In summary, the authors regressed Buffett’s returns against factor exposures commonly known to influence returns. The three factors that showed as significant are forehead-slappingly obvious.
- Value: Buffett has a tendency to favor low price-to-book value stocks.
- Safe: He bets against beta in that he favors low beta stocks.
- Quality: Finally, he favors quality companies (profitable, growing) over junky companies.
Buffett’s worst years were at the height of the TMT bubble when the market saw his way of investing as out of date and not fit for this “new era” of investing. (Side note: Whenever something is said to be in a “new era” or of a “new paradigm,” do yourself a favor and short the ever-loving shit out of those securities—it’ll be like winning a rigged lottery because all those words really mean is “BUBBLE!” and bubbles always burst).
Despite this external pressure, Buffett stuck to his process and made an absolute killing in the tech wreck years that followed. Being a value investor often means you are taking a contrarian view by definition, which can be hard for humans. We are hardwired to take our social cues from the herd, so maintaining an opposite view requires determination and guts.
Do your homework better than the other person, stick to your process, and you too can tilt the odds in your favor.
[see also Buffett's Alpha]