6 Top Stock Picks from One of Warren Buffett’s Most Trusted Investors

Warren Buffett, a legendary figure in investing, is famously selective about the investors he respects. Among his elite circle are Charlie Munger, his longtime partner at Berkshire Hathaway, and Lou Simpson, whom GuruFocus dubs the "third mastermind" behind Berkshire’s investment decisions. Buffett has lauded Simpson as "destined for the Investment Hall of Fame" and praised his exceptional long-term track record.

Like Buffett, Simpson is a dedicated value investor who favors a focused portfolio approach. According to MarketWatch, his firm SQ Advisors managed only 15 stocks as of March 31. Here are six of those stocks, along with their potential upside based on consensus analyst price targets:

Source: FactSet, as reported by MarketWatch on June 13.

Why Warren Buffett Holds Lou Simpson in High Regard

When Berkshire Hathaway acquired the insurance giant GEICO in 1996, Simpson was GEICO’s CEO of capital operations. Impressed by his stellar performance, Buffett retained him as chief investment officer—a role Simpson first took on in 1979 after careers in academia and asset management. From 1980 to 2004, Simpson achieved an impressive 20.3% average annual return, easily outpacing the S&P 500’s 13.5%, according to GuruFocus. He experienced negative returns in only three years and single-digit returns in just four. After retiring from GEICO in 2010, he launched his own investment firm, SQ Advisors.

Simpson’s Investment Strategy

In a 2010 interview cited by GuruFocus, Simpson described his approach as "eclectic," emphasizing thorough research and direct engagement with companies:

• Careful review of all company documents
• Engaging with competitors for insights
• Seeking experts more knowledgeable than himself
• Avoiding reliance on Wall Street research
• Conducting independent research
• Meeting with company management teams

MarketWatch highlights key metrics SQ Advisors uses to evaluate stocks, based on Simpson’s commentary:

• High return on invested capital (ROIC)
• Strong cash flow returns
• Relatively low price-to-cash-flow ratios

However, these are flexible guidelines rather than strict filters. MarketWatch found that nearly half of Simpson’s portfolio stocks underperformed their peers in return on corporate capital (ROCC), and many had valuations above the S&P 500 average when considering price to free cash flow.

Applying Simpson’s Investment Metrics

Using FactSet data, MarketWatch noted the S&P 500’s price-to-free-cash-flow ratio stood at 20.4 as of June 8, excluding companies with negative cash flow. Among Simpson’s top picks, Liberty Global was notably undervalued with a ratio of 5.7, followed by Brookfield at 13.1.

Return on corporate capital (ROCC) is calculated by dividing annual net income plus interest and taxes by total assets minus liabilities (excluding interest-bearing debt). MarketWatch compared ROCC across industries using five-year averages, acknowledging capital intensity differences.

Standout ROCC performers included Berkshire Hathaway, compared to fire, marine, and casualty insurers, and SBA Communications, a wireless tower REIT. However, Berkshire’s status as a diversified conglomerate with significant investments complicates direct industry comparisons.

Emulating Buffett’s Investment Wisdom

Buffett’s extraordinary success has inspired many to follow his investment principles: stick to your circle of competence, recognize that owning stock means owning a piece of a business, and buy shares priced well below intrinsic value. He advocates for long-term ownership and cautions against buying on margin. (See also: Buffett's 3 Best Rules For Stock Investing.)

Additionally, analysts and fund managers often identify stocks that fit Buffett’s criteria as potential future investments. Credit Suisse recently compiled such a list. (See also: 5 Stock Picks That Would Attract Warren Buffett.)

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