Mutual Funds That Have Invested in Warren Buffett's Berkshire Hathaway

Everyone knows that Warren Buffett is one of the greatest living investors. Not for nothing is the guy known as the "Oracle of Omaha." Thing is, while shares of his Berkshire Hathaway holding company look relatively cheap in terms of their price multiples, ponying up the entrance fee might be a stretch: Berkshire's A shares (BRKa) currently go for around $110,000 a pop, while the B shares (BRKb) will set you back roughly $3,667.

Buffett groupies
The good news is that you can get access to Buffett and his portfolio of subsidiaries and equity holdings for smaller sums. How so? Via mutual funds that hold Berkshire shares in their portfolios.

FMI Large Cap (FMIHX), for example, recently had nearly 8% of its assets plunked down on Berkshire Bs. The fund rounds out its portfolio with the likes of Sprint Nextel ( NYSE: S), Tyco International ( NYSE: TYC), and TJX Companies ( NYSE: TJX). Oak Value (OAKVX), meanwhile, runs with a Berkshire slug that weighs in at almost 9% of assets and, if you invest via an IRA, has a $1,000 minimum. Buy shares of this puppy, and in addition to Berkshire, you'll be investing in a portfolio that recently held Harley-Davidson ( NYSE: HOG) and Oracle ( Nasdaq: ORCL), too.

What's that? Those funds don't provide quite enough Buffett for you? Not to worry: In the September issue of Motley Fool Champion Funds, we revisited the investment case for a fund -- my favorite of the Buffett boys -- that packs more than 16% of its assets into Berkshire Hathaway. Other holdings here include EchoStar Communications ( Nasdaq: DISH) and Duke Energy ( NYSE: DUK), and yep, this fund, too, can be had (via an IRA) for a mere $1,000.

In the interest of protecting value for our members, we tend to play our newsletter's recommendations close to the vest. But if you want the inside scoop on this pick and all of our others, no problem: Just click here for a free 30-day guest pass.

Fund your future
In the meantime, add "access" to the list of winning traits that make investing in a world-class portfolio of mutual funds a great way to begin -- and continue -- your career as an investor. In addition to the likes of Berkshire, funds also open the door to areas of the market that might lie outside your circle of investing competence.

If you're looking to dial up your exposure to, say, equities plucked from the world's developing economies or even those in your own backyard that hail from industries you don't fully understand -- biotech, anyone? How 'bout nanotech? -- terrific funds helmed by stock pickers who do understand them can be had, provided you know where (and how) to look.

Pricey picks with green managers are musts-to-avoid, for example, as are most funds that pack tons of assets into narrow areas of the market. Quick and easy diversification, after all, is another built-in advantage of well-chosen mutual funds.

The Foolish bottom line
Choosing well is what we strive to do each month at Champion Funds -- and so far, so good. Our list o' picks is up on the market by more than 10 percentage points since we opened for business back in March 2004.

That free 30-day guest pass I mentioned is just a mouse-click away, and you can use it to rummage through our archives, fund recommendations, and our members-only discussion boards. There's no obligation to stick around if you find it isn't for you, so go ahead and give Champion Funds a whirl. A world of market-beating stocks that you might not otherwise invest in awaits.

This article was originally published on Aug. 15, 2006. It has been updated.

At the time of publication, Shannon Zimmerman didn't own any of the securities mentioned above. Berkshire Hathaway and Tyco are Inside Value selections. Duke Energy is an Income Investor recommendation. You can check out the Fool's strict disclosure policy by clicking right here.

The Motley Fool is dedicated to Educating, Amusing, and Enriching all visitors to their website at http://www.fool.com/index.htm?ref=Yo.

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Food For Thought

Can Individual Investors Beat the Market?

That's a good question -- and the title of a now-famous academic paper. For most investors, the answer is an emphatic "No." At least not by any meaningful degree, but more on that later.

Fortunately, you have options. You can buy an index fund, something we recommend for a good chunk of your portfolio. That way, you essentially bet with the house. But indexing has its downsides, not the least of which is lost opportunity.

Let's take an example. Imagine that, on top of your core index holdings, you earmark an additional $50,000 as market-beating ammo. If that $50,000 earns 10% yearly -- something you might hope for from the Standard & Poor's 500 -- you'll have $336,375 after 20 years.

Sounds good, but wait.

How about an extra half-million?
If you can muster 15% instead of 10% with the more aggressive portion of your portfolio, you'll walk out of the gates with $818,327! That extra 5% per year gets you an additional $481,952. I don't know about you. ... OK, yes I do: We'd all love to grab half a million dollars extra.

Of course, that extra 5% doesn't do you much good if you don't get it. Sadly, most individual investors don't, for many reasons. Here are just two.

Never letting go. In The Courage of Misguided Convictions: The Trading Behavior of Individual Investors, Barber and Odean find that we are 50% more likely to sell a winner than a loser. Our tendency to avoid pain -- in this case, refusing to take a loss that already exists -- is just one psychological weakness that leads us to poor investing decisions.

