Last week, there was a spate of articles commenting on a paper on Warren Buffett published by three researchers working at a US hedge fund.
The paper, ‘Buffett’s Alpha’, analyses what exactly is the reason behind Buffett’s extraordinary returns as an investor, sustained over three decades. Of course, trying to explain Buffett’s returns is an extremely active cottage industry.
All sorts of analysts, journalists and others regularly weigh in, including, some time back, Nassim Nicholas Taleb of Black Swan fame. Predictably, Taleb applied a bit of Black Swanism to Buffet too. He said that in a large enough pool of investors there would always be some outliers, “I am not saying Buffett doesn’t have skill — I’m just saying we don’t have enough evidence to say Buffett isn’t doing it by chance.”
However, the latest paper takes a different tack. The gist of its conclusion is that Buffett’s success stems from sticking to safe, cheap, quality stocks and enhancing the returns with leverage, that is, by using borrowed funds. Somehow, this has been interpreted by many commentators as a sort of a deflation of the Buffett aura. The use of leverage is being seen as something akin to the use of performance drugs in sports.
In reality, this should be seen as a new paradigm. Choose safe and cheap stocks (classic value investing, in other words) for the long run. And then, because your risks are now so much lower, use leverage without fear because your safety-first stock selection and long time-frame.
However, there’s a value to Warren Buffett which goes beyond whatever his investing secrets are. In a world with an investing culture beset with shorter and shorter time frames and a celebration of wealth for its own sake, there’s a great value in the most successful investor being a man who measures time in decades and lives modestly in the same house that he did half a century ago. The word value has many nuances.