Academic research shows that corporate insiders are able predict future stock price movements in their own companies based on their access to corporate information and they are usually willing to trade on this information for their personal accounts. Furthermore, since 2002, Sarbanes-Oxley required that corporate executives disclose these transactions to the public within two business days. This knowledge has created a unique investment style all by itself. Follow the top corporate executives and imitate their transactions: Buy when they buy and sell when they sell. Given the short time delays in disclosure, this investment style should allow anyone to imitate and be as good as top corporate executives. In fact, I wrote a book on analyzing and discussing this investment strategy.
When it comes to investment performance, there is one person we would all like to emulate, the legendary investor Warren Buffett. Like everyone else, Warren Buffett also has to disclose his transactions in Berkshire Hathaway (BH) and let the whole world know what he is doing with respect to his personal account when he buys and sells shares in BH. This brings up the topic of this essay. Just how good is Warren Buffett when it comes to predicting stock price movements in Berkshire Hathaway? How much does Warren Buffett earn when he buys and sells Berkshire Hathaway? Is it possible to imitate him?
I looked at insiders’ transactions in Berkshire Hathaway, including those of Warren Buffett. Overall, I found 416 insider trades between 1975 and 2011, including transactions from Warren Buffett, Charlie Munger and others. On average, BH insiders are similar to all other insiders. First, they trade profitably. Second, both their purchases and sales show profitability. Stock prices rise more than the market index if the index rises (or falls less than the index if the index falls) after insider purchases and rises less than the index (or falls more than the index) after insider sales. After BH insiders traded, BH stock price outperformed the market index by about 1% after20 days, 2.2% after 40 days and 2.7% after 90 days. Again, these number are all very typical of overall insider trading. Third, these abnormal returns are statistically significant, meaning that they cannot be attributed to random chance.
Unfortunately, I have bad news when it comes to the master himself. Warren Buffett reported only 18 transactions. Furthermore, unlike other insiders at BH, Warren Buffett’s transactions do not show any profitability whatsoever. It appears that Warren Buffett’s transactions are strictly liquidity related. While the man is a legend, his transactions in Berkshire Hathaway can be safely ignored. It is no use paying attention to Warren Buffett’s insider trades in Berkshire Hathaway. The most likely inference is that while Warren Buffett does have access to information, he is not willing to trade on it for his personal account.