Warren Buffett's Sucess EXPLAINED. And how you can benefit.
A new research paper was recently publish that examined and explained the reasons for Warren Buffett's investment success. Here's a brief summary...
Warren Buffett's Success is mostly attributable to:
* Use of leverage
* Focus on cheap, safe, quality stocks
* Returns come more from stock selection than quality management
* Wholly-owned companies perform the best
“Berkshire Hathaway has realized a Sharpe ratio of 0.76, higher than any other stock or mutual fund with a history of more than 30 years, and Berkshire has a significant alpha to traditional risk factors. However, we find that the alpha becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. Further, we estimate that Buffett’s leverage is about 1.6-to-1 on average. Buffett’s returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks. Decomposing Berkshires’ portfolio into ownership in publicly traded stocks versus wholly-owned private companies, we find that the former performs the best, suggesting that Buffett’s returns are more due to stock selection than to his effect on management. These results have broad implications for market efficiency and the implementability of academic factors."
Here's a link to the full paper:
http://nber.org/papers/w19681
How can we apply this to the investment in real estate?
I suggest, as I have done, diligent use of leverage balancing this with not taking on too much risk, focus on acquiring cheap (below average cost of housing) properties, in safe/quality neighborhoods. Then developing an efficient low-cost property management strategy in-house. Finally, be very careful about partnering and have a preference for "wholly-owned" properties or owning 100% of all deals you get involved with (control).
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