The Leverage Effect: How Warren Buffett Achieves Market Alpha

Berkshire Hathaway has achieved a Sharpe ratio of **0.76**, surpassing that of any other stock or mutual fund with a track record extending beyond 30 years.

This indicates a substantial alpha relative to conventional risk factors. However, this alpha is rendered non-significant when adjustments are made for the Betting-Against-Beta.

Additionally, it's estimated that Buffett employs an average leverage ratio of approximately 1.6:1.

The success of Buffett's investments seems to stem not from chance or some mystical force but from a strategic blend of leverage use and a preference for undervalued, low-risk, high-quality stocks. Analyzing Berkshire's portfolio by separating the publicly traded stocks from the wholly-owned private enterprises reveals that the former category outperforms, implying that Buffett's impressive returns are more attributable to his stock-picking skills rather than his influence on company management. This insight has significant implications for the understanding of market efficiency and the practical application of academic financial factors.