“Looking at all U.S. stocks from 1926 to 2011 that have been traded for more than 30 years, a paper published this week by the National Bureau of Economic Research calculated that Buffett’s so-called Sharpe ratio is 0.76 since 1976. That was about twice the stock market’s 0.39,” Bloomberg reports. “The ratio is also larger than all 196 U.S. mutual funds that have been around for 30 years. The median Sharpe ratio for them is 0.37.”
The study, Bloomberg says, found that Buffett has succeeded by focusing on cheap, safe, quality stocks and using leverage wisely. “The study said Buffett is willing to take on borrowing to finance investment, then picks stocks that have low volatility, are cheap — with low price-to-book ratios — and are high quality, meaning they are profitable and have high payouts,” Bloomberg says. The study also found that Berkshire Hathaway’s success was due more to the performance of its tradable equities than its operating businesses.