Mutual Funds:Being like Buffett

NEW YORK – Mutual fund investors hoping to mimic the success of Wall Street’s best-known prognosticator don’t need a crystal ball perhaps as much as an iron stomach.

Warren Buffett’s decades-long star power as a wildly successful investor has, not surprisingly, spawned many attempts at imitation. So while adherents might nod in agreement with the buy-and-hold philosophy of the so-called Oracle of Omaha, investors in mutual funds that mimic his approach should also be prepared for the possibility of uneven short-term returns.

Investment research provider Morningstar Inc. analyst Tidd Trubey said Buffett isn’t so worried about volatility in a stock, because it’s unavoidable.

“He believes risk is the possibility of not correctly appraising a business value,” Trubey said.

“If you’re going to invest in one of these funds, you really need to believe in that philosophy because an inherent part of this philosophy is that you will underperform badly for significant periods of time. For two to three years at a stretch, these funds can look dead in the water,” Trubey said.

The Feb. 27 global selloff that led U.S. stock market indexes to pull back more than 3 percent that day would likely be dismissed by true Buffett investors as simply a spasmodic move by jittery investors.

“They would say the companies of America are not worth 3 percent less” than they had been a day earlier, Trubey said.

The funds, which characteristically invest in a smaller number of stocks than other mutual funds and often hold those investments far longer, can be a good match for investors looking years down the road who won’t dwell on every bump.

The Weitz Value Fund, which like Buffett, is based in Omaha, Neb., comprises about three dozen stocks including Berkshire Hathaway Inc., Buffett’s investment company. And the fund doesn’t shy from piling into certain sectors. At the end of last year, 36 percent of the assets in the Weitz Value Fund were in financial stocks, while 19 percent were in media holdings.

The fund, whose assets total about $3.17 billion, lost 2.8 percent in 2005 and was in the 98th percentile of the large value fund category. A year later, the hard-hit media companies that led to the fund’s lackluster performance in 2005 came back in favor on Wall Street and the fund’s return soared to 21.9 percent, vaulting the fund to among the category’s top performers.

Not all funds purporting to use a Buffett style mirror the investments of the billionaire. Perhaps some even drift from his long-term philosophy.

But as Buffett-style companies nearly all hold fewer companies in their portfolios the costs of a misstep in picking investments can reverberate loudly. However, with carefully selected portfolios that change infrequently, investors can pounce on opportunities to acquire more of a company should a dip in the stock provide an opportunity.

“If they lag the market by 10 percentage points, 20 percentage points, that’s OK,” Trubey said. “That should not bother you if you’re truly a Buffett-style investor.”