A top-performing fund manager who's studied Warren Buffett his entire career breaks down the 3-part process he uses to dominate the vast majority of his peers

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• Rich Eisinger of Madison Investments zoomed to the top ranks of Wall Street's best-performing fund managers by replicating Warren Buffett's investing strategy.
• In an interview, he shared the three-part approach that guides his stock picking process, based on several years of studying Buffett's approach and attending his annual meetings.
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Once a year in the summer, thousands of investors flock to Omaha to experience Berkshire Hathaway's annual meeting.

Rich Eisinger is among the faithfuls who have made the pilgrimage more than once. In fact, several members of the US equities team he leads at Madison Investments have made the trip multiple times.

Eisinger was reading books about Warren Buffett's strategy before he even attended business school. He credits the sage of Omaha for motivating him to become an investor.

"His philosophy clicked with me, where you're not trading stocks but you're taking an ownership stake in businesses," Eisinger said. "That's always been the background and the influence behind our strategy."

By imitating Buffett's principles, Eisinger catapulted the $327 million Madison Investors Fund he manages to the the ranks of the top-performing funds of 2019.

In an interview with Business Insider, he drilled down the insights he learned from Buffett's playbook into three checkboxes that guide his stock-picking process today.

1) Strong and sustainable competitive advantage

Buffett famously espouses focusing on a company's moat: its unique propositions relative to wannabe competitors. Just like a physical moat surrounds a castle and protects it from intruders, a firm's competitive advantages protect its market share and lock in a steady stream of profits.

Eisinger knows his team has found a strong moat when they can reasonably predict how a company will generate cash in the future. Moreover, these cash flows must be sufficient to cover any interest expense that may arise in the future.

One company he singled out as having a strong moat is Copart, the online auctioneer of used and salvaged vehicles that soared 93% in 2019.

The company's competitive advantage, Eisinger said, is the global network effect it has created. By design, auctions are more lucrative for the seller when there's a large pool of eager buyers.

Copart is likely to attract even more salvaged cars that can keep the company's income stream flowing, Eisinger said. That's because cars are being fitted with better technologies that are more expensive to repair and, therefore, easier to write-off after a crash.

2) Solid management team

"We want to buy companies that have wise capital allocators," Eisinger said.

Management teams have many options when it comes to cash use, including reinvesting in their businesses, buying back stock, paying down debt, and dishing out dividends.

Eisinger doesn't see anything inherently wrong with any of these choices. However, he wants to know that management teams are timing their decisions well by not executing buybacks at high prices or overpaying for acquisitions.

And even when acquisitions are well executed, Eisinger quizzes management teams to ensure that mergers have not distracted them from the core running of their businesses.

In addition, he likes to buy companies where the management's interests are aligned with shareholders through direct stock ownership or compensation incentives.

3) Reasonable valuation

"Companies can meet all the criteria I've talked about, but we're not going to buy them unless the valuation is reasonable," Eisinger said.

"We want to buy them where they're selling at a discount to our assessed intrinsic value."

That sure sounds a lot like Buffett, who has repeatedly said that he wants to make an acquisition but can't find businesses with sensible price tags. Berkshire Hathaway is now sitting on a record $128 billion pile of cash because most of the good businesses the company could easily acquire are just too expensive.

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