A simple way to beat the market: Invest like Buffett

By investing in the top 5 holdings of Berkshire Hathaway, investors can outperform the market handily.

By GuruFocus.com Sep 17, 2013 2:03PM
 Woman reading newspaper in livingroom © Tetra images/Getty ImagesBeating the market average is the ultimate goal for every long-term investor. If it was not, you could just buy an index fund or ETF. As GuruFocus recently updated the current holdings of Warren Buffett, many investors piled in to check what he has bought and sold lately. 

But one question is rarely answered: What kind of return can you achieve by investing in the holdings of Warren Buffett? Can you beat the market?


With this in mind, GuruFocus conducted research into whether you can beat the market by investing in the holdings of some of the most recognized investors in the world. In the research we share below, we assume that we began investing in the top five holdings of Warren Buffett in January 2000. We may or may not rebalance the portfolio as Warren Buffett buys or sells stocks. We then observed the performance of the portfolio.

 

The reason we selected January was because it was close to a market peak. Over the past 12 years we went through two market crashes. Today the market is only marginally higher than it was in January 2000.

 

Assumptions and facts

1. We started to invest on Jan. 1, 2000, and invested in the top five holding of Berkshire Hathaway, equal-weighted.
2. We compared the market value of the top five holdings with the market value if we had invested directly into SPDR S&P 500 ETF (SPY).

3. The dividends we received would be reinvested into the same stock immediately. 
4. All the prices we used in this research were close prices adjusted for splits and dividends.

Scenarios

1. We invested our money in the top five holdings of Berkshire Hathaway on Jan, 3, 2000, and held these stocks until Jan. 2, 2013.

2. We followed the same top five holdings of Berkshire Hathaway since Jan. 3, 2000, and made adjustments quarterly until Jan. 2, 2013.

The performance of the top five holdings of Warren Buffett 

Buffett is known for long holding periods and a concentrated portfolio. Since 2000, Buffett's top five holdings did change. For instance, in the year 2000, his top holdings were Coca-Cola (KO), American Express (AXP), Gillette, Washington Post (WPO) and Wesco Financial. Gillette was bought by Procter & Gamble (PG), and Wesco was bought by Warren Buffett himself. Today, his top five holdings are Coca-Cola, American Express, Procter & Gamble, Wells Fargo (WFC) and IBM (IBM) (gurufocus.com). 

 

We compared the performance of two scenarios with that of the S&P 500 index ETF. In the first scenario, we hold Buffett's top five holdings from 2000 until today. If a company was acquired, we converted the fund into a new position in the top five holdings. In the second scenario, we rebalanced every quarter if a new stock made it into the top five holdings.

 

The results are shown in the table below. We can clearly see that in both scenarios the top five holdings of Warren Buffett handily beat the benchmark. In Scenario 1, the total return from 2000 to 2012 is 73%, more than double the market return in the same period. In Scenario 2, where we rebalance once a quarter according to Buffett's top five holdings, we quadruple the gain of the market in the same period.

Year

S&P 500

Scenario 1

Scenario 2

2000

-0.83%

-0.42%

-0.42%

2001

-16.34%

-7.27%

-8.19%

2002

-22.76%

4.24%

-2.26%

2003

34.01%

21.19%

23.62%

2004

6.12%

8.13%

8.37%

2005

9.80%

3.97%

24.59%

2006

14.83%

12.12%

14.75%

2007

-2.67%

0.73%

-0.75%

2008

-38.25%

-36.48%

-24.17%

2009

32.65%

36.10%

28.64%

2010

22.18%

11.32%

13.78%

2011

4.19%

2.33%

9.34%

2012

14.48%

18.60%

14.90%

Total

33.5%

73.0%

136.9%

Years of Outperformance:

62%

69%


We want to point out that in neither scenario would the portfolio outperform the market every year. But clearly Buffett's top holdings did much better during market crashes. These are the keys to the outperformance of the portfolios. Just as Buffett has said, "Rule No. 1: Never lose money."

Conclusion
The above results show investors will outperform the market by investing in the top five holdings of Berkshire Hathaway without rebalancing each quarter (though they will need to rebalance when any of the top five holdings was acquired). But they will do much better if they track the top five holdings of Berkshire Hathaway and rebalance when the top five holdings change. This is much more profitable and can beat the market by wide margins.


