On Markets & Investing

Buffett's Alpha, Corporate Longevity, Fat Tails, Gold

A coffee cup, kindle device and earphones on the white wooden table
Two weeks ago, I showed how some basic math concepts can help to achieve better investment results. This week, I share the reports demonstrating how such ideas are applied in practice.

The first piece (Buffett’s Alpha) was written by a well-known quant fund, AQR, which looked into common traits of stocks Warren Buffett had bought over many years. They include low beta, high profit margins, high returns on capital, high dividend payout ratio and low leverage. The second piece examined Buffett’s ‘trading patterns’, holding periods and returns.

I have also included an interesting study by Michael Maboussin on corporate longevity and its implications for investors.

Nassim Taleb has recently shared his piece on Fat Tails, and I decided to add it to my library as well. It is not an easy reading, but this makes it even more interesting. One of the conclusions of his work is that typical behavioural biases, such as loss aversion, become entirely rational when looked through a lens of non-normal distribution. Definitely, something to reflect upon.

Finally, I added a study on drivers behind the gold price, specifically inflation, economic expectations and real interest rates. I own a small position in Barrick Gold as a hedge, although I admit that a high-quality business reasonably priced is a superior option to maintain your purchasing power. I just cannot find many such businesses.

Buffett’s Alpha

The study by AQR quantified the key factors of Berkshire’s stocks that contributed to its 0.76 Sharpe ratio, higher than any mutual fund with a 30+ year history. The factors include low Beta, high profitability, low price and leverage.

Overconfidence, Under-Reaction, and Warren Buffett’s Investments

A study of over 2,000 stocks disclosed by Berkshire quarterly during 1980-2016 and their subsequent performance. Among many insights, the study reveals surprising statistics that over 60% of stocks were held for less than a year.

Birth, Death, and Wealth Creation

Michael Maboussin takes Bessembinder’s study on long-term wealth creation and looks deeper into how companies are born and how long they live, why they die, and patterns of shareholder returns. He also discusses how the composition of the U.S. market has changed over the decades and what that means for investors.

Statistical Consequences of Fat Tails

The author of a famous Black Swan, Nassim Taleb, explains why real-world events rarely follow traditional views (normal distribution). Many "biases" found in psychology become entirely rational under more sophisticated probability distributions. Most of the failures of financial economics can be attributed to using the wrong distributions.

What Drives Gold Prices?

This Fed Letter highlights three considerations that are commonly cited as drivers of gold prices: inflationary expectations, real interest rates, and pessimism about future macroeconomic conditions.

You can find these reports, as well as many others, in the Library section of the website.

If you found this post useful, the best thing you could do is to share it with your friends. I also appreciate all the comments and questions the readers post in the discussion section below the posts. What's on your mind? Anything I missed? Leave your comment below.