US, WASHINGTON (ORDO NEWS) — The legendary investor Warren Buffett and his company Berkshire Hathaway seem to refute the idea that no investor is able to beat the market over a long interval. An analysis of the company’s investments by economists Elena Chirkova and Anastasia Emelkina shows that Buffett is still a classic “value” investor, making money in an “unfashionable” way – by investing in undervalued shares.
Warren Buffett – a living legend and an idol for amateur investors around the world – is considered by many to be a professional whose existence refutes the hypothesis about the effectiveness of financial markets. From this hypothesis it follows that no investor can consistently beat the market over a long interval, since such success can only be the result of chance. Meanwhile, Warren Buffett beat him so much that in his case it is guaranteed not by chance.
So, from 1965 to 2019, the Berkshire Hathaway company controlled by him grew in price by 20.3% per year, while the S&P 500 index with dividends – only by 10%. During this period, Berkshire’s stock price rose more than 27 thousand times, and S&P grew less than 200. Before Buffett took over Berkshire, he managed a fund that generated almost 29% per annum from 1956 to 1969, while the Dow Jones Index – about 8%. Thus, Warren Buffett beat the market at an interval of 64 years, and how he beat!
Meanwhile, the above statistics do not have a direct relationship to the refutation of the hypothesis of an effective market. Berkshire is not a fund, but an insurance company, in which investing in stocks is only part of the business. In a good way, to understand which Buffett is a portfolio investor and whether he really refutes the hypothesis of an effective market, one should look not at Berkshire as a whole, but at its portfolio investments. This is what we did.
We analyzed all equity stakes in the Berkshire portfolio from Q4 1998 to 2019 inclusive. The choice of period is explained by the availability of data on the website of the US Securities Commission – the reporting of public companies in electronic form appears there precisely from the end of 1998. The study included all companies whose purchase and sale of shares, according to the law, was to be declared by Berkshire. Declaration occurs in two cases: either packages worth more than $ 100 million were bought, or at least 10% of a company’s shares were acquired. For Berkshire, the 100 millionth package is small (and it was even in 1998), so we dare to hope that we have analyzed all or almost all of Buffett’s investments in publicly traded stocks.
To begin with, we checked whether he does what he says. In particular, Buffett claims that 85% is a follower of Ben Graham, that is, if you formulate Graham’s position very briefly, he prefers to buy cheap (that is, undervalued. – ed.) papers . Secondly, Buffett has repeatedly said that he buys paper “forever” , and if the paper is chosen correctly, then the time to sell is “almost never”. In other words, his investment horizon is infinity.
The fact that Buffett is inclined to buy cheap paper has been confirmed. If we divide all the stocks included in the S&P 500 index into deciles (ten parts equal in quantity or market capitalization) by P / BV and P / E multipliers (price to book value and price to earnings. – ed.), of which the first decile will be the most expensive, and the tenth – the cheapest, then the seventh-eighth deciles will be median in Buffett’s portfolio. The three lower (cheapest) deciles make up 52% of the portfolio, and such shares (taking into account the weight in the portfolio) are more than twice as many as the shares of the three upper (most expensive) deciles.
But another postulate – that shares need to be bought forever – Buffett should not. He closed many positions – about 54% of the shares in value terms – in 1999-2019, and the average period in the portfolio for such securities was 3 years. There are packages that he holds for a long time, but there are those that were in the portfolio not even for years, but for quarters. So, for example, paper Yum! Brands Inc. (chains of fast-food restaurants under the brands Pizza Hut, KFC, Taco Bell, etc.), acquired in 2000, disappeared from the balance within a quarter. At the same time, this investment turned out to be the most profitable, if measured in annual percentages – the shares jumped by about 40% per quarter. Shares of the network of discount stores Ross Stores and Keystone Financial Inc. (financial services) purchased in 2000 were listed on the balance sheet for two quarters; in 2007, shares of Dow Jones Financial Inc. were acquired for six months, and shares of Finova Group Inc. (financial products for medium-sized businesses) held out in the portfolio after purchasing in 2001 for five quarters.
In 1999–2019, Berkshire’s liquid portfolio generated a return of 11.7% per annum, which is 4.9 percentage points more than the S&P dividend index. Of course, these are not the same results as in the early years, but also outstanding: few investment fund managers beat the market by five percentage points per year over an interval of 21 years.
Short-term investments in the aforementioned Yum shares brought the best yields on an annualized basis! Brands Inc. – 242%. In second place were shares of clothing manufacturer Liz Claiborn (219%), although Buffett held them longer – almost three years. Of the long-term positions, the investments in First Data (payment systems) were the most successful: from the end of 1999 to 2008, when the package was sold, the investment brought 169% per annum. Investments in Moody’s turned out to be very good, which generated 19% per year during the study period, which cumulatively gave an increase of almost 32 times.
At the same time, Buffett also had unprofitable positions, and their share in the portfolio was on average 13.6%. The worst in profitability were investments in the Finova Group. Finova shares, while they were in Buffett’s portfolio (which is a little over a year), managed to fall by 98%. Since the sale of Buffett’s shares, Finova’s business has only worsened, as a result it went bankrupt and was liquidated in 2009.
WilTel Communications, with minus 72% per annum, has been in the honorable second place since the end, although the package was in the portfolio for the entire quarter. About half in price lost shares of energy Edison International, although listed on the balance sheet even less than a quarter. Three-year investment in the paper retailer Pier 1 Imports Inc, specializing in furniture and decor items, cumulatively fell in price by 63%. The purchase of Kraft Heinz Co brought in 2015 – the merger dates of HJ Heinz Co and Kraft Foods Group – minus 52%. Buffett also unsuccessfully invested in the English retailer Tesco in 2005 – however, in this case, the position was still closed in 2014.
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