Warren Buffett: Investment Genius or Statistical Anomaly?
School of Mathematics
University of New South Wales
Sydney, NSW 2052, Australia
School of Business Studies
University of Dublin, Trinity College
Keynote paper presented to the First International Workshop on Intelligent
Finance: A Convergence of Mathematical Finance with Technical and
Fundamental Analysis (December 13-14, 2004, Melbourne, Australia).
Warren Buffett has been Chairman and CEO of Berkshire Hathaway, a general investment
company, since 1965. Before that he headed various private investment partnerships. Over a
period of 47 years, under Buffett’s leadership, these companies have outperformed broad market
indices by an average of 11.16% per year. In 42 of the 47 years he has outperformed the market.
Despite this record, rarely do any standard investment, finance or economics texts mention
Warren Buffett. In this paper we look at possible reasons for this and examine the question
posed in the title, namely whether or not Buffett is simply a statistical anomaly. We also
describe some of the investment criteria used by Buffett and look at some historical studies
implementing these criteria using the investment program Conscious Investor.
1. Warren Buffett: The Invisible Man
The life of Warren Buffett is well documented in a range of biographies and analyses including
Lowenstein (1995), Kilpatrick (2001), Hagstrom (2000), and O’Loughlin (2002) while Miles
(2002) considers the type of managers preferred by him. Warren Buffett began his investing
career working for the Graham-Newman Corporation in New York in 1954. This was the
company partly owned by Benjamin Graham, the author of
Dodd) and who had lectured Buffett at Columbia.
After Graham-Newman was wound up in 1956, Buffett returned to his native Omaha, Nebraska
and started his remarkable investing journey. He established a number of private investment
partnerships. Even though just a young man, he had very definite ideas how he wanted to run
them. He made it clear that he would only provide a summary of his results once a year to the
investors in his partnerships and that he would not disclose where he was investing the money.
In an early letter to the partners he wrote, “All I want to do is hand in a scorecard when I come
off the golf course. I don’t want you following me around and watching me shank a three-iron
on this hole and leave a putt short on the next.” Furthermore, any investors could only add or
withdraw capital on one day a year, December 31. (See Lowenstein (1995, p. 152).)
Warren Buffett closed down all his partnerships in 1965 when he took charge of Berkshire
Hathaway, at the time a textile company with headquarters in New Bedford, Massachusetts. If
anyone had invested $10,000 with one of the original Buffett partnerships in 1956 and then nine
John Price is also chairman and CEO of Conscious Investing in Sydney, Australia.