We all know how Wazza’s done it; at least many of us think we do.
The paper summarized and linked to today though claims to be the first fully rigorous empirical analysis of Berkshire Hathaway’s results from October 1976 to March 2017 and the conclusions are, in fact, somewhat of a surprise.
The paper was published in the Q4 2018 edition of the Financial Analysts Journal and is from Andrea Frazzini, David Kabiller and Lasse Heje Pederson all of whom are employed by AQR Capital Management and can thus reasonably be described as ‘practitioners’ .
This paper then, while doffing its cap to academia, is a highly readable and practical document. For that reason I’m going to summarize it only with the briefest shorthand and recommend you read the work in full if your interest is sufficiently piqued.
Briefly, Wazza’s success is replicable and the paper shows examples (but only of course with the benefit of 20:20 hindsight). The bigger point being there’s no magic. What there is though is a pattern of behavior few, if any, would have been able to mimic over such a long period.
The ‘secret’ is twofold; first is the use of leverage. This may come as a surprise to some. Wazza says this is a bad idea usually. He’s, in fact, used leverage at the ratio of nearly 1.7:1 on average. Much of this comes from the insurance companies’ ‘float’. This may not be called a loan but how else should we describe buying stocks with money that isn’t yours that may at some stage require repayment?
The second ‘secret’ is persistency. Wazza has experienced some tough times but his set-up has allowed him to push through. He doesn’t have to worry about fund redemptions or windy unit-holders. This results in a surprisingly low Sharpe-ratio (highly erratic returns, a Sharpe ratio is return/volatility) of 0.79 which again may surprise many.
Bottom line. You too can generate Buffett-style returns if you put your mind to it. Just find some ‘free’ money, buy some high quality big cap stocks, do nothing when you’re down 60% and keep doing that for 50-years or so. Easy, right?
[The latest version of the work can now be accessed via the following link Buffett’s Alpha]
Happy Sunday