Buying whatever billionaire Warren Buffett bought - often months after his share purchases - delivered twice the return of the Standard & Poor's 500 Index during the past three decades.
Investors would have earned an annual return of 24.6 per cent by buying the same stocks as Buffett, even after he disclosed his holdings in regulatory filings, sometimes four months later, according to a soon-to-be-released study by Gerald Martin of American University in Washington and John Puthenpurackal of the University of Nevada in Las Vegas.
The S&P 500 rose 12.8 per cent a year in the same period. "A monkey would have beaten the pants off the S&P 500 by following Warren's buying and selling," said Mohnish Pabrai, who manages $600 million at Pabrai Investment Funds in Irvine, California.
In fact, Buffett's stock picks outperformed his Omaha, Nebraska-based Berkshire Hathaway group from 2002 to 2006 when Berkshire shares advanced at a yearly rate of 7.8 per cent.
By comparison, Berkshire holding USG, the biggest maker of gypsum wallboard in North America, increased about 1,140 per cent and PetroChina, China's largest oil producer, soared eightfold.
Buffett built Berkshire Hathaway during the past four decades into a $200 billion company with businesses ranging from ice cream and bricks to insurance and corporate jet leasing. Berkshire had $77.9 billion invested in stocks at the end of September.
Prof Martin said he and Prof Puthenpurackal initiated their study because they wanted to know if it was better to buy the stocks that Buffett was buying or invest in Berkshire. The market-beating returns on copycat investing are based on buying and selling at the end of the month following disclosure over 31 years.
"Over the past five years, people haven't been attributing enough of the value Buffett adds to Berkshire," Prof Martin said. "They're missing his managerial expertise and how that makes his business grow."
Buffett's biggest successes include the Washington Post. Berkshire invested $11 million in 1973, attracted by the newspaper's management team. He also decided the company was in a business with high barriers to would-be competitors. Berkshire's stake was worth $1.3 billion at the end of 2006.
Pasadena, California-based Wesco Financial, which has insurance and furniture rental businesses, returned about 200 times the investment over 31 years, according to the study.
The researchers included dividends in calculating gains of stocks and indexes.
Buffett bought $488 million of PetroChina stock after reading the Beijing-based company's annual report and concluding the company was worth more than three times its market value, given rising oil prices and Chinese consumption. Berkshire started selling shares in the third quarter and said last month that it made about $3.5 billion. The stake was disclosed in 2003.
TXU, the Texas power company purchased this year by a buyout group led by Kohlberg Kravis Roberts, more than tripled in the time that Buffett held the shares. Berkshire invested in the company in 2002 after it almost went bankrupt. TXU then sold assets and prospered as electricity demand outstripped supply. Berkshire sold its holding by the end of 2004.
Buffett disclosed in April that he purchased a $3 billion stake in Fort Worth, Texas-based Burlington Northern Santa Fe, the second-largest railroad in the US. Burlington Northern shares hit records in May as copycat investors followed Buffett. The stock then dropped as much as 18 per cent after the company said second-quarter earnings missed analysts' estimates. Berkshire bought more shares.
"We don't go in and out of the market," Buffett told reporters, explaining his investment strategy during a visit last month to a Berkshire subsidiary's factory in Dalian, China. "I simply look at individual businesses and try to figure out where they're likely to be in five or 10 or 20 years from now."
"We try to understand what we're doing. If we don't understand it, we don't do it."
On average, 73 per cent of Berkshire's equity portfolio was in five stocks during the past 31 years, the professors found.
Prof Martin said long-term returns show the easiest way to mimic Buffett is to invest in Berkshire. The stock rose at an annual rate of 27.7 per cent during the past three decades, he said. - (Bloomberg)
