Warren Buffett’s Style Drift

Your source for free real-time insider trading data, Insider Monkey, used Carhart’s (1997) four-factor model to estimate Warren Buffett’s alpha and investment style between 1997 and 2009. The four factors used in the regression can be downloaded at Ken French’s website. They are market factor, size, book-to-market, and momentum. We used Berkshire Hathaway's (BRK) monthly returns to proxy Warren Buffett's performance. Here are the regression results for each decade ending in 1989, 1999, and 2009:

hedge funds vs. mutual funds

[caption id="attachment_412" align="aligncenter" width="640"] Regression 10 Years Ending December 1989[/caption] During the 10 years ending in December 1989, Warren Buffett's alpha was 1.1% per month. His beta was 1, benefitting 100% from increases in the general market. He also invested in small cap stocks, distressed stocks, and stocks with high momentum. All of these coefficients are significant at the 10% level. [caption id="attachment_413" align="aligncenter" width="640"] Regression 10 Years Ending December 1999[/caption] During the 10 years ending in December 1999, Warren Buffett's alpha was 0.63% per month. His beta was 1.1, benefitting 110% from increases in the general market. He also invested in large cap stocks, distressed stocks, and stocks with no momentum. All of these coefficients (except his alpha) are significant at the 10% level. [caption id="attachment_414" align="aligncenter" width="637"] Regression 10 Years Ending December 2009[/caption] During the 10 years ending in December 2009, Warren Buffett's alpha was 0.06% per month, which is technically zero. His beta was 0.35, reflecting all the cash he had been hoarding in his portfolio. He had also been investing in distressed stocks (stocks with high book-to-market ratios), a practice he continues. It's really interesting to see that Warren Buffett's alpha disappeared over the 10 years ending December 2009.
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