Can Computers Beat Star Investors? Case I: Warren Buffet

The initial purpose of this analysis was to explore if a long-only, active strategy based on a benchmark index would be able to match Berkshire Hathaway’s performance?

Based on our simulation results, the (short) answer is yes!

In a first assessment, We can observe that Berkshire A shares (BRKA) outperform the SP500 gross return index (SP500GR) significantly over the full observation window since 1988. It can also be observed that the performance of BRKA started converging to the SP500GR along the fund history, this convergence effect starts 2003 and is even more pronounced from 2012 onwards.

Therefore, we assessed two additional approaches:

1. Comparing BRKA with an unleveraged active management.

2. Comparing BRKA with a leveraged active management, using approx. the same leverage that Berkshire is using internally.

Results Summary:

• From 2003 onwards we can show, that with an active management without leverage it is possible to achieve a similar performance compared to Berkshire shares and the SP500GR but with significantly better risk/return characteristics and lower drawdowns.

• If we apply the same leverage that Berkshire is using internally to the SP500GR since 1988 and combine it with an active management strategy, we can match the BRKA and the leveraged SP500GR index performance in combination with better risk/return characteristics and significantly lower drawdowns.

• A general benefit of BRKA is the relatively low correlation with the SP500, which can potentially create an added value in a multi-asset portfolio. However, this analysis is not in scope for this paper.

So the combination of using leverage with a proper risk management overlay, can match the

performance of BRKA with even better risk statistics! Nevertheless, BRKA and the genius

of Warren Buffet stand for a historically outstanding performance story, long before advanced

mathematical risk management concepts where even thinkable.

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