Buffett's Alpha

Andrea Frazzini (), David Kabiller and Lasse Pedersen

No 19681, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Berkshire Hathaway has realized a Sharpe ratio of 0.76, higher than any other 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 becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. Further, we estimate that Buffett's leverage is about 1.6-to-1 on average. Buffett's returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on 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. These results have broad implications for market efficiency and the implementability of academic factors.

JEL-codes: G11 G12 G14 G22 G23 (search for similar items in EconPapers)
Date: 2013-11
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published as Andrea Frazzini & David Kabiller & Lasse Heje Pedersen, 2018. "Buffett’s Alpha," Financial Analysts Journal, vol 74(4), pages 35-55.

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