Billionaire's record sterling on stock picks

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 percent by buying the same stocks as 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 percent 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 $600 million at Pabrai Investment Funds in Irvine, Calif. Pabrai and a friend paid $650,100 this year in an annual charity auction to lunch with the 77-year-old Buffett.

Buffett's stock picks outperformed his Omaha, Neb.-based Berkshire Hathaway from 2002 to 2006 when Berkshire shares advanced at a yearly rate of 7.8 percent. By comparison, Berkshire holding USG Corp., the biggest maker of gypsum wallboard in North America, increased about 1,140 percent and PetroChina, China's largest oil producer, soared eightfold.

Buffett built Berkshire Hathaway during the past four decades into a $200 billion company with businesses ranging from ice cream and bricks to insurance and corporate-jet leasing. Berkshire had $77.9 billion invested in stocks at the end of September, according to a filing with the U.S. Securities and Exchange Commission. The company's shares closed Friday at 134,100.

Berkshire disclosed a new stake in CarMax, the biggest U.S. used-car dealer, in a regulatory filing Nov. 14.

Martin said he and Puthenpurackal initiated their study because they wanted to know whether it was better to purchase the stocks that 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 after disclosure over 31 years.

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

Buffett's biggest successes include The Washington Post. Berkshire invested $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 $1.3 billion at the end of 2006.

Pasadena, Calif.-based WesCo Financial, 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.

Buffett bought $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 $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, more than tripled in the time that Buffett held the shares. Berkshire invested in the company in 2002, after it almost went bankrupt. TXU then sold assets and prospered as electricity demand outstripped supply. Berkshire sold its holding by the end of 2004.

Buffett disclosed in April that he purchased a $3 billion stake in Fort Worth, Texas-based BNSF Railway, the second-largest railroad in the U.S.

BNSF shares hit records in May as copycat investors followed Buffett. The stock then dropped as much as 18 percent after the company said second-quarter earnings missed analysts' estimates. Berkshire bought more shares.

"We don't go in and out of the market," Buffett told reporters, explaining his investment strategy during a visit last month to a Berkshire subsidiary's factory in Dalian, China. "I simply look at individual businesses and try to figure out where they're likely to be in 5 or 10 or 20 years from now."

On average, 73 percent of Berkshire's equity portfolio was in five stocks during the past 31 years, the professors found.

"We try to understand what we're doing," Buffett said Oct. 24 during his Asia trip. "If we don't understand it, we don't do it."

Martin said long-term returns show the easiest way to mimic Buffett is to invest in Berkshire. The stock rose at an annual rate of 27.7 percent during the past three decades, he said.

"For someone like me, it's better to just buy Berkshire shares," said Martin, who owns Berkshire's Class B shares. They closed Friday at $4,475.00.