Warren Buffett (Trades, Portfolio) is the most celebrated investor of all time, and if you want to benefit from his investing prowess, all you need to do is buy shares in Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial).
Not only does this give you exposure to his equity portfolio, but it also gives you exposure to Berkshire's wide variety of businesses across many different industries and near $100 billion cash balance.
The one problem with this approach, however, is that Berkshire Hathaway shares generally tend to be fully valued.
And why wouldn't they be? They are the holding vehicle for the best investor in the world and are considered to be one of the safest assets around with one of the most predictable outlooks of any stock out there.
Berkshire also gives you limited exposure to Warren Buffett (Trades, Portfolio)'s equity portfolio. True, the conglomerate's book value will rise as Buffett's picks produce returns, but there's also the drag on returns from cash and the rest of the business.
So, if you want to replicate Buffett's investment performance without buying Berkshire stock, you could buy the same stocks he is when they're published in Berkshire's Form 13F when it is filed with the Securities and Exchange Commission within 45 days after the end of each quarter. But does this approach really work?
Copying Buffett
As it turns out, it does.
A study published in 2010 by John S. Hughes of the University of California at Los Angeles, Jing Liu of the Cheung Kong Graduate School of Business and Mingshan Zhang of Hong Kong University of Science & Technology considered the above question and found that on average, it was possible to replicate the performance of Berkshire Hathaway just by copying Warren Buffett’s trades.
The extremely comprehensive study considered the holdings filed by Berkshire Hathaway to the SEC between 1980 and December 2006, a period encompassing 2,140 quarterly stock observations. Excluding any positions that were not reported to the SEC (after Berkshire requested confidential treatment), the researchers found that Berkshire Hathaway's annualized abnormal return from stock holdings during this period was 7.2% (adjusted for market, size, book-to-market and momentum factors).
In comparison, a value-weighted (equal-weighted) portfolio that mimicked these holdings based on quarterly filings, generated an annualized abnormal return of 6% (6.6% for equal weighted) over the entire sample period.
These figures seem to suggest that it is apparently quite easy to replicate Buffett (Trades, Portfolio)'s performance, just by buying the same securities as he does every quarter (although this data is relatively old and may not be as relevant today as it was five or 10 years ago).
Still, the data is interesting nonetheless because it encompasses such a long period (1980 to 2006) and so many different observations.
Another interesting takeaway from this study is the turnover of Buffett (Trades, Portfolio)'s portfolio for the period under consideration. Indeed, Buffett is generally thought of as a long-term investor, as some of his biggest holdings have been in the portfolio for several decades.
However, what the researchers found was that the small holdings tend to be held for a much shorter period.
How much shorter? Well, the data shows that the median holding period of all stocks considered (as mentioned above, just under 2,000 observations) was approximately one year, with 20% of all shares held for more than two years. Thirty percent of stocks were sold within six months of acquisition.
Conclusion
These findings all point to some interesting conclusions. Not only does the data seem to suggest that replicating Buffett (Trades, Portfolio)'s investment performance is relatively easy, but the numbers also show that Buffett is not as much of a long-term investor as it first appears.
Having said all of the above, I do need to point out that this is historic data and the situation might have changed (in performance terms) over the past eight years. Still, no matter how old the numbers are, the conclusions drawn reveal much about Buffett and his strategy.
Disclosure: The author owns no share mentioned.
