Warren Buffett is a hero to many value investors, but some people have argued that he is, as Michael Jensen once put it, the happy winner of a coin-flipping contest. AQR Capital Management analysts Andrea Frazzini and David Kabiller along with NYU professor Lasse H. Pedersen have found a new way to analyze Buffett’s results and have determined that luck alone can’t explain his results. Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) has been more successful than any other stock or mutual fund with more than 30 years under its belt.

warren buffett

Warren Buffett’s stock returns

“Buffett’s returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks,” the researchers write. “Decomposing Berkshires’ portfolio into ownership in publicly traded stocks versus wholly-owned private companies, we find that the former performs the best, suggesting that Warren Buffett’s returns are more due to stock selection than to his effect on management.”

Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s Sharpe ratio is 0.76, much higher than the markets and higher than other funds that have been around for at least thirty years, but the researchers say that it isn’t really as high as many of Warren Buffett’s fans might imagine

Berkshire Hathaway’s Sharpe ratio

“If his Sharpe ratio is very good but not super-human, then how did Warren Buffett become among the richest in the world? The answer is that Buffett has boosted his returns by using leverage, and that he has stuck to a good strategy for a very long time period, surviving rough periods where others might have been forced into a fire sale,” they write.

So Buffett’s success is only partially due to earning money on stocks as they rise, it’s been just as important that he hasn’t had to sell stocks into a bear market, something that causes so many other investors to lose value.

If it seems strange that people are still trying to prove that Warren Buffett is great investor, and not just lucky, remember that his half-century of consistent performance goes against market efficiency theories that many academics take for granted. If it’s possible for one strategy to constantly outperform, it implies that everyone else is doing something wrong, which might simply be the fact of the matter, making this a clear case of Occam’s Razor.