since inception in 2009. The other three portfolios underperformed slightly in 2011. They have more than made up their underperformances of 2011 this year.

All of these portfolios are rebalanced just once a year. During the January 2012 rebalance, 13 out of the 25 stocks in Buffett-Munger portfolio are replaced. So the annual turnover is slightly above 50%. Among the best performers this year BioReference Laboratories Inc. (BRLI) gained 68%, and Express Scripts Inc. (ESRX) gained 41%. The 36% gain of Walmart (WMT) stock has also contributed to the overall performance of the portfolio. 

The outperformance of these strategies is achieved by focusing on high-quality companies that are traded at fair or undervalued prices. Thus we believe that the portfolios carry smaller risk than the general market. This is clearly shown in the performance of the positions in the portfolio. It is almost always the case that the outperformance is driven by the universal outperformance of all the positions. Even for the positions that underperformed, the underperformances of these positions are usually small.

This is just what we expected when we developed the Concept of Business Predictability. By investing in the companies that have consistent and predictable revenue and earnings growth traded at fair prices, we will avoid the losers, and the winners will take care of themselves.

Of all these strategies, we like the Buffett-Munger portfolio the most. As mentioned above, this portfolio invests in the top 25 stocks in the Buffett-Munger screener and is rebalanced once a year. The reasons are:

1. These companies are of high quality. They can grow their revenues and profits consistently.
2. These companies can maintain and even grow their profit margins over time. They have the “moat” that prevents others from entering their market.
3. They incur little debt while growing business.
4. They are at the low end of their historical valuations.

They may not have the market momentum with them, and they may face headwinds which bring the valuations low. But if business continues to grow, we believe it is safer to invest in these companies. Indeed, these companies have outperformed the market every year since inception.

These companies also outperformed the market by wide margins over long period of time in our backtesting. For details, go to: What Worked In The Market From 1998-2008? Part II. Undervalued Predictable Companies And Buffett-Munger Screener.

GuruFocus premium membership is needed to access the details of the portfolios and screeners. We also publish a monthly Buffett-Munger newsletter which features the picks from the Buffett-Munger Screener. If you are a premium member, you can download this for free. If you are not a Premium Member, we invite you for a 7-day Free Trial.

“I do not know if they [the Fed] will announce it… I know they are going to print more money. They already are.  If you look at their balance sheets, you will see that something is happening, assets are building on their balance sheets and they are not coming from the tooth fairy. So I do not know whether they will announce it or not. They are a little bit embarrassed because they announced QE1 and QE2, and it did not work. So they may try to discuss it. They may just continue to do it without getting egg on their face again, but they are going to print money, they are all going to print money. It is the wrong thing to do, but that is all they know to do.”

When asked about the possibility of more shocks from the Eurozone, Rogers said:

“The worst may be behind us for this week but no, there are going to be more problems coming out of Europe. You have got countries that are essentially bankrupt. Nobody is dealing with the problems in Europe. You look at everyone out there. They all have higher debts and all of their projections, maybe Bulgaria and one or two more countries do not have higher debts in their projections, but everybody has got increasing debt. The solution to too much debt is not more debt. So now you are going to have plenty more problems coming out of Europe.”

Regarding the recent late August 2012 rally in Gold and Silver:

“I am not buying either at the moment, but if I had to buy one, I would prefer to buy silver. Silver is 40% off its all-time high, gold is only 10% to 15% off its all-time high. So on a historic basis, silver is much cheaper than gold. So if I had to buy one, I would buy silver, not gold.”

“Unfortunately all central banks know to do is to print money. Most of them will anyway, and you are going to see more money printing, more debasement of currency and therefore, the price of gold will go much higher over the course of the decade. Whether it goes up this year or not, I do not know. The situation with gold is that it has been up 11 years in a row without a down year, which is extremely unusual. I do not know of any asset that has been up 11 years without a down year. So gold is correcting. It would be normal for gold to continue to correct and have a down year. Such markets are supposed to do so. Whether it is going to do, that I do not know, but I do know that gold is going to be much higher over the decade.”

