Thanks to Will for passing this along.
IF INVESTORS had access to a time machine and could take themselves back to 1976, which stock should they buy? For Americans, the answer is clear: the best risk-adjusted return came not from a technology stock, but from Berkshire Hathaway, the conglomerate run by Warren Buffett. Berkshire also has a better record than all the mutual funds that have survived over that long period.
Some academics have discounted Mr Buffett as a statistical outlier. Others have simply stood in awe of his stock-picking skills, which they view as unrepeatable. But a new paper from researchers at New York University and AQR Capital Management, an investment manager, seems to have identified the main factors that have driven the extraordinary record of the sage of Omaha.
The article above concludes with the paragraph:
“These two factors—the low-beta nature of the portfolio and leverage—pretty much explain all of Mr Buffett’s superior returns, the authors find. Of course, that is quite a different thing from saying that such a long-term performance could be easily replicated. As the authors admit, Mr Buffett recognised these principles, and started applying them, half a century before they wrote their paper.”
The things that I—and probably many of you—may have an issue with is that they define the investments as “low-beta.” Sure, things like Coca-Cola and other investments may have ended up being low beta stocks, but that wasn’t necessarily obvious beforehand. Beta is backward-looking, and being able to judge that things like Coca-Cola, The Washington Post, Cap Cities, American Express, etc. would have the runways and success they had that made them end up being low beta stocks beforehand is much different from looking at past volatility when making large, initial purchases. And this doesn't just apply to the public stocks. Buffett and Munger’s skill in providing private businesses a good home and promising not to sell has also gone a long way in Berkshire’s success, as was building the world’s best insurance operation to get access to the low cost float, as the article does mention. All in all, to the use words of Charlie Munger, it was a lollapalooza.
Link to paper: “Buffett’s Alpha”