Does This Oscar-Winner Impact Berkshire Hathaway’s Stock Price?
Back in early 2011, a strange article appeared on the HuffPost website — it pointed to an incredible link between an Oscar-winning actress and the price of one of the biggest companies on the NYSE.
“One thing appears to be certain: When Anne Hathaway makes headlines, the stock for Warren Buffett’s Berkshire Hathaway goes up,” says the web post.
The evidence appears compelling…
On the Friday before the Oscars, Berkshire shares rose a whopping 2.02%. And on the Monday just after the Academy Awards, they rose again, this time 2.94%. But it’s not just an Oscar bounce… just look back at some other landmark dates in Anne Hathaway’s still young career:
- Oct. 3, 2008 — Rachel Getting Married opens: BRK.A up 0.44%
- Jan. 5, 2009 — Bride Wars opens: BRK.A up 2.61%
- Feb. 8, 2010 — Valentine’s Day opens: BRK.A up 1.01%
- March 5, 2010 — Alice in Wonderland opens: BRK.A up 0.74%
- Nov. 24, 2010 — Love and Other Drugs opens: BRK.A up 1.62%
- Nov. 29, 2010 — Anne announced as co-host of the Oscars: BRK.A up 0.25%
What could have caused this sort of bizarre relationship? The algorithms.
The story speculated that automated trading programs were picking up positive news spikes for Anne Hathaway and erroneously buying up shares of Berkshire Hathaway.
It was some interesting detective work.
And the story spread like wildfire. Outlets like CNBC, the Financial Times, Time magazine… even Nobel Prize-winning economist Paul Krugman mentioned it on his New York Times blog.
The only problem was that it was completely bogus.
It’s hard to blame the author of the article for getting it wrong. He’s a filmmaker, not a statistician. And on its face, the story certainly looks compelling. But it’s a little jarring that so many other outlets (particularly finance outlets) committed such serious statistical crimes.
For starters, the idea that trading robots were transacting in shares of Berkshire Hathaway’s class A shares is preposterous on its face. That class of stock cost more than $100,000 per share back in 2010, and wasn’t liquid enough for algorithmic trading — only 445 shares traded hands on one of the days used as an example.
(And the relationship didn’t hold as well for Berkshire’s more liquid class B stock.)
The statistics have problems too.
The six data points used as examples are too small of a sample size to prove that the Anne Hathaway headlines produced returns that were statistically different from those of the S&P 500.
The impressive association between Anne Hathaway headlines and Berkshire moving higher could very likely have been due to chance.
For instance, looking at the relationship between the share price of Berkshire Hathaway’s class A shares and Anne Hathaway’s Google Trends ranking, the correlation is so low that pure randomness would give the same result or better 70% of the time.
There’s nothing there.
What about the incredible Berkshire Hathaway performance around the Oscars the year Anne Hathaway hosted?
It just so happens that Berkshire chairman Warren Buffett released his closely watched annual letter to shareholders that very weekend, delighting Wall Street by saying that he had “an itchy trigger finger” for acquisitions.
Sorry, no robot trading conspiracy.
But it’s a fascinating example of what can happen when people get ahold of a juicy narrative and ignore the statistical realities of the stock market.
At the time, investors were eager to eat up a story about stupid algorithms running amok on the market. And the financial news never bothered to give the story a sanity check.
Stock prices have an incredibly low signal-to-noise ratio. It’s not hard to find spurious associations, especially if you only look at a couple of data points.
Just as bad, it’s easy to throw away real signals that get masked by noise acting in the other direction. Randomness works in both directions, after all, and stock returns tend to “cluster” together.
The only way to cancel out all that randomness is by being consistent with your position size and taking many trades over the long term.
Take a recent example from my trading service Kinetic Profits.
The last week in July we took a frustrating loss on one of our options trades.
Taking a loss is never fun, but it’s part of trading. The important thing to remember, though, is that it actually doesn’t take many trades to make one large loss disappear.
In fact, if readers put an equal amount of money in each of the three recent trades we closed at the time, they would’ve been up well into the double digits for the summer.
You can’t predict the outcome of any single given trade. But stack up a bunch of high probability trades after one another, and you tilt the odds squarely in your favor.
That’s why, in the long run the winners quickly overwhelm the losers when you treat your trading systematically — even when they’re nasty losers.