Buffett is godlike in the investing world. Despite being a generally lackluster human being on a personal level, people love him so much. People who hate him always qualify their statements with “let’s be clear, he is the greatest of all time, but…”
Cliff Asness recently appeared on one of The Economist’s podcasts, discussing his incredible 2022. However, it should be noted that Cliff, a billionaire, can be thin-skinned and overly sensitive. He responded to one of my tweets (from an anonymous, small Twitter account) that was not directed at him in any way with a dismissive and snarky reply, and promptly blocked me. What’s the old saying? Never meet your heroes? I digress.
Cliff’s firm puts out generally interesting research that cuts from a different angle than the usual value drivel on “intrinsic value” that I come across. One of the more interesting papers is titled “Buffett’s Alpha,” which was done by his AQR co-founders. In a nutshell, the researchers found that Buffett’s outperformance can be explained by a number of simple investment factors amplified by leverage. In their words:
In essence, we find that the secret to Buffett’s success is his preference for cheap, safe, high-quality stocks combined with his consistent use of leverage to magnify returns while surviving the inevitable large absolute and relative drawdowns this entails. Indeed, we find that stocks with the characteristics favored by Buffett have done well in general, that Buffett applies about 1.6-to-1 leverage financed partly using insurance float with a low financing rate, and that leveraging safe stocks can largely explain Buffett’s performance.
Buffett’s Alpha
They went on to show what a quant-driven portfolio (human excluded) would have performed with the same defensive value factor amplified by leverage.
However, the paper indicates that such a strategy suffers from brutal drawdowns that most people would not survive.
Berkshire has had a number of down years and drawdown periods. For example, from June 30, 1998, to February 29, 2000, Berkshire lost 44% of its market value while the overall stock market gained 32%. While many fund managers might have had trouble surviving such a shortfall of 76%, Buffett’s impeccable reputation and unique structure as a corporation allowed him to stay the course and rebound as the internet bubble burst.
In conclusion, Buffett’s prowess is undeniable but…(see what I did there?), often quoted investing wisdom derived from Buffett including concentrating funds in best ideas, holding wads of excess cash, and being greedy when others are fearful may be missing underlying factor(s) of his investment success.