Watching Buffett: The Power to Move Markets
It’s more than luck that leaves the Oracle of Omaha, Berkshire Hathway’s legendary CEO Warren E. Buffett, with a track record that beats the S&P 500 index in 20 out of 24 years from 1980 to 2003. And it’s more than luck that leaves those who mimic Buffett’s stock picks sitting pretty with 7 to 10 percent above and beyond what the market normally achieves in a given year.
Mays finance PhD graduates Gerald Martin and John Puthenpurackal (now Gardner Fellow in Finance at Ohio University) put empirical tests to work and dismiss as major influencers higher-risk investments or anything reminiscent of luck — instead, they conclude in their 2005 paper on Buffett’s investment success, the man’s skill outweighs the possibility that his success stems from random chance and market variables. He and longtime friend and advisor Charles Munger evaluate the fundamentals of a potential stock pick and only dally in businesses they understand. Many businesses in the Berkshire Hathaway portfolio mirror those overseen by Berkshire itself, including insurance and retail.
“We systematically eliminate all these other explanations, and what’s left over is skill,” says Martin, a visiting scholar in Mays’ finance department. “You have to forecast cash flow and future growth and determine if the intrinsic value is greater than the market, and then that it’s a good thing to invest in. Buffett just seems to be really, really good at doing that.”
The paper, “Imitation is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway,” was presented in October 2005 at the Financial Management Association annual meeting in Chicago. In it, the researchers examine 261 Berkshire Hathaway common equity investments in filings and market databases from 1980 to 2003. The paper also tackles policy implications that Martin says the Securities and Exchange Commission should think seriously about.
The market reacts positively to the public disclosure of a Berkshire Hathaway stock investment, with that stock bounding as high as 3 percent above normal market returns once it’s revealed that Buffett has given it the nod. Operating on the knowledge that a single stock pick can manipulate the market based on one man’s reputation alone, the researchers indicate the SEC would be wise to consider delayed-disclosure requests from Buffett and other major players in the market.
“He has the power to move markets,” Martin says. “If people like Buffett want to keep their investments quiet, the SEC really needs to take that seriously.”
A writer for Business Week discussed the research in its Oct. 24, 2005, editions, generating contacts from around the world that hail Martin and Puthenpurackal’s empirics and in some cases engender debate about their academic assessment of Buffett as a “big growth” investor. The duo was also invited to present at a November value investing conference and will take their research to more practitioners and hedge fund managers in two additional conferences in early 2006.
To view the paper, visit http://papers.ssrn.com/sol3/papers.cfm?abstract_id=806246. You can also search for the paper at http://papers.ssrn.com.
