Comments by "JP 72" (@739jep) on "Advice From Warren Buffett" video.

@neillamas8929 it’s not my idea , it was discussed in the video . I believe it was when he was discussing a paper called ‘buffets alpha’. That paper explains everything in more detail. The main difference between having an etf portfolio with similar exposure to known risk factors as buffet is that you will have a similar expected return for less risk. (You will have similar exposure to systematic risks but less exposure to idiosyncratic risks.) I believe the risk factors buffet would tilt towards are more than likely (historically at least) value & profitability. To understand this part of the discussion you would need to have some understanding of valuation theory and pricing models, in particular the Fama and French 3 & 5 factor models.
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It’s not that you need a single fund to replicate it - you could do it yourself using a portfolio of funds at the correct weightings. You would also need to use the same leverage as buffet. Which not everyone has access to. The point of the research referenced in this video isn’t to instruct anyone on how to copy buffet - it is merely to explain his performance. We shouldn’t copy buffets strategy. He’s not a messiah - we all have our own personal risk tolerance levels, stages of our lifecycle , financial goals and financial needs. We should tailor our own portfolios according to these variables rather than what someone else is doing.
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@pbinsb3437 don’t get caught basing investment decisions off past returns, that is not basis to evaluate an investment decision.
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Would you not just work out the exposure buffet has to known risk factors by running regression analysis - then compose a portfolio using etfs that achieve the same exposure? And then use the same amount of leverage as buffet? Shouldn’t take that much skill - there are online tools for this stuff? Ps. Not saying this would be a good idea, just saying if you wanted a buffet like portfolio that was passive this would be an option. He’s not saying you need to pick index funds you think will do better. It’s about constructing a portfolio that has similar exposure to factors such as market beta , value , size , profitability etc
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He picks those stocks based on risk factors whether he realises it or not. He just does it in a more concentrated way. As was mentioned in the video , his over performance is risk based , not skill based. How has he done lately compared to the market? He’s underperformed. Just like the value risk premium as lagged the market in recent years.
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No such thing as over diversification. Investing in Apple would be an easy way to beat the market IF there was such thing as earning historical returns 😂 how do you know which stocks will outperform the market long term before it happens? Remember that the market does a pretty good job of pricing in all available information. Individual stock returns are positively skewed, it’s like finding a needle in a hay stack.
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@junkequation replicating his results is different from explaining what drove his returns. But yes you could gain similar levels of exposure to the relevant risk factors fairly simply using etfs and (provided you could get similar leverage as buffet ) you could get similar ‘expected returns’ for even less risk than buffet. This is different from actual returns which include unexpected returns - but as they’re unexpected I think it makes sense for investors to simply focus on expected returns. This wasn’t possible in the past , nor do we have a Time Machine so the exercise of trying to mirror buffets performance historically is purely theoretical but still relevant for investors making decisions today.
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@junkequation additionally , this video never claims that an investor will be able to replicate buffets returns by having similar exposure to certain factors. What this video does say is that if you want to replicate buffets returns then you would be far ‘more likely’ to if you maintained diversified exposure to the relevant factors over time - compared to trying to replicate his results by skilfully picking stocks. I think it’s more ridiculous to argue that this isn’t the case.
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@junkequation ‘this video definitely says factors explain Buffets returns. And that’s stupid’ - this video refers to a study that analysed buffets returns and reached that conclusion. What is stupid about this ? What issue do you have with the paper? Or do you just think it must be stupid because you perceive it as some kind of slight against your hero? Factor investing might be slightly more active that investing in the market at a market cap weighting that’s true - but it’s a bit of a stretch to call it stock picking. You’re not picking individual stocks when factor investing , or at least you shouldn’t be, all you’re doing is holding the market but instead of having it weighted by market cap - the weightings of its holdings are influenced by the other factors and not just the market cap. Other than the stock picking comment I mostly agree with your final paragraph 👍 but it’s not an argument against factor investing. The more efficient markets are the more it makes sense to build a portfolio with a factor tilt. These are risk factors so they’re reflected in stocks prices. Factors such as value were discovered becuase they did in fact beat the market. That’s why there’s a rational argument to be made that you can beat the market return by taking on these risks. Will they last forever ? Maybe not , but if you’re being logically consistent you have to ask the same question about the market premium as well. Will the value premium persist? If you don’t think so then why would you expect the market premium to persist?
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