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Warren Buffett Market-Beating Skills Revealed: Cutting Research

By Simon Kennedy
December 05, 2013 7:00 PM EST 43 Comments
Berkshire Hathaway CEO Warren Buffett
Berkshire Hathaway CEO Warren Buffett

Warren Buffett isn’t just a great investor. He’s the best investor, an economic study has found.

An index measuring returns adjusted by price fluctuations shows the billionaire chairman and chief executive officer of Berkshire Hathaway Inc. has done better than every long-lived U.S. stock and mutual fund.

Looking at all U.S. stocks from 1926 to 2011 that have been traded for more than 30 years, a paper published this week by the National Bureau of Economic Research calculated that Buffett’s so-called Sharpe ratio is 0.76 since 1976. That was about twice the stock market’s 0.39.

The ratio is also larger than all 196 U.S. mutual funds that have been around for 30 years. The median Sharpe ratio for them is 0.37.

The review of Buffett’s investments concluded he has been rewarded for his use of leverage, coupled with a focus on cheap, safe, quality shares.

The study said Buffett is willing to take on borrowing to finance investment, then picks stocks that have low volatility, are cheap -- with low price-to-book ratios -- and are high quality, meaning they are profitable and have high payouts.

By breaking down Berkshire Hathaway’s portfolio into ownership of publicly traded stocks versus wholly owned private companies, the authors also found the tradable equities performed best. That suggested to them that Buffett’s returns are due more to stock selection than to the pressure he puts on companies he has stakes in to improve their management.

“Buffett’s performance appears not to be luck, but an expression that value and quality investing can be implemented,” said Andrea Frazzini and David Kabiller of AQR Capital Management LLC and Lasse H. Pedersen of Copenhagen Business School. “If you travel back in time and pick one stock in 1976, Berkshire would be your pick.”

Related: You Can Invest Just Like Warren Buffett, If You're a Quant Hedge Fund

* * *

Former U.S. Treasury Secretary Lawrence Summers is wrong in warning the U.S. economy is stuck in “secular stagnation,” according to Deutsche Bank AG economist Torsten Slok.

“Secular stagnation is a nice academic concept, but unfortunately it doesn’t fit with the data,” Slok is telling clients in recent presentations.

Summers attracted attention after he told an International Monetary Fund conference last month that there is a risk of a prolonged period of weak economic growth and hiring in the U.S.

Not so, said Slok, Deutsche’s New York-based chief international economist who used to work at the IMF.

Wealth continues to increase and will eventually spur growth, the drag of fiscal policy on the economy is lessening and wages are rising in every industry except construction, he said. While an aging population will restrain expansion, the U.S. will remain innovative, he said.

Slok noted work by Harvard University economists Kenneth Rogoff and Carmen Reinhart that found it takes seven years to recover from banking and housing crises.

“Add seven years to 2007 and we may be closer to growth than many people think,” he said.

* * *

U.S. stock and bond movements “greatly influence” those elsewhere, yet shifts abroad don’t impact American assets.

So says Pierre LaPointe, head of global strategy and research at Pavilion Global Markets Ltd. in Montreal. The MSCI USA Index explains about 40 percent of the variance of similar gauges in Germany, France and the U.K since 2000. The proportion is lower in Asia and as high as 52 percent in Canada.

By contrast, fluctuations in equities outside the U.S. explain only 1.4 percent of the variance in the MSCI USA Index. The same principle is true for fixed income. Since 2000, as much of 35 percent of the daily volatility in European bonds can be traced to U.S. bond price action. It’s 63 percent in Canada.

“As major central banks of the world are set on diverging paths in terms of monetary policy, we find that the U.S. economy will have the greatest gravitational pull in 2014,” said LaPointe. “The tapering process in the U.S. will cause a short pullback in global equities.”

* * *

Central bankers in major economies may find they’re being ignored.

A November study by economists at the Federal Reserve Bank of San Francisco found consumers in the U.S., U.K. and Japan expect inflation to run higher than the target of monetary policy makers.

The study also said people don’t pay attention to the official goals and react sluggishly to persistent shifts in prices, said economists Bharet Trehan and Maura Lynch of the regional Fed bank.

What they do notice is if the oil price swings, suggesting households use highly volatile energy prices as a “rule of thumb for updating their inflation expectations,” the paper said.

* * *

Central banking is getting more of a feminine touch.

Women now make up 46 percent of central bank employees, an increase of one percentage point from a year ago, according to the Central Bank Directory 2014, published last week by Central Banking Publications.

Still, only nine percent of 189 central banks are run by women and only three of the 28 new governors who took the helm this year are still in office were female. The total number of central bankers increased 0.8 percent to 474,572 from a year ago.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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