Interesting article about Warren Buffett-News Flash: Academics Prove Buffett Talented Investor!
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JOSE BAILEN
Jan 18, 2008, 3:44:02 PM1/18/08
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raylopez99
Jan 20, 2008, 5:27:36 PM1/20/08
to Small Microcap Value
To me the most surprising thing was not that Warren Buffett, risk
adjusted, outperformed the market (because we know his volatility was
greater than the market, so it has to be risk adjusted to be
meaningful). No, the most surprising thing from the Abstract below is
that following Buffett's publically announced trades, even a full 30
days after they are announced, will yield +14% greater returns than
expected. This is amazing. It means the Efficient Market Theory is
so ingrained in people's mind that they think they cannot capitalize
on Buffett's choices the moment they are announced. This is akin to
the joke about the finance professors who refuse to pick up a $20 bill
lying on the sidewalk because in theory it should not be there.
On the other hand, this +14% return could be a backward looking data
mining anomaly that is ficticious, that will disappear the next month
by chance. Or it could be a real anomaly that will disappear because
now people will trade on it, akin to the legendary "January Effect"
for small caps. If the latter, it begs the question why it was there
to begin with (the original question in the first paragraph).
RL
Abstract:
We analyze the performance of Berkshire Hathaway's equity portfolio
and explore potential explanations for its superior performance.
Contrary to popular belief we show Berkshire's investment style is
best characterized as a large-cap growth. We examine whether
Berkshire's investment performance is due to luck and find that
beating the market in 28 out of 31 years places it in the 99.99
percentile; however, incorporating the magnitude by which Berkshire
beats the market makes the "luck" explanation unlikely even after
taking into account ex-post selection bias. After adjusting for risk
we find that Berkshire's performance cannot be explained by assuming
high risk. From 1976 to 2006 Berkshire's stock portfolio beats the S&P
500 Index by 14.65%, the value-weighted index of all stocks by 10.91%,
and the Fama and French characteristic portfolio by 8.56% per year.
The market also appears to under-react to the news of a Berkshire
stock investment since a hypothetical portfolio that mimics
Berkshire's investments created the month after they are publicly
disclosed earns positive abnormal returns of 14.26% per year. Overall,
the Berkshire Hathaway triumvirates of Warren Buffett, Charles Munger,
and Lou Simpson posses' investment skill consistent with a number of
recent papers that argue investment skill is more prevalent than
earlier papers suggest.
adjusted, outperformed the market (because we know his volatility was
greater than the market, so it has to be risk adjusted to be
meaningful). No, the most surprising thing from the Abstract below is
that following Buffett's publically announced trades, even a full 30
days after they are announced, will yield +14% greater returns than
expected. This is amazing. It means the Efficient Market Theory is
so ingrained in people's mind that they think they cannot capitalize
on Buffett's choices the moment they are announced. This is akin to
the joke about the finance professors who refuse to pick up a $20 bill
lying on the sidewalk because in theory it should not be there.
On the other hand, this +14% return could be a backward looking data
mining anomaly that is ficticious, that will disappear the next month
by chance. Or it could be a real anomaly that will disappear because
now people will trade on it, akin to the legendary "January Effect"
for small caps. If the latter, it begs the question why it was there
to begin with (the original question in the first paragraph).
RL
Abstract:
We analyze the performance of Berkshire Hathaway's equity portfolio
and explore potential explanations for its superior performance.
Contrary to popular belief we show Berkshire's investment style is
best characterized as a large-cap growth. We examine whether
Berkshire's investment performance is due to luck and find that
beating the market in 28 out of 31 years places it in the 99.99
percentile; however, incorporating the magnitude by which Berkshire
beats the market makes the "luck" explanation unlikely even after
taking into account ex-post selection bias. After adjusting for risk
we find that Berkshire's performance cannot be explained by assuming
high risk. From 1976 to 2006 Berkshire's stock portfolio beats the S&P
500 Index by 14.65%, the value-weighted index of all stocks by 10.91%,
and the Fama and French characteristic portfolio by 8.56% per year.
The market also appears to under-react to the news of a Berkshire
stock investment since a hypothetical portfolio that mimics
Berkshire's investments created the month after they are publicly
disclosed earns positive abnormal returns of 14.26% per year. Overall,
the Berkshire Hathaway triumvirates of Warren Buffett, Charles Munger,
and Lou Simpson posses' investment skill consistent with a number of
recent papers that argue investment skill is more prevalent than
earlier papers suggest.
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