An Analysis of Buffett’s Alpha

A 2018 paper published in the Financial Analyst’s Journal analyzes  the alpha created by Warren Buffett’s Berkshire Hathaway. The introduction, by authors Andrea Frazzini, David Kabiller, and Lasse Heje Pedersen (of AQR Capital management), reads:

“While much has been said and written about Warren Buffett and his investment style, there has been little rigorous empirical analysis that explains his performance. Every investor has a view on how Buffett has done it and the practical implications of his success, but we seek the answer via a thorough empirical analysis in light of some the latest research on the drivers of returns.”

Their findings illustrate that Buffett’s returns appear to be “neither luck nor magic, but, rather, reward for leveraging cheap, safe, quality stocks.” The study, which involved “decomposing Berkshires’ portfolio into ownership in publicly traded stocks versus wholly-owned private companies,” revealed that the publicly-traded shares were the stronger performers, therefore suggesting that Buffett’s alpha is attributed more to his stock selection process than to his effect on management.

The 34-page paper outlines the data sources used by the authors and is divided into the following sections regarding Buffett’s returns:

  • Track Record
  • Leverage: Magnitude and Cost
  • Public Stocks vs. Private Companies
  • Alpha and Investment Style: What Type of Stocks?
  • A Systematic Buffett Strategy
  • Conclusion: Practical Implications of the Oracle’s Alpha