That irrational exuberance. Another is a sort of self-perpetuating prophecy: We pursue exciting opportunities to the point where they are no longer such good investments. AMD ( NYSE: AMD) may have merit as a company, but was it worth a triple-digit P/Eback in 2005? Probably not. And that's one of the reasons the stock has dropped even as the company has grown earnings.

OK, it's smoky in here ...
But given the choice, where will you sit? At the table of visor-clad sharks or the one with the Hawaiian-shirted tourists? Sounds simple, but odds are you've been sitting down with the sharks in the stock market, playing a tougher game than you have to.

Lakonishok, Shleifer, and Vishny -- three professors I'll call "LSV" for short -- suspected as much. In 1994, the trio set out to investigate why certain types of stocks consistently tend to outperform. They started by dividing stocks, using a variety of factors, into two groups: Unloved, low-expectation nobodies -- value stocks. High-priced, high-expectation glamour stocks.

Picture shoelace makers and semi-regional banks versus, say, Infosys Technologies ( Nasdaq: INFY), CNET Networks ( Nasdaq: CNET), or Wind River Systems ( Nasdaq: WIND). Tell me, where do you think the sharks are playing?

So, how about that extra 5%?
Breaking stocks into a 10-group spectrum ranked by earnings yield (earnings divided by price, or E/P -- academics prefer to rearrange familiar measures to maintain an air of sophistication), the trio shows that the high-E/P value end of the spectrum bested the glamour end by about four percentage points per year.

That's not pocket change. And it wasn't news to many of history's greatest investors. The likes of Dodd, Graham, Buffett, and many others have espoused buying stocks with low P/Es. It's great to see confirmation of the low P/E ideology from both academia and investors past -- but there's work to be done.

You don't have to be Warren Buffett to notice that E/P, however powerful, is a simple, imprecise measure. LSV knew this -- in fact, the study aimed in part to expound upon a study (by Fama and French) that harped on the book-to-market ratio (B/M), a variable described by LSV as "not 'clean'" for its oversimplicity and inability to capture other forces -- namely, growth.

Investors gone wild
Indeed, growth is sorely missing from measures like B/M (again, an academic inverse of the familiar price/book value ratio) measure. So LSV gave growth special attention.

The trio again broke the universe into deciles, this time using a formula based on historical sales growth. Amazingly, value stocks -- the low-expectation, low-growth nobodies -- again walloped glamour, this time by 7.3 percentage points per year.

It's important to understand why. The gang explicitly rejected the knee-jerk academic explanation that if value stocks do better, they must somehow be riskier. Instead, they identified -- and politely termed "suboptimal" -- inferior behavior on the part of investors as the culprit.

Investors overpursue today's hot performers to the point that returns are no longer lucrative. And, to be more specific, LSV's glamour stocks are high-sales-growth stocks that don't have much in the way of assets or cash flows. In other words, stocks like Apollo Group ( Nasdaq: APOL), CA ( NYSE: CA), or (arguably) even eBay ( Nasdaq: EBAY), which have experienced strong sales growth in the past, wouldn't fit the "glamour" moniker. Moreover -- and I'm probably butchering once-eloquent thoughts -- investors don't adequately understand mean reversion, a concept best explained by analogy.

Odds are that a car going 100 mph on the freeway will be traveling closer to the speed of traffic five minutes later. Similarly, a driver clocked at 35 may be going slowly only temporarily (unless he's driving in front of me) and will, the odds dictate, also be traveling closer to the speed of traffic five minutes hence.

It's not impossible to make money in glamour stocks. In fact, some people make a killing in them. But it's a mistake to assume that current trends will continue indefinitely -- and clearly, the glamour table is a tougher game.

Now I'll drop the bomb
The real secret of the LSV study was the magic of combining factors. A portfolio favoring high (cheap) E/Ps and low growth outperforms its glamour opposite by 11% per year. Now that's astounding. Wouldn't you be eager to sit down at a card table knowing you had an 11% advantage?

And remember the study about individual investors failing to beat the market? There's more to the story, both good and bad. A precious handful -- the top decile -- of investors do beat the market, and nicely, earning "excess returns" of 0.12% to 0.15% per day. But that's largely offset by the bottom decile's 0.11% to 0.12% loss. In other words, for every couch potato investor doing well, one does poorly -- ironically, so poorly that we'd do well to sell short his favorite picks and profit from their declines.

Bottom line for you
If you're just jumping into the game, odds are you won't win. Your odds of consistently beating the market are about the same as those of consistently letting the market beat you. Of course, we'd all like to think we're in that special 10%, but with your retirement at stake, isn't a little honesty in order?

One option is to find someone in that 10% -- a proven top-deciler -- and keep him or her on a short leash. If you either (a) don't have the time, effort, skill, or inclination to beat the market, or (b) don't know anyone who does, I highly recommend you take a look at Tom Gardner.

Cheating off Tom makes all kinds of sense for the "bottom 90%" of us. Since he launched his Motley Fool Hidden Gems newsletter service in July 2003, Tom's picks have returned 47% -- a mind-blowing 26 percentage points above the S&P 500. If you like those odds, Tom is offering a no-obligation, 30-day free trial to Hidden Gems, full privileges included -- simply click right here to learn more.

