The secrets of Buffett’s success

Beating the market with beta

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Readers' comments



There is a particular punctuation issue that I've seen here and in a couple of other articles on Economist.com, and I'm confused. In the first paragraph, the comma pair around the clause "not from a technology stock" is incomplete. According to the Economist Style Guide, either both commas should be used or neither comma should be used. Also, while I understand the practicality of being able to start a sentence with "and," I think the sentence at the end of the fifth paragraph would have been clearer had it been connected to the previous sentence with a comma.

Golib Kholjigitov

I think one WB's success has to do with better management of his time and energy. Rather than focusing on 1000 of stocks, pick strong companies with good legacy brands, and trustworthy management. This will narrow down the companies to perhaps hundreds. Conduct some due diligence and pick 10, then conduct deep analysis and pick couple. True insurance business is strong, but I see it as cash cow to finance better deals.


Alas, all the people who have studied Buffet's writings in detail would dispute with these writings, as Buffet's Investment Partnership before Berkshire was ran in an entirely different fashion, and his returns then were phenomenal.

One notable fact that has been missed by this article is that an insurance float provides a wholly different form of leverage than margin lending or debt leveraging.

Besides the fact that AQR has been continuously advocating the value momentum strategy, and as such the classic case whereby the thesis is shaped to suite the objective.


You missed out one key advantage that Warren Buffett has, he is a lot brighter than your average run of the mill financial person.


Buffett is a big time gambler with his insurance float. If he ever gets it wrong, then hundreds of thousands will be left without savings and insurance coverage. But meanwhile, he is an all American hero...


A certain theory called the “Random walk theory” asserts that in no way we can predict the movements of the stock market. It argues that the current price of a stock is the perfect one right now because it is based on specific equilibrium, and in 10 minutes a new equilibrium will have been formed which results in a new perfect price, but that the path between those two perfect prices is random and unpredictable. Therefore, it is impossible to outperform market without increasing risk. Thus, investing following the news is as risky because the delay needed to react is too long.

I am pretty sure W.B. partially agrees with this theory, but that it concerns more high beta, because violent movements in low betas are abnormal and therefore explainable and the outcome of the trouble is more predictable on a long term period.

Let me explain myself: guessing when Apple’s stock is going to stop going up but to start to fall after the release of iphone 5 to sell it short and make an appreciable gain is much more of a gamble than predicting that the stock of Coke will eventually go back up after a slight fall because of an punctual incident.

The defect of the low beta strategy is that it requires time/patients and money, which Buffet brilliantly arranged to have.


How is this a "secret"? Buffet's letters to shareholders since 1979 have been saying as much. High quality companies with good cash flow, funded by carry from Berkshire Hathaway's insurance operations. Come on Economist, we expect better editorial vetting from you.


I cannot just let this go by: punctuation marks (i.e. commas and periods) go INSIDE quotation marks.

The writer of this article might be a financial wizard who barely passed English 101, but the editor of this website should know better (and do his/her job).

This sort of error really does impact the credibility of the author, the article, and the publication. (Sadly, the editor generally gets a pass, which is just wrong.)

Alex Kilgour

Mr. Buffet is likely sitting back and laughing at every analysis that is performed of his investing methods.

Personally, I think it lies in the very simple fact that if a company is profitable and is likely worth more than it is being sold for, then it is worth buying. Everyone diving into profitless companies in the desperate hope that somehow they would hit a goldmine likely face better odds in Vegas.

Most investors handle picking stocks in the same manner your average deadbeat picks horses in a race. They don't get past the name. Mr. Buffet actually rips open the guts of a company's financial information, performs actual math on their numbers, and then decides if it is a worthwhile investment. This is akin to going down to the stables and putting each horse through their paces the day before the race to determine which one is more likely to win, based on actual evidence.

It so happens that most companies that are quietly profitable and undervalued likely have a low beta. But I don't think that picking the beta matters, it is picking the right company which gives you the low beta.

antiquarian in reply to Alex Kilgour

That's too simple. A company being profitable now and selling for less than its value when calculated only on that basis is not enough to interest Buffett. The quality of the company's earnings is also highly important. He wants a wide moat, for example, in the form of such advantages as an unbeatable brand or high capital barriers to entry. Predictability of earnings for decades to come rates very highly with him too. And lots of companies that are worth having by his calculations are still not worth buying-- at least not until they drop significantly in price.