Jim Rogers on OIl:

“The surprise with oil is going to be how high it stays and how high it goes. We are running out of known reserves of oil. There may be a lot of oil in the world. If there is, we just don’t know where it is. So prices are going to stay high and go much higher. If America goes to war with Iran, they are going to skyrocket. If there is a big surprise, if Spain suddenly goes bankrupt out of the blue, then oil prices will collapse. If the prices collapse, I would suggest you to buy more. If there is anything that makes it go down, I would suggest buying it because until we find a lot of oil, prices will stay high and go much higher.

On the Overall Commodity Markets:

The commodity bull market is going to on until there is a lot of new supply. You do not have much new supply in most commodities. Commodities are determined by supply and demand. You will certainly have corrections. You will have corrections in all bull markets, and you had several corrections in stocks which went up from 1982 until 2000. In 1987, stocks went down 40% to 80%. It was at the end of the bull market and you will certainly have corrections in commodities, but we are going to have shortages. If the world economy gets better, you will have big shortages. If the world economy does not get better, governments and central banks will print more money. It is a wrong thing to do, but that is what they do and that of course when currencies are being debased, the best way to protect yourself is with real assets.

With the Shanghai Composite at a new 3.5 year low, Chinese PMI data slow and Chinese consumers slowing. Rogers had this to say about China: 

“China tried tightening for three years. It started back in 2009 or so to try to kill the inflation bubble and the property bubble. Rightly so in my view. Now they are starting to loosen up. I would not loosen up yet if I were China because they need to kill inflation totally and they need to totally pop the property bubble. But I am not China. They are going to do what they want to do and it looks as though since they have transferred to the Chinese public, they are going to start loosening up now which is still soon, if you ask me. Remember China has saved huge amounts of money for a rainy day. Once it starts raining, they are going to spend that money.”

More at the Economic Times HERE

The Bottom Line

Equity markets around the world recorded technical signs of at least the start of a short term correction as of August 21^st that is likely to last until mid/late October. Seasonal trades in selected sectors such as gold and energy continue to show encouraging technical traits on the upside while other sectors such as transportation and semiconductors continue to show encouraging technical traits on the downside. A cautious stance in other markets and sectors appears appropriate until the second half of October when upside opportunities are expected to re-appear. (Ed Note: Equity Trends below the Mark Leibovit comment)

Gold and silver prices both advanced by two and four per cent respectively as Federal Reserve chairman Ben Bernanke delivered his eagerly-awaited policy statement at Jackson Hole today that fell short of delivering QE3 money printing but strongly supported the use of the policy when it was needed. Precious metals took this as a signal that the US dollar is on a down-slope.

Mr Bernanke said that past QE policy had been successful and that this is being held in reserve. He would not rule out further bond purchases to boost growth and reduce unemployment, which he called a “grave concern.”

“The costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant,” Bernanke 

Marc Faber : Ben Bernanke says well the market occasionally fails and so on and so forth but at no time was it mentioned that actually the failure was not the free market the failure was that the free market was not allowed to operate because under the free market system , Mexico would have gone bankrupt in 1994 , LTCM in 1998 , we wouldn’t have because of ultra expendituary monetary policies the housing bubble and the housing bust and the FED encouraging people to take out sub-prime loans and so forth and so on , so we had a series of interventions that led to the crisis , now the FED and other central banks just turn around and tell you ‘well if we had not eased massively after 2007 the crisis would be much worse’ what they are not telling you is that they caused the crisis – in Bloomberg Radio Interview HERE

Is Central Bank Buying Just a Driving Force Behind Gold or Much More?!

by Julian D.W. Phillips

In the same year we saw the arrival of emerging nation’s central banks into the gold market as buyers. Since then, they’ve set a pattern of buying gold that continues as a driving force behind the gold price even today. In this article, we look at these events and other monetary developments in the gold market to see what to expect in the days and months ahead.

Which Central Banks are Buying Gold and Why?