This commentary was originally published on Jan. 14, 2005. It has been updated.

James Early owns none of the stocks mentioned in this article. CNET is a Rule Breakers pick. eBay is a Stock Advisor recommendation. The Motley Fool has a disclosure policy.

Word Picture Gallery

Heard casually at mid-morning of a rainy 4th of January 2007 in the cluttered lift lobby of the 10th floor of Loita House, Nairobi. One blue-collar (but really cheerful -- and hairless) worker to his three less talkative mates, while contemplating the grey cityscape (but more the ongoing heavy short rains):

"Imenyesha mpaka wadudu wanakufa!"

[Trans: "It has rained till the insects are dying!"].

Oh-my-God! The insects!

The 10th floor, if you didn't know, is where the head office of Dyer & Blair Investment Bank is located; though, when the full gang of those workers is through with the re-partitioning, we'll be talking of both the 9th and 10th floor. Jimnah Mbaru's empire is growing. Now Kenya, tomorrow Eastern and Central Africa -- and then to the Cape.

That talkative worker said a little more ... but that's for another day. Didn't hear anything about shares, though.

And then they were gone -- scattered to their various urgent tasks of re-doing (fanyaring, tengezating) Mbaru's empire.

Nation Media Group Limited Announces a Special Interim Dividend

On December 14, 2006, the Board of Directors of Nation Media Group Limited announced a special interim dividend, in respect of the 2006 financial year, amounting to 100% of the par value of its 71,305,260 issued ordinary shares, which are quoted on the Nairobi stock Exchange.

The special interim dividend amounts to Kshs. 5.00 (or US$ .072, per share, at CBK's mean exchange rate of Kshs. 69.4467 per Dollar on January 3rd). It will be payable on or about January 31, 2007 to shareholders registered at the close of business on January 5th. For purposes of preparing the dividend, the register will remain closed from January 8th to 19th, both days inclusive.

The total dividend payout will amount to Kshs. 356.5 million; and will be paid less withholding tax where applicable, which for Kenya residents stands at 5% and remains the final tax on dividends.

On January 3rd, NMG shares traded at the average price of Kshs. 312.00, down from the average price of Kshs. 314.00 recorded on January 2nd (this year's first day of trading).

List of Constituent Companies of the Nairobi Stock Exchange (NSE) Index

As of January 3rd, 2007, constituent companies of the NSE 20-Share Index were as follows:

1. Bamburi
2. Barclays Bank Kenya
3. BAT (K)
4. BOC Limited
5. Diamond Trust
6. EABL
7. Kakuzi
8. Kenya Airways
9. KCB
10. KPLC
11. Nation MG
12. NIC
13. Sameer Tyres
14. Sasini Tea and Coffee
15. Standaed Chartered
16. Total Kenya
17. TPS-Serena
18. Uchumi
19. Unilever
20. Williamsons Tea

How The Nairobi Stock Exchange Performed in 2006

The NSE closed year 2006 with a 42.10% gain on 2005. It rose from 3973.04 points at the start of the year to 5645.65 points at the end, based on the NSE 20-share index. Compared to the year's growth figures of a number of the more developed stock markets around the world, shown below, this was remarkable.

Even more noteworthy, however, was the growth in market capitalization in 2006. In local currency terms, this rose by 75.97%, from Kshs 448.1 billion to Kshs 788.4 billion. In US$ terms, the growth was even higher, from $6.2 billion to %11.4 billion -- meaning an 84.35% appreciation, or twice the rise in the NSE index! For the first time in its history, the NSE passed the US$ 10 billion threshhold in market capitalization in '06.

This performance in turn indicates that, with the steady appreciation of the Shilling against the Dollar in '06, there was in effect an 8.38 percentage-point premium for investors coming into the Kenyan market with Dollars. This should be icing on the cake for all non-resident investors, and in particular Overseas Kenyans. It should be more that sufficient incentive for those in the Diaspora to invest back home. For Kenyan investors at home, the message is clear: investing in the country is the real deal!

Clearly, however, there is a significant disconnect between the gains recorded in the NSE index (42.10%) and in NSE's market capitalization (75.97% in local currency and 84.35% in Dollar terms).

One inference from this is that an investment allocation strategy which had sought to track/mirror the NSE 20-share index would have achieved returns far below what was in fact possible. And this reinforces recent calls to overhaul the index, whose basis for calculation is the geometric mean, and to include more of the nearly 50 equities currently quoted on the exchange.

How Other Bourses/Indexes Performed in 2006:

1. India's Sensex Index: 46.0%
2. Hong Kong's Hang Seng Index: 34.20%
3. Australia's S&P/ASX 200 Index: 19.0%
4. Broad European Index of Leading Stocks: 18.0%
5. Paris Stock Exchange: 16.49%
6. Zurich Stock Exchnage: 16.0%
7. Milan Stock Exchange: 15.28%
8. London Stock Exchange: 10.50%
9. Nikkei 225 Index: 7.0%

Data Sources: nse.co.ke, news.bbc.co.uk, cnbc