Buffett Hands Over Reins, What’s Next for Berkshire’s Capital Strategy?

What is Buffett’s strategy?

Buffett took control of Berkshire in 1965, back when the company was a struggling textile manufacturer.

In a 2010 letter to shareholders, he recounted his experience in those early days:

“Berkshire was then only in
textiles, where it had in the previous decade lost significant money. The dumbest thing I could have done was to
pursue ‘opportunities’ to improve and expand the existing textile operation – so for years that’s exactly what I
did. And then, in a final burst of brilliance, I went out and bought another textile company. Aaaaaaargh!
Eventually I came to my senses, heading first into insurance and then into other industries.”

Many people have tried to explain Buffett’s success in recent years. A Financial Times article titled “How Buffet Did It” notes that his strategy is “more than great stock picks and insurance premiums.”

An older paper called “Buffett’s Alpha” suggests that his exposure to low-risk, cheap and high-quality stocks is key.

“(He) 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 or a career shift,” authors Andrea Frazzini, David Kabiller and Lasse Heje Pedersen state in the paper.

“We estimate that Buffett applies a leverage of about 1.7-to-1, boosting both his risk and excess return in that proportion. Thus, his many accomplishments include having the conviction, wherewithal, and skill to operate with leverage and significant risk over a number of decades,” they also note.