As you have seen in our newsletter in the Table of Central Banks buying and selling gold, it is the emerging nation’s central banks whose reserves have been growing strongly, that have led the way in buying gold for their reserves. Their aim is to diversify away from the U.S. dollar and other leading world currencies and to buy gold as a counter weight to those currencies.

These central banks are based in Asia, the Middle East, South America, etc. They include:

Russia – Bangladesh – Philippines – Saudi Arabia – Thailand – Belarus – Venezuela – India – Sri Lanka – Mauritius – Mexico – Bolivia – Colombia – South Korea – Turkey – Kazakhstan – Tajikistan – Serbia – Ukraine – Mongolia – Malta – Greece – Argentina.

The underlying reason why they’re buying and why the European signatories to the Central Bank Gold Agreement stopped selling is because they all consider gold to be an important Reserve Asset and as the head of the Bundesbank put it, “gold is a counter to the swings of the dollar”. Neatly put, but isn’t there more to this than simply countering the swings of the dollar?

Since gold was at $300 an ounce in 1979 right through to 2005 gold has been at that level or higher. Now it is at $1,660, five and a half times higher, and the dollar is not five and a half times lower than other currencies. Gold has risen in all currencies including the euro which was well below €300 to an ounce of gold and is now at €1,321 more than four times higher than then.

Clearly, gold adds further ingredients to national reserves as these numbers demonstrate in part. The emerging world is as aware of gold’s value in their reserves as are the developed world’s central banks and are doing something about it before there are potentially devastating developments in the global monetary system.

Why Central Banks of the U.S., Germany, France and Italy Hold 70%+ of Their Reserves in Gold

Having stated that they were sellers of gold from 1999 onwards through until now, Europe’s signatory central banks to the CBGA gave the impression before 1999 that their gold holding weighed heavily above the gold market. This combined with accelerated mining of gold as the price was dropping forced the gold price down and pushed the developed world to more and more dependence of the dollar then the euro. But in reality central banks were not trying to get rid of their gold holdings. Some aimed at selling 20% of their reserves in total, while others like Germany, did not sell any of their gold, despite being signatories to the agreement.  Some like the U.K. and Switzerland appeared to gullibly sell half of their reserves.

Then in 2009 all the signatories stopped selling except for small amounts for the minting of gold coins. This left the holding of European banks at these levels:

For such an archaic reserve asset, it is doing very well in terms of its price moves. But the governments of the developed world knew that if their 40-year long experiment with un-backed paper money were to go wrong then gold could come to their rescue and, my goodness, it has!

The now incumbent money managers may feel surprised at the way we have described currencies, i.e. as an experiment, but since Nixon cut the link of gold to currencies back in 1971, and experiment is what we’ve had. Now, the money experts and leaders of the world –looking at all the ways in which governments across the developed world have abused paper money and particularly national debt levels— can see the sinking level of confidence in such money both inside and outside the developed world. What can pull them from the brink of disaster if confidence in the two leading developed world currencies (and leading reserve currencies) collapses? What can pull the world’s leading commercial banks –particularly those fused at the hip to government in their asset portfolios— from collapse?

Having watched the credit crunch morph into the Eurozone debt crisis and potentially return across the Atlantic by year’s end to see the U.S. once again fighting over-indebtedness, developed world central and commercial banks realize that whatever their dislike of the discipline of gold and its unmanageability, it will allow them to harness a confidence that currencies are failing to do currently. Gold is also facilitating loans and liquidity that goes far beyond its price.

The structural benefits of gold are now showing through clearly in gold and the need to side-line it from the monetary system is proving a dangerous handicap for the monetary system. Hence, Basel III discussion taking place now, to be implemented from January 1^st 2013.

In the 2^nd Part of the Article, We Explore:

• Basel III and its implications for gold and its price.
• How gold is returning to the monetary system right now in the banking system.
• Will the ‘powers-that-be’ continue to allow gold to be privately owned [including in gold ETFs.
• How you can protect yourself against gold confiscation even if held in Switzerland or elsewhere.

Get the 2^nd Part of Article and Much More!

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