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Lindley Estes is a business writer for The Free Lance-Star and This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.

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Simple investment tip: Imitate Buffett

INVESTORS WHO mimicked the stock market purchases of Warren Buffett’s Berkshire Hathaway over the past 30 years would have earned returns that greatly exceeded the Standard & Poor’s 500.

That’s one of the findings of a newly released study by professors Gerald S. Martin of American University and John Puthenpurackal of the University of Nevada, Las Vegas.

Between 1976 and 2006, Berkshire’s stock portfolio beat the returns of an S&P 500 index fund in 28 out of 31 years, with the average annual return exceeding the index by a whopping 14.7 percent. Berkshire’s investment portfolio had a negative return in just one year–2001.

“A portfolio that mimics Berkshire’s investments after they are made public in regulatory filings earns significantly large risk-adjusted returns,” the professors wrote in their report, which is titled “Imitation is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway.”

Martin and Puthenpurackal looked at 335 common-stock investments that Berkshire made between Jan. 1, 1976, and Dec. 31, 2006. They found that the holding company’s stock investments consistently beat the market without taking on excessive risk. They concluded that luck likely played little role in Berkshire’s market-beating returns.

Berkshire’s $50 billion-plus stock portfolio would make it the ninth-largest equity mutual fund, according to the study. The Omaha-based company also owns a large number of companies outright–including GEICO and Dairy Queen.

Of course most investors can’t buy big companies outright. But it is possible to copy Berkshire’s stock investments. Like other institutional investors, Berkshire reports its stock holdings at least four times a year. Its holdings are widely chronicled in the financial press.

The professors found that stocks newly acquired by Berkshire tend to jump significantly after the acquisition is made public. That was especially true in the second half of their study period (1991-2006), when Buffett became increasingly famous.

Nonetheless, Martin and Puthenpurackal find, investors are still able to mimic the purchases and beat the market. That suggests that the market under-reacts to reports of a Berkshire buy.

Further, although Berkshire-bought stocks typically jump right after the disclosure, they often slip back down as other news becomes more pertinent. Patient investors can thus wait to jump in until prices fall back to where Buffett likely bought.

There are also other advantages to mimicking Berkshire instead of others. The company tends to hold investments for long periods, especially its larger holdings. The copycat investor can be reasonably sure that his holdings will match those of Berkshire into the future.

Of course just because Berkshire’s stock portfolio delivered market-beating returns for the past 30 years doesn’t mean it’ll continue. Buffett is now 77 years old and has had trouble finding enough investments for Berkshire’s billions of dollars worth of cash.

For many investors, it might be easier just to buy an S&P index fund or even a share of Berkshire Hathaway itself (“B” shares recently sold for about $4,570 each; “A” shares for $137,000).

But for those investors who prefer the challenge of buying individual stocks, the professors’ study offers an intriguing possibility. Several Web sites, including guru, track Berkshire’s stock investments.

Berkshire’s recently disclosed major common-stock purchases include U.S. Bancorp, Wells Fargo, Johnson & Johnson and Burlington Northern Santa Fe.