Warren Buffett: Great Investor or Greatest Investor?

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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.

That the typical mutual fund would lag the S&P 500 isn’t surprising. Fees, taxes, human error, and the fog of war make reliably beating the market an incredibly difficult task. This reasoning has helped increase the popularity of lightly managed index funds: If the data show that fees erode would-be superior returns, why bother paying? Just sit back and enjoy the ebb and flow (or the inexorable rise, depending on perspective) of equity valuations.

But the lure of superior returns is strong, and a few money managers have demonstrated an ability to outperform the market on a long-term basis. With a Sharpe ratio of 0.76, Buffett and his team at Berkshire Hathaway are the chief of that tribe. This is more than double the median score for the long-term mutual funds included in the study.

Buffett’s performance as a money manager can also be measured by simple returns. According to Buffett’s 2012 letter to shareholders, Berkshire Hathaway had a 19.7 percent compounded annual gain from 1965 to 2012. Starting from 1964, that’s an overall gain of 586,817 percent. This compares against a compounded annual gain of 9.4 percent for the S&P 500 and an overall gain of 7,433 percent.

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