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.
A simple accounting based framework is used to link two primary measures of ‘value’ to expected returns for countries: earnings-to-price (E/P) and book-to-price (B/P). When ‘E’ is more persistent, E/P is close to a sufficient statistic for expected returns. When ‘E’ is less persistent, B/P is needed. High B/P countries are, on average, facing temporarily depressed ‘E’ and their recovery in near term earnings growth is uncertain. Countries with high B/P also exhibit greater downside sensitivity to contemporaneous global earnings growth, consistent with B/P reflecting risky future earnings growth.
All photography by Jared Chambers