Explaining Warren Buffett’s Performance

Is Warren Buffett’s track record explicable and replicable? In the August 2012 draft of their paper entitled “Buffett’s Alpha”, Andrea Frazzini, David Kabiller and Lasse Pedersen model Warren Buffett’s exceptional investing performance based on replicating the exposure of the publicly traded holdings of Berkshire Hathaway to six factors. Four of the factors are those commonly used to explain stock returns: market return, size, book-to-market ratio and momentum. The other two factors are betting-against-beta (buy low beta and avoid high beta) and quality (profitable, growing, dividend-paying). Using monthly stock returns and balance sheet data for a broad sample of U.S. stocks and quarterly Berkshire Hathaway SEC Form 13F holdings during 1976 to 2011, along with open-end active mutual fund performance data during 1980 through 2009, they find that: (more…)