“In investing it is not necessary to do extraordinary things to get extraordinary results,” says Warren Buffett

At times, the world of modern finance resembles a standoff at the OK Corral. On one side are the great money managers with their long history of outperformance. On the other are the academics trying to prove that their records are either lucky or systematically repeatable. In their sights has long been the biggest prize of all, Warren Buffett. But where many have failed, a recent research paper entitled “Buffet’s Alpha” appears to have hit the mark. Has the riddle of his stockpicking edge finally been deciphered?
The authors, Andrea Frazzini, David Kabiller and Lasse H Pedersen, began by breaking down the returns generated by Buffett’s investment vehicle, Berkshire Hathaway, into their constituent parts. By isolating the component specifically due to stock market investment, they aimed to discover exactly how, for 36 years, he had achieved compound returns of 19 per cent a year over and above the return from government bonds.
First, they learnt that Buffett has boosted his profits through the extensive use of borrowed money, or leverage. Effectively he has bought $60 of stocks using borrowed money for every $100 of his own, and was able to borrow extremely cheaply through Berkshire’s excellent credit rating and by using the cash available inside its insurance businesses as, effectively, an interest-free loan. Insurance companies take in money via premiums paid by customers. Until they have to pay it out in claims, they can use it to invest for their own profit. However, that only explained 10 percentage points of the annual 19 per cent excess return. What about the rest?
The traditional academic consensus is that, over the long run, just a few factors explain investment outperformance, specifically: size (“small caps beat large

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