34 Pages Posted: 30 Jun 2018 Last revised: 10 Jan 2019
Date Written: January 9, 2019
Berkshire Hathaway has realized a Sharpe ratio of 0.79 with significant alpha to traditional risk factors. However, the alpha becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. Further, we estimate that Buffett’s leverage is about 1.7-to-1 on average. Therefore, Buffett’s returns appear to be neither luck nor magic, but, rather, reward for leveraging cheap, safe, quality stocks. Decomposing Berkshires’ portfolio into ownership in publicly traded stocks versus wholly-owned private companies, we find that the former performs the best, suggesting that Buffett’s returns are more due to stock selection than to his effect on management.
Keywords: investments, market efficiency, leverage, quality, value, betting against beta
JEL Classification: G11, G12, G14, G22, G23
Suggested Citation: Suggested Citation