Buffetts Alpha
As an update on an earlier post on S&P leverage, Here is a link to “Buffetts alpha” by Andrea Frazzini, David Kabiller and Lasse H. Pederse from the National Bureau of Economic Research in 2013. They describe decomposing the success of Warren Buffetts Berkshire Hathoway innate different categories. For example how much is due to the businesses Berkshire runs, versus the public stock holdings? How much is his stock picking extraordinary vs. about the same as the market.
They find:
The outperformance of the company is more due to stock picking than the underlying businesses.
That his stock picking is good but not so exceptional that others can’t try to replicate it. The general strategy of buying greta businesses for a fair or good price - value is copyable.
That the business structure (insurance float held at low rates?) enabled him to have about 1.7X leverage in his investments - hence the reference to the amount of leverage needed in the S&P. Note this is pretty close to the 2X recommended for the S&P based one historical analysis.
That his skill was to realize this strategy was sound and to implement it successfully and stick to it for many decades.
So now two sources say that 2X is about the right amount of leverage for the stock market. If you can stock pick!