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Overconfidence, Under-Reaction, and Warren Buffett’s Investments

39 Pages Posted: 5 Jul 2010 Last revised: 19 Jul 2010

John S. Hughes

University of California at Los Angeles

Jing Liu

The Cheung Kong Graduate School of Business

Mingshan Zhang

Hong Kong University of Science & Technology (HKUST)

Date Written: July 5, 2010

Abstract

Warren Buffett is a long-term investor, but is required by law to disclose his trades on a quarterly basis. The market seems to under-react to the revelation of his trades. From 1980 to 2006, it has been possible to achieve investment results similar to Buffett’s own simply by following his trades disclosed by Berkshire Hathaway. We consider overconfidence by sophisticated market participants as a contributing factor to the apparent under reaction to information contained in public disclosures of changes in Berkshire Hathaway’s holdings of stocks. Net sales of corporate insiders of stocks held by Berkshire Hathaway tend to decrease when those holdings increase consistent with shared private information. However, financial analysts’ recommendations tend to downgrade and institutions tend to sell at those times. This behavior by analysts and fund managers is consistent with pejorative experts displaying overconfidence by over estimating their stock picking abilities or precision of their independent private information and, as a consequence, underweighting public information in making their decisions.

Keywords: Warren Buffett, Behavioral Finance, Under-reaction, Analyst, Institutional Investors, Insiders

JEL Classification: G11, G12, M40

Suggested Citation

Hughes, John S. and Liu, Jing and Zhang, Mingshan, Overconfidence, Under-Reaction, and Warren Buffett’s Investments (July 5, 2010). Available at SSRN: https://ssrn.com/abstract=1635061 or http://dx.doi.org/10.2139/ssrn.1635061

John S. Hughes

University of California at Los Angeles ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-794-9553 (Phone)
310-267-2193 (Fax)

Jing Liu (Contact Author)

The Cheung Kong Graduate School of Business ( email )

1 East Changan Avenue, Oriental Plaza
E3/3F
Beijing
China

Mingshan Zhang

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

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