Truly said, his portfolio in part benefits from his cult of being the “Investment Oracle”. But we also have to consider the fact that he invest in exceptionally good business. So, weather the investment by managers in the companies he owns, after the disclosure by SEC is purely bcoz of his cult or because of the value that they sensed at the same time or before is difficult to scrutinize.
About the discussion revolving around Alpha, I have two Scenarios:
Firstly, its through buying the “Fair” Company @ some discount to Intrinsic value , say @ discount of 33% to book value; thus creating a “margin of safety” of atleast 33% (its here when he can with high conviction put the capital ) and henceforth, can generate a cool return of 50 % by the time company reaches to its Book value. Now , such opportunities comes very rarely, may be only during the occasions of heavy selling or slowdown and the rapid recovery that follows. So, basically he loads his gun during the period of “fear and greed” and creates “ALPHA”. The Salad Oil Scandal and his investment n AMEX is testimony to this style of investing.
This explains the authors reasoning behind Buffett’s buying low-risk, cheap, and high-quality stocks.
Moving further, the author’s analysis of the main contributors to buffets portfolio returns from “betting against Beta” and ”Quality minus junk” lies in his the fact that he wants companies with consistent performance rather than cyclical or companies with high beta/leverage or fluctuating annual returns(although he never cares for quarterly results). This explains his investments in Wal-Mart, wells-fargo and others where he can have near term revenue visibility and assured consistence performance.
He likes buying good business when they are beaten down.(although value investor like me never let those businesses to come down as warren is not only the one who is patiently waiting for fair price of such business).After the Charlie’s advice of buying such business at fair price rather than waiting for good price(i.e.,33% discount or more),he seems to have started focusing on purchasing good business even at high book values.IBM purchase seems to explain this.
Secondly,adding High beta stocks(high risk) to generate higher sharpe ratio makes sense; however more sense it does makes to him to add low beta stocks(low risk) and use leverage to increase the holdings of those stocks in his portfolio to generate higher sharpe ratio. His leverage comes from” Insurance float” which is very cheap as compared to T-bill and “negative coupon Bonds” that he can issue to investors which again is one of its own kind. Clearly, its Unique.
So This Unique Tool in part helps him to create alpha along with the rest part from his Low beta and High quality stock picking ability.