This is not to say that record gains have been made in an extended bull market. Assuming more risk does not necessarily lead to higher returns, especially in disposals, but it should certainly apply when stocks perform well in the very long term, as was the case during Buffett's tenure at Berkshire. With the Buffett equity portfolio, the usual risk and return rules have been reversed.
<p class = "canvas-atom web-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Berkshire Hathaway radically contradicts the Nobel laureate Model of valuation of financial assets (CAPM) William Sharpe. According to the CAPM, the only element that determines the long-term return of a stock is its market sensitivity, or beta. Buffett's Alpha authors measure Berkshire's historical beta at 0.69, as opposed to an average of 1.0 in the market, which means that, according to the CAPM, Berkshire Hathaway should have been left behind by the S & P 500 during the reign of Buffett. "Data-reactid =" 24 "> Berkshire Hathaway is in flagrant contradiction with William Sharpe's Nobel Prize-winning financial asset pricing model (CAPM), which is the only element long-term performance of an action Buffett Alpha authors measure Berkshire's historical beta at 0.69, as opposed to an average of 1.0 in the market, which means that, according to CAPM, Berkshire Hathaway should have been left behind by the S & P 500 during Buffett's reign.
Berkshire is also struggling with a recent rival model at CAPM, the Asset Pricing Value Model (PAPM). Unlike CAPM, the PAPM assumes that stock prices are set for several reasons. Any attribute that makes a stock "more popular" makes this security more desirable, reducing its expected future returns. In exchange for these pleasing characteristics, investors in equities with attractive attributes are content with less future gains. They are "consenting losers".
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This concept would not seem to work with Berkshire Hathaway. What might not be attractive about holding low-leverage companies that are reliably profitable and whose stocks tend to resist recessions? With Berkshire, CAPM and PAPM share their confusion. The CAPM disapproves Berkshire's low beta, while the PAPM warns that Berkshire's soft assets will slow down its returns.
The traditional answer to such an argument is that Buffett is the exception to the rule. In the hands of other people, such a portfolio could not shine. As the Buffett Alpha document shows, however, this statement is incorrect. The authors created a Buffett-inspired mechanical investment strategy for high-quality, low-beta companies without incorporating additional information. Prior to trading fees, this portfolio has exceeded Berkshire's holdings since 1976.
How could this be? How could such a simple and secure investment approach be so successful? It is there that modern finance falters. He became adept at diagnosis. In the early days of the assumption of efficient markets – which states that the market has already updated the publicly available information – the aberrations have not been the subject of any discussion. sufficient attention. The thesis is generally correct, but the financial markets have many strange nooks. Today's researchers have identified many of these quirks. They know what is, but not so much the why and the how.
The authors of Buffett's Alpha provided a possible explanation of why turtles beat hares, albeit in a different context: low-volatility stocks benefited from a common investment constraint. The CAPM assumes that investors will conclude that they should hold the entire market portfolio, partnering with liquidity if they want to reduce risk and using leverage if they increase it. This describes the real world today in two out of three cases. Indexing has become widespread and the money has always been, but few investors, large or small, resort to leverage.
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So, if investors are to "beat the market", they do not by holding more stocks, but by holding the best performing stocks – which are generally considered riskier securities. As a result, stock buyers have gathered in the most speculative segment of the market.
This assumption assumes that the market is in equilibrium; that is, the past will inform the future. Stable low-beta companies have been forced to offer relatively high stock market returns due to leverage constraints and, since these constraints continue to exist, this condition will likely persist. The baskets of these stocks will be referred to as "smart beta" – or strategic beta, as Morningstar's terminology would say.
The story continues
This is how investment funds are created. The second explanation is the opposite of the first. He argues that the equilibrium of the stock market has been disrupted. When Buffett took over Berkshire Hathaway 50 years ago, the merits of low volatility profitable companies were underestimated. They were considered useful in times of recession, but lagging behind in the long run. Over time, however, these companies have been re-evaluated. Shareholders now realize that seemingly drab businesses can be anything but.
As a result, Buffett's type of stock is no longer neglected. In fact, the extraordinary gains of Berkshire and those of the Robo-Buffett portfolio are partly due to investors' new calculations. They have raised the prices of blue-chip companies, thus boosting the prior gains of these stocks, but reducing their future returns, so that they would closely monitor the overall stock market, as predicted by academics.
By such an argument, the PAPM – and the CAPM – can be defended.
A set of observations, but two divergent conclusions. The first interpretation urges investors to look like Buffett, while the second warns them to behave differently because what has been is not what will be. It is difficult to know which belief is correct. Modern finance is better at identifying so-called anomalies than understanding their causes – an essential point of view for understanding what to do with our discoveries.