How to explain Warren Buffet's superior performance? Via John Cochrane's lovely resource on his teaching website, I came across this paper, "Buffet's Alpha".
The abstract is posted below:
The abstract is posted below:
"Berkshire Hathaway has a higher Sharpe ratio than any 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 become insignificant when controlling for exposures to Betting-Against-Beta and quality factors. We estimate that Buffett’s leverage is about 1.6-to-1 on average. Buffett’s returns can thus largely be explained by the use of leverage combined with a focus on cheap, safe, quality stocks. Decomposing Berkshires’ returns into a portfolio of publicly traded stocks versus private companies, we find that the former performs the best, suggesting that Buffett’s returns are more due to stock selection than to a direct effect on management."
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