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Have you ever dreamed of investing as successfully as Warren Buffett, Ben Graham or Peter Lynch?
It's my guess that every savvy investor has. After all, these gurus have made money in good times and bad. They each have a specific style of investing, and the incredible discipline it takes to stick to that investing philosophy. The problem with most of us is that we are human, and often we let our emotions get in the way of disciplined trading practices.
One company says: Dream no more. Help may be on the way in the form of stock screens and the magic of modern technology. A Web site called Validea has developed software designed to mimic the investing styles of several of the so-called wizards of Wall Street, such as Benjamin Graham, Warren Buffett and Peter Lynch. You can create a virtual portfolio that Validea believes would pass the tests of each of these portfolio managers, or you can create a "best-of-the best" portfolio, with stock selections that meet the criteria of the all of the most successful investors rolled into one portfolio.
Validea's theory sounds simple in concept. The company argues that the best way to outperform the market is to learn from those who have done so. The site interprets the strategies of nine of history's most successful stock pickers and offers them according to your investing time frame, although Validea has no affiliation with those investment gurus.
Ben Graham is the father of value investing. He ran a New York hedge fund, taught at Columbia University, and wrote The Intelligent Investor, widely considered the bible for value investors. He also co-authored the 1934 book Securities Analysis and gained a following after turning a $720,000 investment in Geico into $500 million.
(Graham also was a bon vivant who loved skiing, tennis and dancing along with Virgil and Proust. Able to translate Portuguese, Greek and Latin, he married three times, before dying in the company of his French mistress in 1976 at the age of 82. Who said money managers have to be boring?)
Warren Buffett is literally a Graham student. He was the only person to earn an A+ in one of Graham's classes, although he also ignored Graham's advice not to work on Wall Street. Buffett started out as a hedge fund manager before shifting gears to run Berkshire Hathaway. Generally considered the best investor of modern times, Buffett has produced an annual return of 28 percent for his Berkshire Hathaway investors over the last 30 years. He subscribes to Graham's investment principles: Know the business, know who runs the business, invest for profits and have confidence.
Peter Lynch ran Fidelity's Magellan Fund for 13 years. In that period the Magellan Fund, a small, aggressive capital appreciation fund, rose 2,700 percent. He retired in 1990 at the age of 46, but his investing "secrets" live on. His foundation rests on buying what you know, but his real secret is cutting your losses and letting your profits run. In a basket full of stocks you just need one or two winners. Add to those winners and let those winners offset your investing mistakes.
Other investment experts Validea attempts to mimic include Kenneth Fisher; William O'Neil; James P. O'Shaughnessy; Joseph Piotroski; John Neff; and David Dreman, who has been a guest on Wall $treet Week with FORTUNE.
In addition to tracking total returns, Validea uses a metric called "accuracy" that refers to the percentage of its portfolio stock picks that produced a positive return. In their brief history, most of these portfolios have outperformed the S&P 500 by a sizable margin:
| Portfolios started on July 15, 2003 |
| Portfolio | Based on | Return since inception | Accuracy |
| PE Growth Investor | Peter Lynch | 53.8% | 59.2% |
| Contrarian Investor | David Dreman | 51.1% | 78.3% |
| Value Investor | Benjamin Graham | 50.5% | 66.7% |
| Growth/Value Investor | James P. O'Shaughnessy | 41.6% | 53.3% |
| Growth Investor | Martin Zweig | 38.8% | 71.7% |
| Momentum Investor | William O'Neil | 32.6% | 55% |
| Price/Sales Investor | Kenneth Fisher | 28.2% | 65% |
| Small-Cap Growth Investor | Peter Lynch | 53.8% | 59.2% |
| Note: The S&P 500 has returned 11.4% since July 15. |
| Portfolios started later |
| Portfolio | Based on | Started on | Return since inception | S&P 500 return | Portfolio accuracy |
| Patient Investor | Warren Buffett | 12/5/2003 | 8.5% | 5% | 55.7% |
| Book/Market Investor | Joseph Piotroski | 2/27/2004 | 8.1% | -2.8% | 75% |
| Low PE Investor | John Neff | 1/2/2004 | 0.2% | 0.3% | 46.7% |
Keep in mind that most of Validea's portfolios launched during a market rally, when successful strategies often are magnified. On the other side, notice that the later the portfolio began, the less sucessful it has been to date, reflecting the market's retreat in recent months. However, Validea says it back-tested the portfolio strategies for three years with market-beating results.
Now, if it were that easy to just buy like Buffett, we'd all be billionaires. To say that a software program could replace these guys is an insult at best. Often great stock pickers can't articulate what makes them so successful -- intuition is an important input for investors that isn't easily quantifiable.
Finally, no system is infallible. The most crucial decision in any virtual portfolio selection is which data to analyze. That decision must be made by a human being, and subject to human foibles.
And as always, there's no such thing as a free lunch. Frequent fine-tuning and rebalancing of your portfolio -- Validea's guru portfolios are rebalanced monthly -- generates transaction costs. The company's service itself costs $29.95 a month or $74.95 a quarter, so if you're investing $30,000, that's equivalent to a fee of almost 1 percent - less than many actively managed funds, but far more than you'd pay on a passive investment, such as an index fund.
It's worth noting that Validea is not a money management firm, so it's not investing real dollars. The company recommends using a financial advisor to take into account your risk tolerance, investing time frame and tax consequences, just to name a few investing variables.
But data does show that using intelligent data systems can boost performance, in both rising and falling markets. If you can't hire the Wall Street wizard of your choice, a computer-based stock picking program may make sense.
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