Cutting Research on Warren Buffett
Comment of the Day

December 05 2013

Commentary by David Fuller

Cutting Research on Warren Buffett

Here is the opening for this informative article from Bloomberg:

Warren Buffett isn't just a great investor. He's the best investor, an economic study has found

An index measuring returns adjusted by price fluctuations shows the billionaire chairman and chief executive officer of Berkshire Hathaway Inc. (BRK/A) has done better than every long-lived U.S. stock and mutual fund.

The ratio is also larger than all 196 U.S. mutual funds that have been around for 30 years. The median Sharpe ratio for them is 0.37.

The review of Buffett¡¯s investments concluded he has been rewarded for his use of leverage, coupled with a focus on cheap, safe, quality shares.

The study said Buffett is willing to take on borrowing to finance investment, then picks stocks that have low volatility, are cheap -- with low price-to-book ratios -- and are high quality, meaning they are profitable and have high payouts.

By breaking down Berkshire Hathaway's portfolio into ownership of publicly traded stocks versus wholly owned private companies, the authors also found the tradable equities performed best. That suggested to them that Buffett's returns are due more to stock selection than to the pressure he puts on companies he has stakes in to improve their management.

"Buffet's performance appears not to be luck, but an expression that value and quality investing can be implemented," said Andrea Frazzini and David Kabiller of AQR Capital Management LLC and Lasse H. Pedersen of Copenhagen Business School. "If you travel back in time and pick one stock in 1976, Berkshire would be your pick."

David Fuller's view

There are some useful insights here and at the risk of being simplistic, Warren Buffett's approach is not that complicated.  He favours companies which have a dominant position and are very difficult for competition to replace.  He buys low and sells high, but runs his growth stock holdings for the very long term.  

Subscribers can do that with the Autonomies that FT Money so favours.  

Buffett's real strength, I suggest, is in his personality.  

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