Buffett's Alpha
Berkshire Hathaway has realized a Sharpe ratio of 0.76, higher than any other stock or mutual fund with a history of more than 30 years, and Berkshire has a significant alpha to traditional risk factors. However, we find that the alpha becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. Further, we estimate that Buffett's leverage is about 1.6-to-1 on average. Buffett's returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks. Decomposing Berkshires' portfolio into ownership in publicly traded stocks versus wholly-owned private companies, we find that the former performs the best, suggesting that Buffett's returns are more due to stock selection than to his effect on management. These results have broad implications for market efficiency and the implementability of academic factors.
In general, though, the formula favors “cheap, safe stocks.” By this, the researchers mean stocks that have low price-to-book-value ratios, have exhibited below-average volatility, and are from companies whose profits have been growing at an above-average pace and that pay out a significant portion of their earnings as dividends.
Buffett's Alpha Version 1
NBER Working Paper No. w19681
Number of pages: 46 Posted: 28 Nov 2013
Buffett's Alpha Version 2
Financial Analysts Journal, 2018, 74 (4): 35-55
Number of pages: 34 Posted: 30 Jun 2018
Last Revised: 10 Jan 2019
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2360949
Buffett's Alpha
Submitted September 15, 2019 at 06:07PM by HBScott1961 https://ift.tt/2NgyBLw
