Download this Paper Open PDF in Browser

Imitation is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway

51 Pages Posted: 26 Sep 2005 Last revised: 5 May 2008

Gerald S. Martin

American University - Kogod School of Business

John Puthenpurackal

University of Nevada, Las Vegas - Department of Finance

Date Written: April 15, 2008

Abstract

We analyze Berkshire Hathaway's equity portfolio over the 1976 to 2006 period and explore potential explanations for its superior performance. Contrary to popular belief, we find Berkshire Hathaway invests primarily in large-cap growth rather than "value" stocks. Over the period the portfolio beat the benchmarks in 27 out of 31 years, on average exceeding the S&P 500 Index by 11.14%, the value-weighted index of all stocks by 10.92%, and a Fama and French characteristic-based portfolio by 8.56% per year. Although beating the market in all but four years can statistically happen due to chance, incorporating the magnitude by which the portfolio beats the market makes a luck explanation extremely unlikely even after taking into account ex-post selection bias. We find that Berkshire Hathaway's portfolio is concentrated in relatively few stocks with the top five holdings averaging 73% of the portfolio value. While increased volatility is normally associated with higher concentration we show the volatility of the portfolio is driven by large positive returns and not downside risk. The market appears to under-react to the news of a Berkshire Hathaway stock investment since a hypothetical portfolio that mimics the investments at the beginning of the following month after they are publicly disclosed also earns significantly positive abnormal returns of 10.75% over the S&P 500 Index. Our evidence suggests the Berkshire Hathaway triumvirates of Warren Buffett, Charles Munger, and Lou Simpson posses' investment skill unlikely to be explained by Efficient Market Theory.

Keywords: Warren Buffett, Berkshire Hathaway, efficient markets, long-term performance, investment performance, abnormal returns

JEL Classification: G11, G14, G22, C22

Suggested Citation

Martin, Gerald S. and Puthenpurackal, John, Imitation is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway (April 15, 2008). Available at SSRN: https://ssrn.com/abstract=806246 or http://dx.doi.org/10.2139/ssrn.806246

Gerald S. Martin (Contact Author)

American University - Kogod School of Business ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-3914 (Phone)

John Puthenpurackal

University of Nevada, Las Vegas - Department of Finance ( email )

4505 S. Maryland Parkway
Box 456008
Las Vegas, NV 89154-6008
United States

Paper statistics

Downloads
14,870
Rank
158
Abstract Views
67,997