The Efficient Market Hypothesis in the Light of Abnormal Returns on Portfolio Investments by Warren Buffett and his Copycats

This research analyses the investing strategy and the profitability of the liquid portfolio of the greatest investor in the world, Warren Buffett, the 4th person in Forbes’s list of Billionaires 2020. The major goals of the work are to answer the question whether it is possible to achieve the success close to Mr. Buffett’s one by mimicking his investing portfolio disclosed in obligatory reports on Securities and Exchange Commission’s website, as well as to draw conclusions regarding the compliance of the Efficient Market Hypothesis in the current century. We have shown that about half of liquid stocks acquired by Berkshire Hathaway are value stocks with low P/BV and P/E ratios, and their share is twice as large as percentage of growth, or ‘expensive’, stocks. The latter, in turn, were purchased during the periods of relatively low prices. This fundamental strategy of value investing is one of the drivers of 11.7% compounded annual gain of the company’s investment portfolio in 1999-2019 which was higher than S&P 500 with dividends by 4.9 p.p. during this period. However, in the recent decade, excess returns significantly decreased and the portfolio underperformed the benchmark by about 4.1 p.p. annually. Among possible reasons of this decline are larger market value of BH’s liquid portfolio, poorer performance of non-tech ‘glamorous’ stocks in this portfolio and hiring external investment managers in 2010 and 2012. The evidence of the event study shows that Warren Buffett’s popularity among market participants has increased compared with results got in previous papers despite the reduction of his liquid investments’ abnormal returns. The publicly disclosed purchases and sales of stocks by BH have statistically significant market impact (especially high for initial purchases), hence, the strong form of the EMH is rejected. Finally, the replication of the Oracle of Omaha’s deals after a time delay in investing caused by SEC rules was associated with 8.6-8.7% compounded annual gain outperforming the index by about 2 p.p. only on the overall period of 1999-2019, while during the recent decade mimicking strategy led to an annual 4.4-5.4 p.p. lag behind S&P 500 with dividends. The copycatting remained less profitable than the performance of BH’s liquid portfolio in all time intervals and investing into BH’s shares was more attractive in terms of profitability in the recent decade. The evidence does not allow to make a conclusion on the refutation of the EMH in its semi-strong form.