Buffett's Alpha / Andrea Frazzini, David Kabiller, Lasse H. Pedersen.

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Frazzini, Andrea

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w19681.Publication details: Cambridge, Mass. National Bureau of Economic Research 2013.Description: 1 online resource: illustrations (black and white)Subject(s):

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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.

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Previous	nber w19679 Deals Not Done: Sources of Failure in the Market for Ideas /	nber w1968 Reflections on the Inter-Industry Wage Structure /	nber w19680 Housing Collateral and Entrepreneurship /	nber w19681 Buffett's Alpha /	nber w19682 Consumer Credit: Too Much or Too Little (or Just Right)? /	nber w19683 Jobless Recoveries During Financial Crises: Is Inflation the Way Out? /	nber w19684 Maximum likelihood estimation of the equity premium /	Next

November 2013.

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.