Buffett’s alpha: further explanations from a behavioral value investing perspective

Warren Buffett has had extraordinary success as an investor, but there is no agreement as to why. Some academic researchers attribute his performance to mere luck. Frazzini et al. (Financ Anal J 74(4):35–55, 2018), concluded that his alpha is due to leveraging safe, high-quality, and cheap stocks. However, there has been no analysis to date of Buffett’s performance from a behavioral perspective. We argue that Buffett’s success is partly due to qualitative and psychological factors, including tenacity, patience, avoidance of overconfidence, organizational culture, and the reputation effect. Using information from shareholder letters, writings, interviews, and speeches by Buffett and his colleague Charlie Munger, we demonstrate how such psychological factors, together with the quantitative findings of Frazzini et al., render a more complete and satisfying explanation of Buffett’s alpha.