Tags: Hulbert | study | margin | Buffett

Hulbert: Study Shows Invest on Margin to Be Like Buffett

By    |   Tuesday, 17 December 2013 07:12 AM

How can mere mortals invest like Warren Buffett? Find solid blue chips and buy them on margin, according to a study published by the National Bureau of Economic Research last month, Mark Hulbert, editor of Hulbert Financial Digest, writes in The Wall Street Journal.

The study's authors, who work at money management firm AQR Capital Management, looked at Buffett's record going back to 1964, when he purchased Berkshire Hathaway, to identify the formula of his success.

The report has a two-pronged approach for defining Buffett's victories. "The first is a 'focus on cheap, safe, quality stocks,' defined as those that have exhibited below-average volatility and sport low ratios of price-to-book value — a measure of net worth," Hulbert writes.

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It's also about finding stocks with profits growing faster than average and stocks that offer significant dividend payouts.

"The second part of the formula will raise eyebrows," Hulbert asserts. "It calls for investing in these stocks 'on margin' — that is, borrowing money to buy more shares than could otherwise be purchased."

To equal Buffett's returns, investors would need to leverage their positions 1.6 to 1, according to the report.

"Nevertheless, it may be possible for you to at least partially follow the researchers' formula without actually resorting to borrowed money," he explains.

"If you have cash in your portfolio, for example, you could add it to the portion you already have allocated to equities-achieving the equivalent of going on margin by, in effect, 'borrowing' from yourself. This, of course, is what Mr. Buffett does by borrowing from other parts of his business."

"So can you copy Buffett's investing strategy? The short answer is yes and no," writes Sam Ro of Business Insider.

"Anyone can invest in boring stocks. But not everyone can borrow as cheaply as Buffett and Berkshire Hathaway."

The authors of the report point out that "Berkshire's debt has benefitted from being highly rated, enjoying a AAA rating from 1989 to 2009."

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How can mere mortals invest like Warren Buffett? Find solid blue chips and buy them on margin, according to a study published by the National Bureau of Economic Research last month, Mark Hulbert, editor of Hulbert Financial Digest, writes in The Wall Street Journal.
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2013-12-17
Tuesday, 17 December 2013 07:12 AM
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