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 statistically insignificant when controlling for exposures to Betting-Against-Beta and quality factors. We estimate that Berkshire’s average leverage is about 1.6-to-1 and that it relies on unusually low-cost and stable sources of financing. Berkshire’s returns can thus largely be explained by the use of leverage combined with a focus on cheap, safe, quality stocks. We find that Berkshire’s portfolio of publicly-traded stocks outperform private companies, suggesting that Buffett’s returns are more due to stock selection than to a direct effect on management.
http://www.econ.yale.edu/~af227/pdf/Buf ... dersen.pdf
Buffet's Alpha
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MachineGhost
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Buffet's Alpha
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Re: Buffet's Alpha
What are these low-cost, stable lending sources that Warren enjoys and others can't?
Re: Buffet's Alpha
"Float" from insurance companies he owns is part of it.clacy wrote: What are these low-cost, stable lending sources that Warren enjoys and others can't?
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Ad Orientem
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Re: Buffet's Alpha
With all due respect to Buffet, I recall reading somewhere that his returns over the last decade were not that impressive.
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MachineGhost
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Re: Buffet's Alpha
Indeed, its guaranteed money when you cross an insurance company with a steller investment manager. The time to get in is when its early. They seem to pop up at the rate of about once a decade on average, i.e. Buffet, Watsa, Tisch, Markel, Simpson, Einhorn.MediumTex wrote: "Float" from insurance companies he owns is part of it.
An important point is that its not hard to duplicate Buffet's success (leaving aside the first two-three decades of hedge fund trading which conveniently gets overlooked in Buffet's history): first screen by quality, then screen the remaining by safety, then screen the remaining by value.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Re: Buffet's Alpha
And you too can be a multi-billionaire!MachineGhost wrote: An important point is that its not hard to duplicate Buffet's success (leaving aside the first two-three decades of hedge fund trading which conveniently gets overlooked in Buffet's history): first screen by quality, then screen the remaining by safety, then screen the remaining by value.
Re: Buffet's Alpha
The paper linked in the OP claims Berk is leveraged 1.6x. In other words they control 60% more investments than they own or they have borrowed 60% of what they are worth to invest. Just like if you were to put $10,000 into a margin account and buy $16,000 worth of securities.
In light of that, I suspect your 158/(158-66) is the correct approach.
Though I'm not sure what you mean in the calculation about "You earn 14%, BRK earns 24%" (or 20%).
Investing in Berk? As an investor in Berk you do not earn any return on your investment. The market may or may not decide to reward you at some future time, but there is no upper limit to market reward and the only floor under your investment is Buffet's stated intent to buy back Berk shares if they drop under 110% of book value.
Or investing in the same asset mix as Berk? If you just pulled 14% from where the sun don't shine as an example, I suppose the calculation could be theoretically correct. In reality it would be calculated based on the actual investment returns and of course you could also leverage your investments.
There is nothing but your credit worthiness preventing you from using 1.6x leverage, or even much more. Most brokers in the U.S. will let you borrow 70% against the typical Berk investments and you can borrow additional against your other assets, borrow from a 401(k) plan (which then acts as if the 401(k) were invested in bonds while you get to invest the loan proceeds however you like) or even just utilize a signature line of credit. Of course, you aren't going to be borrowing at the low or negative cost that BRK enjoys, so with your higher cost you will need more leverage to equal the gains in BRK. Assuming, of course, that you would be able to duplicate their investment mix, which you cannot.
In light of that, I suspect your 158/(158-66) is the correct approach.
Though I'm not sure what you mean in the calculation about "You earn 14%, BRK earns 24%" (or 20%).
Investing in Berk? As an investor in Berk you do not earn any return on your investment. The market may or may not decide to reward you at some future time, but there is no upper limit to market reward and the only floor under your investment is Buffet's stated intent to buy back Berk shares if they drop under 110% of book value.
Or investing in the same asset mix as Berk? If you just pulled 14% from where the sun don't shine as an example, I suppose the calculation could be theoretically correct. In reality it would be calculated based on the actual investment returns and of course you could also leverage your investments.
There is nothing but your credit worthiness preventing you from using 1.6x leverage, or even much more. Most brokers in the U.S. will let you borrow 70% against the typical Berk investments and you can borrow additional against your other assets, borrow from a 401(k) plan (which then acts as if the 401(k) were invested in bonds while you get to invest the loan proceeds however you like) or even just utilize a signature line of credit. Of course, you aren't going to be borrowing at the low or negative cost that BRK enjoys, so with your higher cost you will need more leverage to equal the gains in BRK. Assuming, of course, that you would be able to duplicate their investment mix, which you cannot.