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Ill take it even farther: Buffet isn't statistically different than average. He just found a strategy that happened to work, was stubborn enough to stick to it

Ill take it even farther: Buffet isn't statistically different than average. He just found a strategy that happened to work, was stubborn enough to stick to it through bad times, and used copious amounts of leverage to juice returns. A really interesting paper called "Buffet's Alpha" talks about this, and was able to replicate his performance by following a few simple rules. They found that he produced very little actual alpha. To his credit, he seems to have been observant enough to stumble into factors(value, quality, and low beta) before anyone else knew they existed, which is his real strength and contribution.

throwawaymath 8y ago
A summary of that paper from the authors is here: https://www.aqr.com/Insights/Research/Journal-Article/Buffetts-Alpha https://www.aqr.com/Insights/Research/Journal-Article/Buffet.... They work at AQR, a firm which is notable for being one of the only successful hedge funds to actually publish meaningful research. The paper's conclusion is noteworthy: > The efficient market counterargument is that Buffett was simply lucky. Our findings suggest that Buffett’s success is neither luck nor magic but is a reward for a successful implementation of value and quality exposures that have historically produced high returns. Second, we illustrated how Buffett’s record can be viewed as an expression of the practical implementability of academic factor returns after transaction costs and financing costs. We simulated how investors can try to take advan- tage of similar investment principles. Buffett’s success shows that the high returns of these academic factors are not simply “paper” returns; these returns can be realized in the real world after transaction costs and funding costs, at least by Warren Buffett. Furthermore, Buffett’s exposure to the BAB factor and his unique access to leverage are consistent with the idea that the BAB factor represents reward to the use of leverage.
- westurner 8y ago
  BTW, AQR funded the initial development of pandas; which now powers tools like alphalens (predictive factor analysis) and pyfolio. There's your 'compounding knowledge'.
  - westurner 8y ago
    (Days later) "7 Best Community-Built Value Investing Algorithms Using Fundamentals" https://blog.quantopian.com/fundamentals-contest-winners/ https://blog.quantopian.com/fundamentals-contest-winners/ (The Zipline backtesting library also builds upon Pandas) How can we factor ESG/sustainability reporting into these fundamentals-driven algorithms in order to save the world?
jimbokun 8y ago
"He just found a strategy that happened to work, was stubborn enough to stick to it through bad times, and used copious amounts of leverage to juice returns." Which is anything but average.
- sobani 8y ago
  Especially the "stubborn enough to stick to it through bad times" part.
dangoor 8y ago
Compared to the S&P 500 going back to 1996, Berkshire Hathaway is up 845% vs 257% for S&P 500. Is this not a statistically significant result? (Or is there another average I should be looking at?)
james_s_tayler 8y ago
I dunno. I find certain entrepreneurs often have life stories where they start making money around pre-teen or early teen years. I find those people to be at the tail ends of the distribution.

throwawaymath 8y ago

A summary of that paper from the authors is here: https://www.aqr.com/Insights/Research/Journal-Article/Buffetts-Alpha https://www.aqr.com/Insights/Research/Journal-Article/Buffet.... They work at AQR, a firm which is notable for being one of the only successful hedge funds to actually publish meaningful research. The paper's conclusion is noteworthy: > The efficient market counterargument is that Buffett was simply lucky. Our findings suggest that Buffett’s success is neither luck nor magic but is a reward for a successful implementation of value and quality exposures that have historically produced high returns. Second, we illustrated how Buffett’s record can be viewed as an expression of the practical implementability of academic factor returns after transaction costs and financing costs. We simulated how investors can try to take advan- tage of similar investment principles. Buffett’s success shows that the high returns of these academic factors are not simply “paper” returns; these returns can be realized in the real world after transaction costs and funding costs, at least by Warren Buffett. Furthermore, Buffett’s exposure to the BAB factor and his unique access to leverage are consistent with the idea that the BAB factor represents reward to the use of leverage.

westurner 8y ago
BTW, AQR funded the initial development of pandas; which now powers tools like alphalens (predictive factor analysis) and pyfolio. There's your 'compounding knowledge'.
- westurner 8y ago
  (Days later) "7 Best Community-Built Value Investing Algorithms Using Fundamentals" https://blog.quantopian.com/fundamentals-contest-winners/ https://blog.quantopian.com/fundamentals-contest-winners/ (The Zipline backtesting library also builds upon Pandas) How can we factor ESG/sustainability reporting into these fundamentals-driven algorithms in order to save the world?

jimbokun 8y ago

"He just found a strategy that happened to work, was stubborn enough to stick to it through bad times, and used copious amounts of leverage to juice returns." Which is anything but average.

sobani 8y ago
Especially the "stubborn enough to stick to it through bad times" part.

dangoor 8y ago

Compared to the S&P 500 going back to 1996, Berkshire Hathaway is up 845% vs 257% for S&P 500. Is this not a statistically significant result? (Or is there another average I should be looking at?)

james_s_tayler 8y ago

I dunno. I find certain entrepreneurs often have life stories where they start making money around pre-teen or early teen years. I find those people to be at the tail ends of the distribution.