Phil Ng

If you could travel back in time to 1976, why would you select stocks based on risk-adjusted return?

koba khitalishvili

It is important to mention that using loopholes in taxation system also contributed to WB's private accumulated wealth. As I have read in numerous articles and heard on TV WB pays only 15 % tax on income, which suggests he earns between 0-70k$ according to the tax bracket(http://www.mondaq.com/unitedstates/x/178778/Income+Tax/2013+Federal+Inco...).

He pays only 15% tax on income because most of his income comes from realized long-term capital gains and dividends which are taxed at that rate. But the vast majority of his wealth is untaxed because it's in the form of Berkshire Hathaway stock which he doesn't sell. He therefore doesn't incur capital gains tax on it because it's not realized. He explains this in his Li'l Abner parable in the 1993 chairman's letter. (Just click on the link and do a control-F to "Find" the word Abner.)


Oh I thought I'd reply a post where guys say "look he takes so less a salary", only few were there and comments section was long.

The reason he doesn't take much salary because the success of his offsprings (great grandkids I suppopse) in procreation doesn't depend on his salary, but does depend on size of berkshire and his philiantropic work.

Thats the same reason why some put mercedes in their rooms and some build a billion dollar homes, their perception of success of procreative efforts of their offsprings.


why those stocks WB invested got low BETA?

Because the stocks he bought, go up anyway no matter how the market perform.

I would rather say, the reason of the success of WB : bet big on excellent company.


Warren is not a passive investor. He does buy good companies that are temporarily down on their luck, but he does not simply wait around for them to improve. Warren makes active changes to management and/or management compensation packages to bring good companies back to peak efficiency.

IOW, he invests premiums of his insurance company wisely, so that he can pay out on future claims, plus earn a profit. Some other insurance companies "invest" in bonds with a negative real yield, giving them a guaranteed loss to inflation. This leads to future premium increases to make up for bond losses. IOW, wanton printing is creating super inflation in insurance premiums.

Nikita popov

Buffet wrote a brilliant essay "The Superinvestors of Graham-and-Doddsville" that I would like to see Buttonwood analyse.


But, still for some investors Berkshire Hathaway is not sexy enough, like other Hedge Funds, or Madoff Investment Securities.....


I daresay that Mr. Buffet, rather than considering Beta, Alpha and the rest of greek alphabet, just invests in companies that have sound management and useful products.

john4law in reply to Rincewind_wizzard

That would make him a run of the mill billionaire! Leveraging is REALLY RISKY AND EXTREMELY DIFFICULT over 40 years or more of large scale investing. That is what made him a supreme success! The key to making leveraging work is a gold plated reputation for character and integrity which gives him access to cheap capital even in troubled markets. He is unique in ALL these qualities.

john4law in reply to Rincewind_wizzard


antiquarian in reply to john4law

Leveraging is not at all risky when it's almost cost-free and mostly within your control, which is the form he naturally prefers. He leverages not by literally borrowing money (though he does do that sometimes) but by using the money his insurance companies receive as float-- the premium money in between when they receive it and when they have to pay it out again in claims. All insurance companies do this, by the way-- it's the main reason why few insurance companies make a profit on their underwriting activities. (Buffett's, by contrast, mainly do, as a result of his careful selection of honest and talented CEOs.) That kind of leverage, as the study authors and Buttonwood note, costs far less than other kinds.

The man simply does not miss a trick. (Except in bridge, perhaps.)

john4law in reply to antiquarian

Not true! The money is NOT out of his OWN POCKET but from Insurance Reserves he has a FIDUCIARY RESPONSIBILITY for. If the money is not paid back, or a default occurs ( even a LATE or PARTIAL payment ) his whole empire collapses along with HIS REPUTATION since mis-allocation or wasting of FIDUCIARY assets can be serious CRIMINAL acts.

antiquarian in reply to john4law

I didn't say it was out of his own pocket. He's well aware that he has a fiduciary responsibility for it, but his insurance companies are simply so well run that they don't run risks for too small a premium. Rather than do so, they won't write policies at all. The amount of premium and the amount of money he can make investing the premium temporarily makes up for the losses that his insurance companies pay out for.


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