In future columns we will discuss some of the top holdings of Warren Buffett. In the meantime, you can check out his complete portfolio here


More from GuruFocus

29Comments
Sep 17, 2013 6:05PM
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Or you could buy Berkshire Hathaway and let Buffett do your investing for you.
Sep 17, 2013 4:42PM
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Hell, I beat Warren and the S&P from 2007 and forward...

Didn't compare the others..

 

If I can do it, many others can also....

But with me, it's a personal game..

Depending on Gold miners, I may not beat him this year...

Sep 17, 2013 6:01PM
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Buffet can invest in ways the average investor cannot. It's ridiculous to think folks can invest like Buffet, we don't have the leverage he has thus the ability to cut sweet investment deals.
Sep 17, 2013 7:46PM
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I just gave the price of gold and silver for the SAME time frame as the article, so ALL of you thumbs down can stick it where the sun doesn't shine if you don't LIKE INCONVIENENT facts. ALL I did was post the beginning and end prices of TWO commodities, and point out that DURING THAT TIME PERIOD, they beat the S&P 500 AND the scenarios in the article. I'M NOT saying that the stock market didn't give BETTER returns from 1982-1999, because it did.  All I said was during the time period in question [the one given in the article] that these two commodities BEAT the stock market, WHICH THEY DID.  I did NOT and WILL NOT say they will continue to beat the market. I just said that they did during the period stated.
Sep 17, 2013 5:40PM
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Hey No monopoly Steve

 

I only gave the figures I did because of the time frame in the article.

 

You can do your own research if you want other years.

Sep 17, 2013 4:37PM
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Give me 50 Bill and I'll invest it (or half) anyway someone wants me to....
Sep 17, 2013 4:15PM
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Wouldn't that be a big risk play?  arf, arf, arf..
Sep 17, 2013 9:12PM
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Five stocks should outperform the S&P 500 because you accept the added volatility from a five stock portfolio. Remember risk vs reward?
I'd love to see what a portfolio of the five best performing S&P stocks for one year, bought the first week of January the next year, did. 
Better yet-make it the ten best performing. Or give me the top five from the S&P, and the top five from the Nasdaq.
Sep 17, 2013 5:35PM
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I think you need to check your math. S&P = 57.41% . . .  Scenario 1 = 74.56% and  . . . . Scenario 2 = 76.20% . . . . . that is a little over 1%/year difference between the S&P  . . . . 1% is 1% however.
Sep 17, 2013 10:04PM
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Neon Guy.....Quit worrying about the THUMBS.....They mean NOTHING.
Sep 18, 2013 3:34PM
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Step 1: Get a gazzillion dollars

Step 2: Get inside information on oil pipeline from President

Step 3: Buy Train stocks as said President all but said he's killing said pipeline to transport fuels...

 

You too will be like Warren Buffett 

Sep 17, 2013 6:01PM
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Invest like Buffett:

 

You know the market is heading for a "GREAT FALL" if one must use the name Warren Buffett to entice others to invest.

Sep 17, 2013 11:47PM
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 Besides my belief that the stock market is rigged I can't invest like Buffet because I'm not an insider trading crook like he is.
Sep 17, 2013 5:12PM
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The price of gold 12-31-1999  $290.90 per ounce

The price of gold 12-31-2012  $1655.90 per ounce

 

The rate of increase 469.23%

 

The price of silver 12-31-1999 $5.19 per ounce

The price of silver 12-31-2012 $29.98 per ounce

 

The rate of increase 477.65%

 

Sep 17, 2013 6:41PM
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 Like Buffet? Sure fund the democrat nazi party next thing you know there is tons of oil flowing on your train tracks.  And don't forget to keep a peasant house for the morons to enjoy on tv propaganda story's of how your slave master is "modest". That's right you freaky stupid democrats your party is exactly what you've been taught republicans are. Al Gore taught me that when he called from his private Jet or was it his Yacht perhaps his mansion I don't know but the point is your a complete moron.
Sep 17, 2013 4:42PM
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Here's a better way to beat the market. Stay the f*** out of it!
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