Warren Buffett has become an easy target as Berkshire Hathaway Inc. (NYSE:BRK-B) delivered less glamorous returns than it historically has done. BRK-B shares returned 52% since the end of 2007 vs. a gain of 63% for simple S&P 500 ETF (SPY). “Has Warren Buffett lost his touch?” became a common headline in recent years. Are star hedge fund managers, like David Einhorn, better at picking stocks than Buffett or is it something else? David Einhorn’s top stock picks are technology stocks like Apple Inc. (NASDAQ:AAPL) and Micron Technology, Inc. (NASDAQ:MU). Are Einhorn’s large-cap stock picks better performers than Buffett’s conventional stock picks like Wells Fargo & Co (NYSE:WFC), The Coca-Cola Co (NYSE:KO), and American Express Company (NYSE:AXP)?
Insider Monkey tracks hedge funds and billionaire investors to take advantage of their best ideas without paying an arm and a leg. Our research has shown that, on average, hedge funds and billionaires aren’t very good at picking large-cap stocks but extremely talented at picking underfollowed small-cap stocks. The 50 most popular large-cap stocks among hedge funds actually underperformed the S&P 500 Total Return Index by an average of 7 basis points per month between 1999 and 2012. Our back tests also revealed that the 15 most popular small-cap stocks among hedge funds beat the same S&P 500 Total Return Index by an average of 95 basis points per month. That’s an outperformance of almost a percentage point per month. We have been sharing the list of these top 15 small-cap stocks in real time since the end of August 2012. These stocks delivered an astonishing 134.1% gain through March 25th, vs. 54.2% gain for the S&P 500 ETF (SPY) (read the details here).
Some fund managers and billionaire investors may demonstrate higher returns than the average returns we revealed in our research. Both David Einhorn and Warren Buffett became billionaires by picking stocks. So, it is possible that these two billionaires may be extremely talented at picking large-cap stocks. We will limit our comparisons to large-cap space because, due to Berkshire’s enormous portfolio size, Warren Buffett generally invests only in large-cap stocks (stocks with at least $20 billion in market cap). His top picks were actually made one or two decades ago. It wouldn’t be fair to compare his large-cap picks to Einhorn’s small-cap picks. We also restrict our analysis period to the 5 years between 2008 and 2012. We already know Buffett was extremely successful in the 80s and the 90s. We also know that Einhorn didn’t really start investing in large-cap stocks until the middle of the last decade.
Warren Buffett had an average of 19 large-cap stocks in his 13F portfolio between 2008 and 2012. The average value weighted return of these stocks were 63 basis points per month. S&P 500 Total Return Index returned 29 basis points per month during the same period. Buffett’s large-cap picks outperformed the market by an average of 34 basis points per month. The stocks that are in Buffett’s portfolio might have lower risk characteristics than the average stock in the S&P 500 Index. We used Carhart’s 4-factor model to adjust for risk and found out that Buffett’s large-cap picks generated a monthly alpha of 44 basis points.