Buffett's Alpha: Further Explanations from Behavioral Value Investing Perspective
25 Pages Posted: 18 Oct 2017 Last revised: 2 Mar 2019
Date Written: October 16, 2017
The secret behind Warren Buffett’s extraordinary success as an investor has intrigued many people. However, there is not much academic research on it. Frazzini, Kabiller, and Pedersen (2018) carried out a systematic empirical study of the investment performance of Warren Buffett from 1976 to 2017 and came to the conclusion that Buffett generated a high alpha because of his unique access to leverage as well as in safe, high-quality, cheap stocks. We re-examine their hypothesis and evidence and note that there is more to Buffett’s sterling performance than the factors listed by Frazzini et al., 2018. Using information from shareholder letters, writings, interviews and speeches by both Warren Buffett and Charlie Munger, we propose, by means of a series of analytical arguments, a number of psychological factors to augment the findings of Frazzini et al in order to render a more complete explanation of Buffett’s alpha. We hypothesize that the behavioral factors could conceivably be the more fundamental reasons as to how Warren Buffett emerged as such an outstanding investor.
Keywords: Buffett, Alpha, Value Investing, Behavioral Finance, CAPM
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