A Simple Method for Buffett Like Returns

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July 27, 2010 4:38 pm by Dean Morel

So you want to be an investing superstar. Or at least retire comfortably with control over your own finances. Here’s a simple starting point for Buffett like returns.

Buy a basket of stock in the highest book to market decile, rinse and repeat. (Lowest price to book.)
Hold more cash when the market is above long term trend lines, deploy that cash when it is below.

http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

What do you think when you look at the above graph and consider the following?

More thoughts

While markets are reasonably micro-efficient they are certainly prone to times of macro-inefficiency.
The high risk premiums from equity market can be reasonably explained by investors taking a short term view. Those taking long term views are better placed to exploit the risk premium.

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3 Comments »

Harvey said:

The Y axis is labeled “monthly”. Did you mean annual?
Also, (1) how often do you rebalance for cash and decile? (2) How much cash do you raise(?) when it crosses the median? (3) When do you re-deploy how much of it?

# 13 October 2010 at 9:26 am

Dean Morel (author) said:

Hi Harvey
You’ll find a lot more information on this at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html and http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html#BookEquity
I believe the general approach was yearly re-balancing, but it could have been done as frequently as monthly, which would make sense why the y axis was labelled monthly.

# 13 October 2010 at 9:43 am

Mike said:

Very nice. I particularly like your comments regarding market efficiency. How anyone can argue the markets are nearly perfect efficiency after the past 3 years is beyond me, and I agree that the long term investor is better positioned to take advantage of market dips simply because they don’t have to time the market with precision.

# 23 June 2011 at 12:06 am

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