They first show that Mr Buffett's returns can be largely explained two things. One is that he's tended to buy lower volatility, low beta stocks. He's therefore taken advantage of the tendency for defensive stocks to out-perform over the long run. He's betted against beta.
Secondly, he has invested in "quality" stocks. And this isn't a subjective thing; it consists of profitable, growing companies.
Mr Pedersen and colleagues show that any portfolio of quality, defensive stocks would have done similarly to Mr Buffett. This implies that his skill lies not in identifying particular individual stocks, but rather in spotting the right general strategies.
This, though, merely deepens the puzzle of why so few have emulated Mr Buffett's success. The virtues of quality stocks and defensives have been known for decades. Ben Graham, Mr Buffett's biggest influence, first published the case for them in 1934. And economists identified the tendency for defensives to out-perform as long ago as 1972.
Why, then, haven't more people successfully copied Mr Buffett?
It's not because he is a great manager. Mr Pedersen and colleagues estimate that the privately-run businesses controlled by Berkshire Hathaway haven’t done unusually well. Instead, they say, there are two other reasons.
One is that Mr Buffett has used leverage. On average, he's geared up his returns by borrowing. Here, though, he has a massive advantage over ordinary investors because he can borrow cheaply. Berkshire Hathaway’s insurance float - its ability to collect insurance premiums before it has to pay out on claims - has given Mr Buffett a source of funds even cheaper, down the years, than US Treasury bills. To this, Mr Buffett has also used deferred tax liabilities as a source of funds.
In this sense, we can't copy Mr Buffett. But there's something else he's done brilliantly - he's stuck to his guns even in bad times. For example, he under-performed the US market by seventy percentage points between 1998 and 2000 by missing out on tech stocks. But he didn't throw in the towel then, and so profited hugely when defensives and quality came back into favour.
In this sense, Mr Buffett's superiority over other stock-pickers isn't an intellectual one so much as a moral one. He has the courage and ability to stick with his principles. It's discipline, not intellect, that raises him above other investors. But of course, this is only a virtue if your principles are right.
