# Warren Buffett's investment strategy cracked: researchers



## ROE (2 October 2013)

http://www.afr.com/p/business/companies/warren_buffett_investment_strategy_NNBr3YuYWoMWE9J6oJtFBN

Direct Link 
http://www.econ.yale.edu/~af227/pdf/Buffett's Alpha - Frazzini, Kabiller and Pedersen.pdf


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## tech/a (2 October 2013)

Truly remarkable.


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## galumay (2 October 2013)

I understood about 10% of the detail! Very impressive confirmation about the general approach of combining value investment with moderate gearing.

I have decided to buy a couple of insurance companies and take a similar approach.


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## So_Cynical (2 October 2013)

A very interesting read, thanks for posting that ROE.

Leverage + Value + Quality + Timing + Time + Conviction = Extraordinary profits....or at least can do.

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I have come away from reading that, feeling like i own to many stocks and should have at least some leverage...and be more prepared to back my self.


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## ROE (2 October 2013)

The secret to Warren incredible return is nothing extra-ordinary but he do simple boring things most people cant or wont 

someone used to ask him how they can becomes a better market investor .... his reply

"Read 500 pages like this every day, that's how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it."


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## artist (2 October 2013)

This article was referenced on another thread https://www.aussiestockforums.com/forums/showthread.php?t=25573&page=2&p=733687#post733687 (Post #25). I mention this only because there is a different discussion of the research paper, perhaps easier to digest, and that discussion emphasises the significance of WB's access to low(er)-cost funds from his insurance businesses.


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## TikoMike (5 October 2013)

I hope these aren't the same academics that spruik the market efficiency theory and that Warren Buffett is simply just "lucky" or an outlier on the graph - during my uni days this is what one lecturer said in Finance 1 when I asked about Warren Buffett during the lecture about the theory. Surprised they have taken this long to "study" Warren Buffett instead of saying he just one of the 12 monkeys who got lucky. 

As per usual they try to make something that's simple so much more complicated than what it seems with their algebra formulas.

Academics are usually the worst kind of money grabbing scam artists from "students" and all those academic formulas are a joke for understandability by most common people. They need to get out in the real world and need to learn the KISS principle if they want "students" to learn. Instead they prefer to look like elitists (pity their net worth is usually ****).


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## Gringotts Bank (5 October 2013)

So_Cynical said:


> A very interesting read, thanks for posting that ROE.
> 
> Leverage + Value + Quality + Timing + Time + Conviction = Extraordinary profits....or at least can do.
> 
> ...




All of that sounds very do-able, but for timing.  Poor timing + leverage = wipeout.


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## robusta (5 October 2013)

Gringotts Bank said:


> All of that sounds very do-able, but for timing.  Poor timing + leverage = wipeout.




It sounds too simple but be greedy when others are fearful and fearful when others are greedy may help with the timing issues.


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## Valued (5 October 2013)

In his shareholder letters Warren Buffet notes that he does "financial calculus" but I am not sure if that's a reference to actual calculus or rather he is using the term loosely to refer to basic quantitative techniques. 

He also notes the best way to value a company is the present value of future cash flows so he must have a discount cash flow model that he uses.

I suspect though that if you used a more simple valuation technique (like return on equity valuations) and you picked companies with a beta lower than 1.0 and they were amazing companies with great competitive advantage then you will do well. The issue is valuation in order to find them cheap. Even if you use a simple RoE formula and work out what the intrinsic value is for a company in 2013 well that's going to go up or down in the future so it really depends how bullish you are or how bearish you are about the particular company. That comes down to qualatative analysis. Of course, if you're a math whiz you could use a DCF model or at least forecast future earnings and come up with a range of valuations. Even this is somewhat involved, so I don't think it's as easy as some people think and I also don't think it's hard as some people think.


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## TPI (15 November 2013)

artist said:


> This article was referenced on another thread https://www.aussiestockforums.com/forums/showthread.php?t=25573&page=2&p=733687#post733687 (Post #25). I mention this only because there is a different discussion of the research paper, perhaps easier to digest, and that discussion emphasises the significance of WB's access to low(er)-cost funds from his insurance businesses.




Ordinary folk can access low cost funds from a line of credit/loan against their PPOR or residential investment properties for less than 5% interest rates now.

Margin loans go as low as 6.65% or even lower if you have the capital to deal directly with investment banks or use Interactive Brokers...


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## CanOz (15 November 2013)

TPI said:


> Ordinary folk can access low cost funds from a line of credit/loan against their PPOR or residential investment properties for less than 5% interest rates now.
> 
> Margin loans go as low as 6.65% or even lower if you have the capital to deal directly with investment banks or use Interactive Brokers...




I think Buffet's cost of capital is much much lower than a standard margin loan yeah?

Maybe Ves, Craft or McLovin might know but i think the cost of Berkshire's available cash for investment would come much cheaper?


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## TPI (15 November 2013)

CanOz said:


> I think Buffet's cost of capital is much much lower than a standard margin loan yeah?
> 
> Maybe Ves, Craft or McLovin might know but i think the cost of Berkshire's available cash for investment would come much cheaper?




Probably, I guess the point is that ordinary investors do have some options to access "relatively" low cost capital (for ordinary investors) in an attempt to emulate these investment strategies.

Margin loan interest rates in Australia are as low as 4% if you are a high net worth client and use investment banks or are happy to use Interactive Brokers.


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