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Rupert Hargreaves
Rupert Hargreaves
Articles (1078)  | Author's Website |

Warren Buffett: More Luck Than Skill?

Statistically, there should be several other value investors out there with records similar to Buffett's

June 28, 2018

Warren Buffett (Trades, Portfolio) is generally considered to be the best investor of all time because he's made more money from investing in stocks than anyone else.

It's interesting, however, to consider the reasons for his success. It is all too easy to say Buffett has been successful because he's a great stock picker. While this is true, Buffett himself has acknowledged that a large part of his success has come from luck.

He's also admitted that his largest mistake was buying Berkshire Hathaway, a mistake that cost him $200 billion.

What's more, it's a mistake to think that Buffett has been successful by investing in just a few select companies and holding them for the long term. A study published in 2010 by John S. Hughes of the University of California at Los Angeles, Jing Liu of the Cheung Kong Graduate School of Business and Mingshan Zhang of Hong Kong University of Science & Technology, found that between 1980 and December 2006, according to Berkshire Hathaway's SEC filings, the holding company reported ownership of 2,140 stocks with a median holding period of just one year. Twenty percent of all shares were held for more than two years. Thirty percent of stocks were sold within six months of acquisition.

Still, there's no denying that Buffett's performance looks exceptional in its own right.

That being said, a research paper published by Newfound Research earlier this year found that Buffett's performance is, statistically, inevitable.

More than one Buffett?

Newfound's report notes that since 1980, Buffett has generated annualized alpha of 9.86% with idiosyncratic volatility of 19.26% -- a prime example of the investment skill that has helped him achieve the reputation he has today.

The research paper goes on to note that if any other investor had started investing in 1980 with a 19.26% idiosyncratic volatility, there is a 99.93% chance they would have underperformed Buffett.

However, in a much larger sample group the chances of at least one investor beating, or achieving the same record as Buffett significantly increase.

In fact, Newfound calculates that in a sample of 5,875 invetors, all investing with an 19.26% idiosyncratic volatility the chance that all of these investors would underperform Buffett is less than 1%.

In other words, statistically, there should be other investors out there who have achieved a similar record to the Oracle of Omaha.

There are some drawbacks with this data. For a start, the study assumes that the 5,875 investors are all investing independently of each other in different stocks. As there are only around 4,000 publicly traded equities in the U.S., this isn't entirely possible.

Nonetheless, it is an interesting conclusion and one that ignites further debate on how Warren Buffett (Trades, Portfolio) has been able to achieve the reputation that he has. One of the issues the Newfound report highlights is that Buffett's record has benefited from longevity. At nearly 90 years of age, he has been investing in one way or another for seven decades (although it's closer to eight) -- a record few, if any other investors can claim.

What's more, Buffett has the perfect investment mindset. He has lived through several vicious bear markets and has always managed to come out on top. Unlike so many other investors, his long-term outlook means that he's always looking for investments that produce returns not just for the next few quarters but for the next few decades, a mindset that has helped him be greedy when others are fearful and sit on his hands when markets are bubbling.

Overall, no matter how much analysis is done on Buffett's investment performance, it's clear that his investment skill has allowed him to outperform the market. However, it would be a mistake to think that this is the only factor that has contributed to his success. Luck has been a contributing factor and so has his unwavering long-term focus.

Disclosure: The author owns no share mentioned.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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