Explaining Warren Buffett’s Performance

Is Warren Buffett’s track record explicable and replicable? In the June 2018 update of their paper entitled “Buffett’s Alpha”, Andrea Frazzini, David Kabiller and Lasse Pedersen model Warren Buffett’s exceptional investing performance based on replicating exposures of Berkshire Hathaway overall and of its publicly traded holdings to six factors. Four of the factors are those conventionally 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). They further create portfolios that track Berkshire Hathaway’s factor exposures, leveraged to the same active risk as Berkshire Hathaway. Using monthly stock returns and accounting data for a broad sample of U.S. stocks, quarterly Berkshire Hathaway SEC Form 13F holdings and monthly returns for six factors specified above during October 1976 through March 2017, along with contemporaneous open-end active mutual fund performance data, they find that:

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