Warren Buffett took a step back from Berkshire Hathaway this week. The end of an (amazing) era.
Warren Buffett is often portrayed as a financial genius whose returns are unmatched. But behind the impressive numbers of Berkshire Hathaway lies no secret recipe, nor a magical investment approach. On the contrary, in-depth empirical research by Frazzini, Kabiller, and Pedersen shows that Buffett’s performance can largely be explained by his consistent exposure to simple, well-understood investment factors—and his exceptional ability to stick with them for decades.
Figure 1: Performance
Buffett’s portfolio predominantly consists of shares in large, high-quality companies with low risk and attractive valuations. These are businesses with stable earnings, high margins, predictable cash flows, and strong balance sheets—companies that score well on the factor dimensions of “quality,” “value,” and “low beta.” What makes his returns extraordinary is not that he had access to unique information or consistently outsmarted the market. It is that he systematically invested in a segment of the market with historically strong risk-return characteristics—and he continued to do so without being distracted.
When the researchers adjusted for Buffett’s systematic factor exposures, his alpha—the portion of his return not explained by risk factors—statistically diminished to a large extent. This was particularly true for the public equity portfolio of Berkshire Hathaway. Buffett is not investing in random winners, but in a coherent part of the market that is also accessible to other investors. What he adds to that is moderate but structural leverage, mainly financed through Berkshire’s insurance operations. The so-called “float”—premiums received for future claims—serves in practice as a cheap, stable source of funding. This allows him to increase his exposure to desired investment factors without incurring high financing costs or liquidity risks.
Still, these building blocks—value, quality, low beta, and leverage—are not unique in and of themselves. What truly sets Buffett apart is his extraordinary discipline. In times of euphoria, when the market chases tech hypes or growth stories, he stuck to his sober valuation principles. And during periods of loss—such as the late 1990s, when Berkshire lost 44 percent of its value while the Nasdaq exploded—he held firm. That consistency is rarer than many think, and may well be, according to the research, the most important explanation for his success. Buffett does not have the highest Sharpe ratio ever—his stands at 0.79 (impressive, but not otherworldly)—but he sustained that ratio over more than forty years. And that, it turns out, is exceptional.
For institutional investors, the key lesson is that Buffett’s success is no mystery, but rather a confirmation of what financial science has long known. Cheap, high-quality companies deliver above-average returns over the long term. Leverage can enhance that strategy, if applied carefully. But the crucial factor is behavior: the ability to stick with a strategy, even when the market appears to demand something else.
What makes Buffett unique is not his talent for predicting the future, but his steadfast commitment to principles he has followed since the 1960s. That is not only admirable—it is replicable, provided one has the discipline to stay the course.
Gertjan Verdickt is an Assistant Professor of Finance at the University of Auckland and a columnist at Investment Officer.