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Individual investors follow every step Warren Buffett makes. So do professional money managers.

The pros invest their clients' money in Berkshire Hathaway Inc. stock. Everybody knows that if they had invested $1,000 with Buffett back in the day, they would have been a zillionaire today.

Does it make sense to invest in Berkshire today? Can Buffett beat stock-market indices, also known as generating alpha, as hedge fund managers like David Einhorn, Bill Ackman or Dan Loeb can?

Insider Monkey analyzed the returns of Warren Buffett's Berkshire Hathaway between 1977 and 2009. We ran hundreds of regressions to calculate Warren Buffett's alpha skill for every single month, using 5- and 10-year historical performance data.

Contrary to the general perception, Buffett has not had any alpha for the past 10 years. Let us repeat that: Buffett, no alpha, for the past decade. You would have been better off if you had invested your money with Einhorn. (Note: We used Carhart's four-factor model and French's factor returns to calculate Buffett's alpha.)





Warren Buffett had a phenomenal annual alpha of 19 per cent between 1956 and 1968. Our current analysis shows that his alpha was more than 30 per cent between 1977 and 1981. During the '80s and '90s, his annual alpha declined but was still better than 12 per cent. For the 10 years leading to mid-2003, his annual alpha stayed around 12 per cent a year. Since then, it started a steep decline; by the end of 2004 it was 6 per cent a year. Between 2005 and 2008, Buffett's alpha averaged only 3 per cent per year. Finally, in the 10 years ending in 2009, it went virtually to zero.

One might argue that Warren Buffett's alpha can't be perfectly extracted from the stock performance of Berkshire Hathaway. The recent poor performance and lackluster alpha may be a result of a decline in the "Warren Buffett premium" present in Berkshire's stock. Nevertheless, investing in Berkshire Hathaway is the only way for many investors to tap into Buffett's investment know-how, but they just can't achieve abnormally high returns simply by buying Berkshire stock anymore.



Meena Krishnamsetty is the editor of Insider Monkey, a Web site that provides free real-time insider-trading data.