Commemorating Warren Buffett’s legacy and the Financial Analysts Journal’s 80th Anniversary through the lens of the award-winning article, “Buffett’s Alpha.”
Warren Buffett’s announcement that he will step down as CEO of Berkshire Hathaway at the end of 2025 marked the end of an era — and the beginning of “a moment of reflection” across the financial world. For investment professionals, it’s a time to look back not just at the remarkable arc of an individual career, but also at the intellectual infrastructure that helps explain, validate, and even challenge investing philosophy.
As it happens, the Financial Analysts Journal is celebrating its 80th Anniversary this year. Since 1945, the Journal has helped shape investment practice by publishing research that is practical, empirically sound, and ahead of the curve. Buffett himself has long valued clarity over complexity, so it’s fitting that one of the Journal’s award-winning papers, “Buffett’s Alpha,” offers exactly that: a rigorous, data-driven exploration of the principles behind the Oracle of Omaha’s extraordinary success.
Published in 2018 and honored with the Graham & Dodd Award for research excellence, “Buffett’s Alpha” (Andrea Frazzini, David Kabiller, and Lasse Heje Pedersen) attempts to quantify what generations of investors have admired in Buffett: his ability to consistently outperform the market.
Although much has been written about Buffett and his investment philosophy, surprisingly little rigorous empirical analysis has been conducted to explain his performance record. That’s just what the authors of “Buffett’s Alpha” did.
Since Buffett’s success lies at the heart of the debate about market efficiency, the authors wanted to test the notion that his success can be attributed to luck; that he’s simply the winner of a coin toss. That idea was articulated by efficient markets proponent Michael Jensen during a 1984 Columbia Business School conference celebrating the 50th anniversary of Graham and Dodd’s Security Analysis. At the event, Buffett countered that many stock market winners come from the “Graham-and-Doddsville” school of thought.
Frazzini, Kabiller, and Pedersen sought to determine what factors might explain his performance success and whether creating a portfolio with similar characteristics and outsized returns is possible. They found that the standard academic factors — market, size, value, and momentum — do not fully explain Buffett’s performance. So, they included two additional factors: betting-against-beta (BAB) — going long low-beta stocks and short high-beta stocks — and quality-minus-junk (QMJ) — going long high-quality stocks and short low-quality junk stocks.
Their systematic Buffett-style portfolio generated significant alpha and performed comparably to that of Berkshire Hathaway. Though Buffett is best known as a value investor, the authors’ findings suggest that his focus on safe, quality stocks “may in fact be at least as important” as his value tilt in accounting for his consistent outperformance.
The paper also highlights Berkshire Hathaway’s unique structure, which gave Buffett access to stable, low-cost leverage, particularly through insurance float. That access amplified returns without requiring excessive risk-taking, and it allowed Buffett to weather periods of underperformance without altering course. As the authors of “Buffett’s Alpha” note, from mid-1998 to early 2000, Berkshire lost more than 40% of its market value even as the S&P 500 rose by more than 30%. Yet, Buffett stayed the course, reaffirming the behavioral side of his advantage: the ability to hold to a sound strategy when others wouldn’t.
Lasting Impact
As Buffett prepares to pass the torch, and as the Journal turns the page on its eighth decade, “Buffett’s Alpha” reminds us that good ideas endure, especially when they’re tested, published, and applied. The future of investing may look different in form, but its foundation will still rest on the qualities Buffett exemplifies and the Journal continues to champion. That is, discipline, evidence, and practical relevance.
Notably, CFA Institute Research and Policy Center is celebrating another major milestone this year – the 60th Anniversary of the Research Foundation. Visit our Celebrating Research hub to explore some of the high-quality, high-impact articles and reports that have shaped the investment industry over the decades.