Warren Buffett: Great Investor or Greatest Investor?
A recent study released by the National Bureau of Economic Research argues that Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB) Chairman and CEO Warren Buffett is not just a great investor but the greatest investor in the past 30 years.
The study draws its conclusion by ranking every mutual fund that has been around for 30 or more years by its Sharpe ratio. The Sharpe ratio measures the risk-adjusted performance of an investment and can be used as a way to gain insight into where the returns are coming from in a portfolio. Two portfolios with with the same returns could have very different Sharpe ratios if one made risky bets and got lucky, and the other made safe bets that produced superior returns. A high Sharpe ratio is arguably the Holy Grail of investing: low risk, high reward.
The average Sharpe ratio for all mutual funds that have been in existence for 30 or more years is 0.37. The Sharpe ratio for the S&P 500 is 0.39, meaning that your typical mutual fund’s risk-adjusted returns are a little below the index at large.