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Even a monkey can get 24% with this investment formula

Investors could beat the S&P 500 just by imitating Warren Buffett’s trades

(NEW YORK) Buying whatever billionaire Warren Buffett bought, often months after his share purchases, delivered twice the return of the Standard & Poor’s 500 Index during the past three decades.

Investors would have earned an annual return of 24.6 per cent by buying the same stocks as Mr Buffett after he disclosed his holdings in regulatory filings, sometimes four months later, according to a soon-to-be-released study by Gerald Martin of American University in Washington and John Puthenpurackal of the University of Nevada, Las Vegas.

The S&P 500 rose 12.8 per cent a year in the same period.

‘A monkey would have beaten the pants off the S&P 500 by following Warren’s buying and selling,’ said Mohnish Pabrai, who manages US$600 million at Pabrai Investment Funds in Irvine, California.

Mr Pabrai and a friend paid US$650,100 this year in an annual charity auction to lunch with the 77-year-old Buffett.

Mr Buffett’s stock picks outperformed his Omaha, Nebraska-based Berkshire Hathaway Inc from 2002 to 2006 when Berkshire shares advanced at a yearly rate of 7.8 per cent.

By comparison, Berkshire holding USG Corp, the biggest maker of gypsum wallboard in North America, increased about 1,140 per cent and PetroChina Co, China’s largest oil producer, soared eight-fold.

Mr Buffett built Berkshire Hathaway during the past four decades into a US$200 billion company with businesses ranging from ice cream and bricks to insurance and corporate jet leasing.

Berkshire had US$77.9 billion invested in stocks at the end of September, according to a filing with the US Securities and Exchange Commission.

The company’s shares closed on Thursday at US$135,300, the highest price on the New York Stock Exchange.

Berkshire disclosed a new stake in CarMax Inc, the biggest US used-car dealer, in a regulatory filing on Nov 14, sending shares of the Richmond, Virginia-based company 7.6 per cent higher on Thursday.

Berkshire held 14 million shares as of Sept 30, according to the quarterly filing.

Mr Martin said he and Mr Puthenpurackal initiated their study because they wanted to know whether it was better to purchase the stocks that Mr Buffett was buying or invest in Berkshire.

The market-beating returns on copycat investing are based on buying and selling at the end of the month following disclosure over 31 years.

‘Over the past five years, people haven’t been attributing enough of the value Buffett adds to Berkshire,’ Mr Martin said. ‘They’re missing his managerial expertise and how that makes his business grow.’

Mr Buffett’s biggest successes include Washington Post Co. Berkshire invested US$11 million in 1973, attracted by the newspaper’s management team. He also decided the company was in a business with high barriers to would-be competitors. Berkshire’s stake was worth US$1.3 billion at the end of 2006.

Pasadena, California- based Wesco Financial Corp, which has insurance and furniture rental businesses, returned about 200 times the investment over 31 years, according to the study.

The researchers included dividends in calculating gains of stocks and indexes.

Mr Buffett bought US$488 million of PetroChina stock after reading the Beijing-based company’s annual report and concluding the company was worth more than three times its market value given rising oil prices and Chinese consumption.

Berkshire started selling shares in the third quarter and said last month that it made about US$3.5 billion. The stake was disclosed in 2003.

TXU Corp, the Texas power company purchased this year by a buyout group led by Kohlberg Kravis Roberts & Co, more than tripled in the time that Mr Buffett held the shares.

 

Source: Bloomberg (Business Times 17 Nov 07)

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