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28 agosto 2007

Warren Buffett's Favorite Stocks

Berkshire Hathaway recently released its updated stock holdings in an SEC filing, giving Average Joe Investor a glimpse into the playbook of Warren Buffett. Let's look at Berkshire's top 10 holdings and see what we can learn.

Company

Value of Holdings (mm)

Coca-Cola (KO)

10,904.0

Wells Fargo (WFC)

9,559.8

American Express (AXP)

8,896.5

Procter & Gamble (PG)

6,842.1

Johnson & Johnson (JNJ)

3,286.0

Burlington Northern Santa Fe

3,183.9

Wesco Financial

2,304.0

Moody's (MCO)

2,202.7

Anheuser-Busch (BUD)

1,701.7

ConocoPhillips (COP)

1,432.5

Source: 13-F filing as of June 30, 2007. Data aggregated by Capital IQ.

No alternative energy here
These top holdings are classic Buffett stocks -- low-tech companies with wide competitive moats that generate substantial cash flow. They also have long histories of success. You won't find stun guns, satellite radio, ethanol, or funky plastic shoes anywhere near Berkshire's portfolio.

Most of these companies are household names, like J&J, Coca-Cola, and AmEx. My first reaction when I saw this list was "Well, duh!" These stocks are no-brainers. The great thing about Buffett's approach is that it's so simple. And while I don't recommend mimicking Berkshire's portfolio (after all, you won't be getting the same prices Buffett did), investors could do far worse than this solid portfolio.

Best in show
This list shows that Buffett loves industry leaders with protective moats around their businesses. What exactly is a moat? Well, consider brand. Five of these companies have brands that are among the world's best, according to Interbrand. Coca-Cola is the world's leading brand, and American Express and Gillette (owned by P&G) rank in the top 20. Budweiser and Johnson & Johnson crack the top 100.

These brands are firmly ingrained in consumers' minds, and that makes life difficult for competitors. Like many Americans, I've used Gillette razor blades for years, and I often order Coke at restaurants without even thinking about it. My default beverage when I'm out on the town? You guessed it: Anheuser-Busch's Bud Light.

Besides brand, a competitive advantage could be an entrenched distribution system, a unique corporate culture, a strong network, or a protected patent. According to Forbes, railroad operator Burlington Northern has the shortest transcontinental route of its competitors. I'm no transportation expert, but that sounds like a serious advantage to me. Fellow Fool Emil Lee has been doing a crack job dissecting the competitive advantages of Buffett stocks Moody's, Wells Fargo, and American Express.

At the Fool, we call companies with sustainable competitive advantages "Rule Makers." I've been harping on the benefits of the Rule Maker strategy because I think all investors should have a portion of their portfolios dedicated to these rock-solid companies. True Rule Makers generate high returns on capital and maintain clean balance sheets, making them excellent long-term investments. Besides, if they are good enough for the Oracle of Omaha -- the world's greatest investor -- then they are good enough for me.