The Exchange

Can Mimicking Warren Buffett Really Beat the Market?

The Exchange

By Charlie Tian

Beating the market average should be the ultimate goal for every long-term investor. If it is not, you could just buy an index fund or ETF. We at GuruFocus just updated the current holdings of Warren Buffett, and many investors have piled in to check what he bought and sold lately. But one question is rarely answered: What kind of return can you achieve by investing in the portfolios of Warren Buffett? Can you beat the market?

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With this in mind, we researched whether you can beat the market by investing in the holdings of some of the most recognized investors in the world. In the example shared below, we assume that we started to invest in the top five holdings of Warren Buffett in January of 2000. We may or may not rebalance the portfolio as Warren Buffett buys or sells stocks. We then observe the performance of the portfolio.

The reason we selected January 2000 was because it was close to a market peak. Over the past 12 years we have been through two market crashes, and today the market is only marginally higher than it was in January of 2000.

Assumptions and Facts

1. We started to invest on Jan. 1, 2000, and invested in the top five holding of Berkshire Hathaway (BRK-A), equal-weighted.

2. We would compare the market value of the top five holdings with the market value if we invest directly into SPDR S&P 500 ETF (SPY).

3. The dividends we received would be reinvested into the same stock immediately.

4. All the prices we used in this research were close prices adjusted for splits and dividends.

Scenarios

1. We invested our money in the top five holdings of Berkshire Hathaway on Jan, 3, 2000, and held these stocks until Jan. 2, 2013.

2. We followed exactly the same top five holdings of Berkshire Hathaway since Jan. 3, 2000, and made adjustments quarterly until Jan. 2, 2013.

Performance over time

Buffett is known for long holding periods and a concentrated portfolio, though since 2000 Buffett’s top five holdings have changed. For instance, in the year 2000, his top holdings were Coca-Cola (KO), American Express (AXP), Gillette, Washington Post (WPO) and Wesco Financial. Gillette was bought by Procter & Gamble (PG), and Wesco was bought by Warren Buffett himself. Today his top five holdings are Coca-Cola, American Express, Procter & Gamble, Wells Fargo (WFC) and IBM (IBM).

We compared the performance of two scenarios with that of the S&P 500 index ETF. In the first scenario we held Buffett’s top five holdings until today. If a company was acquired, we would convert the fund into a new position in the top five holdings. In the second scenario we rebalanced every quarter if a new stock made it into the top five holdings.

The results are shown in the table below. We can clearly see that in both scenarios the top five holdings of Warren Buffett handily beat the benchmark. In Scenario one the total return from 2000 to 2012 is 73%, more than double the market return in the same period. In Scenario two, where we rebalance once a quarter according to Buffett’s top five holdings, we quadruple the gain of the market in the same period.

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We want to point out that in neither scenario would the portfolio outperform the market every year. But clearly Buffett’s top holdings did much better during market crashes. These are the keys to the outperformance of the portfolios. Just as Buffett says, “Rule No. 1: Never lose money.”

The above results show that investors in the past could have outperformed the market by investing in the top five holdings of Berkshire Hathaway without rebalancing each quarter. But they would have done much better if they tracked the top five holdings of Berkshire Hathaway and rebalanced when those holdings changed.

Charlie Tian is the founder and CEO of GuruFocus.com, a website focused on value-investing strategies and based in Plano, Texas.

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