Now we have another word to describe Warren Buffett

February 14, 2013 Categories: Investment Strategy

Russell Investments - Warren Buffet graphic

I have a confession! I had a little bit of help writing the post below. In fact…a lot of help. Actually, Bob Collie, who led the consulting team here in the UK before heading off to our Tacoma office in early 2002, is the rightful owner. Bob remains a lively voice in Russell debates – informative and thoughtful. He’s a regular contributor to our US blog, and I always enjoy reading his latest postings so I thought I’d share this one with you.

Words are powerful things. The act of naming can turn an elusive abstraction into a solid concept, making it more real and helping our minds to grasp it. It can change how we see the world: “azure” is a distinct color from blue in the Russian and Italian languages, but not in English, while the (to American eyes) green light on a Japanese traffic signal is described there as “blue”, even though it is the same color as a traffic signal in the U.S.

So when Dave Hintz first applied the terms “defensive” and its counterpoint “dynamic” to certain investment styles in 2010, it gave a new level of reality to an idea that has been around for a long time.

And now it seems that this concept could cast new light on the investment style of the world’s most famous investor, Warren Buffett. A 2012 working paper by AQR’s Andrea Frazzini, David Kabiller and Lasse Pedersen analyzes Berkshire Hathaway’s holdings over a period of more than thirty years and finds a strong preference for “cheap, safe, quality” stocks. They argue that this (alongside the use of Berkshire’s insurance cashflows to lever the investment portfolio, and an iron constitution) goes a long way to explaining Buffett’s remarkable success, concluding that:

“In summary, we find that Buffett has developed a unique access to leverage that he has invested in safe, high-quality, cheap stocks and that these key characteristics can largely explain his impressive performance.”*

So while most commentators have long been accustomed to referring to Buffett’s investment style as “value”, it may be more accurate to call it “defensive”. Defensive is defined using a combination of volatility and quality factors, closely related to the factors on which Frazzini and his co-authors based their analysis. (Incidentally, defensive is not synonymous with low-volatility, although the definitions do partially overlap). The apparent mispricing of risk in the context of what we would now call defensive portfolios has been documented in a number of academic papers over the years, dating back at least to Fama and French’s landmark 1992 paper on the cross-section of returns.

Of course, whether defensive stocks will continue to perform as well in the future as they have in the past is a matter of opinion. And nobody should think that defensiveness is Buffett-in-a-box or that his track record is attributable to this one factor alone. But at least we now have another word to describe him.

Bob Collie, Chief Research Strategist, Americas Institutional

* “Buffett’s Alpha”, Andrea Frazzini, David Kabiller and Lasse Heje Pedersen (2012), working paper.


Sorca Kelly-Scholte – Managing Director, Consulting and Advisory Services, EMEA

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