Many investors are disciples of Berkshire Hathaway’s Warren Buffett. Buffett learned his craft from his mentor, Benjamin Graham, author of the legendary tomes "Security Analysis" and "Intelligent Investor". Graham stated the following in 1976, shortly before his death [to the Journal of Finance]:
"I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when [the bible of fundamental stock analysis, Graham and Dodd's Security Analysis] was first published; but the situation has changed. I doubt whether such extensive efforts will generate sufficiently superior selections to justify their cost."
Would the student be able to prove the teacher wrong? Buffet's Chairman’s Letter  in the Berkshire Hathaway annual report indicates that the per-share book value of Berkshire Hathaway has increased at an average annual rate of 21.5% since 1965. Compared to an average of 10.3% for the S&P 500 total return including dividends, the outperformance is striking.
There have been numerous books written on the Oracle of Omaha, including "The Warren Buffet Way", "Trade Like Warren Buffett", and "How to Think Like Benjamin Graham and Invest Like Warren Buffett."
Investors who want exposure to his style can invest in any of the dozens of mutual funds that have sprouted claiming adherence to the Buffet investment style. The American Association of Individual Investors and websites such as Validea.com have developed screens that are designed to find companies that Warren Buffet would buy based on criteria he has promoted in the decades of public speaking and annual reports. Indeed, some planners simply buy Berkshire Hathaway stock, gaining access to his portfolio management skills as well as exposure to the operations of an insurance conglomerate.
What many investors do not realize is that they could simply buy the stocks comprising Buffett’s equity portfolio. If the holdings of the “world’s greatest value investor” were available, surely one should take notice. In fact, anyone can track any institutional fund manger with over $100 million in assets on the Securities and Exchange Commissions website for free. It is possible to examine the holdings of every manager from George Soros to Seth Klarman.
The form 13F (also referred to as the 13F-HR) is the initial quarterly report of holdings filed by institutional managers. It is a reporting form required pursuant to Section 13(f) of the Securities Exchange Act of 1934. Section 13(f) was passed in 1975 by Congress to increase the public availability of information regarding the securities holdings of institutional investor. Managers with over $100 million in assets must file the form within 45 days after the last day of each quarter. Futures do not show up on the form, nor do short sales.
While Section 13(f) has been in place for over 30 years, some people are beginning to question the purpose and tangible benefits for the transparency. Philip Goldstein, the managing partner of hedge fund Bulldog Investors, filed in October 2006 a formal request for exemption from the rule. His reasoning is that the Form 13F disclosure will make public his proprietary trade secrets. He argues that the composition of his portfolio is secret intellectual property, and protected under the Constitution’s Fifth Amendment. While most experts believe Goldstein’s request will be denied, he states publicly that he is will to go as far as suing the SEC. While we make no argument as to the validity of his arguments, as long as the law is in its current form, it behooves the advisor to take advantage of the information available to piggyback on some of the most brilliant minds in the business.
Examining the most recent 13F from Berkshire (11/15/2006) reveals a list of long time Buffet holdings. American Express (NYSE:AXP), Anheuser Busch (NYSE:BUD), Washington Post (WPO), and Coca-Cola (NYSE:KO) are all represented.
This information is indeed interesting, but can it be of any value to the investor? We set out to examine if a simple, passive approach to tracking the holdings via the 13F filings can result in strong portfolio performance. The reason that value managers are an ideal subject is due to their low turnover. Typically, value investors have long-term holding periods (in Buffet’s case he has stated that his favorite holding period is “forever”). Thus, the 45 delay in reporting times should not be a major factor in performance. We suspect that the major value added in the investment process from value managers is in the identification of target companies, and not in investment timing, but that is merely conjecture (and difficult to test). The portfolios we will track are long-only (most hedge funds short and/or use derivatives to hedge or leverage their ideas).
In this test we simply take a list of all of his holdings and equal weight them. Total return data is used including stocks that are no longer traded.
The 13Fs are published 45 days after quarter end. In the previous example we utilized the filing from 11/14/2006. We use the closing price from the following day to track performance. [In a follow up post, we will track only the top 10 holdings and delay the entry until quarter's end.]
Following a simple update of Buffet's holdings would have resulted in strong outperformance, with no down years since 2000.
Average Annual Return
Buffet Clone: 14.33%
Berkshire Stock: 10.62%
HedgeFundResearch Equity L/S Category: 7.9%
The full table of results is below, along with an equity curve:
Stay tuned for further backtests (going to do the Buffett variant next followed by David Einhorn's Greenlight Capital). . .
Current Buffett holdings include:
General Electric (NYSE:GE)
Ameriprise Financial (NYSE:AMP)
Iron Mountain Inc. (NYSE:IRM)
Proctor & Gamble (NYSE:PG)
Moody's Corporation (NYSE:MCO)
Westco Financial (NYSEMKT:WSC)
Johnson & Johnson (NYSE:JNJ)
American Express (AXP)
Wells Fargo Company (NYSE:WFC)
M&T Bank Corporation (NYSE:MTB)
American Standard (ASD)
United Parcel Service (NYSE:UPS)
Western Union (NYSE:WU)
H & R Block (NYSE:HRB)