18-08-2015, 10:00 AM
Let me share some interim findings of mine.
I have a long-term uncleared doubt, is concentrated fund more riskier than broadly diversified one, thus having a higher return in general? Is the "riskier" is an illusion, or a reality?
I found this report, from Yale University on Mr. Buffett portfolio riskiness, base on Sharpe ratio. For those not familiar with the term, please refer to the wiki below
https://en.wikipedia.org/wiki/Sharpe_ratio
Based on the report, linked below. Mr. Buffett ratio between 1976-2011, was 0.76, vs the market 0.39. It seems Mr. Buffett was having almost double the return, per unit of risk. For comparison, I calculated from Yeoman Cap 18 years of monthly data, the ratio is 0.56, with risk-free rate of 2.5%. Warren Buffett won the game.
http://www.econ.yale.edu/~af227/pdf/Buff...dersen.pdf
But wait a minute, don't value investing prefer volatility? Is it a contradiction here? Yes, short-term volatility is a friend of value investing, not a risk. But over a longer term, I tent to agree with Howard Mark's statement, "prices of fundamentally risky securities fluctuate more than those of safer ones (over longer term)". The definition of risk here, is "possibility of permanently loss of capital"
I adjusted the calculation, based on yearly performance, rather than monthly,with similar risk-free rate. The adjusted ratio, based on data from Mr. Buffett shareholder letter, from 1965-2014
BH: 1.2
S&P 500 : 0.5
For comparison, I calculated Yeoman Cap's 18 years data, the ratios were
YC: 0.4
Asia x-Japan : 0.2
One observation, Mr. Buffett's SD was lower than S&P 500, while almost double in return. In Yeoman Cap, its SD was higher than Asia ex-Japan, while double in return.
An interim conclusion of mine. Concentrated approach yield better result, if not similar, per unit of "real" risk. I am practicing it, and hope I am right, many years later.
All comments are welcomed.
(sharing interim finding of my own "researches")
I have a long-term uncleared doubt, is concentrated fund more riskier than broadly diversified one, thus having a higher return in general? Is the "riskier" is an illusion, or a reality?
I found this report, from Yale University on Mr. Buffett portfolio riskiness, base on Sharpe ratio. For those not familiar with the term, please refer to the wiki below
https://en.wikipedia.org/wiki/Sharpe_ratio
Based on the report, linked below. Mr. Buffett ratio between 1976-2011, was 0.76, vs the market 0.39. It seems Mr. Buffett was having almost double the return, per unit of risk. For comparison, I calculated from Yeoman Cap 18 years of monthly data, the ratio is 0.56, with risk-free rate of 2.5%. Warren Buffett won the game.
http://www.econ.yale.edu/~af227/pdf/Buff...dersen.pdf
But wait a minute, don't value investing prefer volatility? Is it a contradiction here? Yes, short-term volatility is a friend of value investing, not a risk. But over a longer term, I tent to agree with Howard Mark's statement, "prices of fundamentally risky securities fluctuate more than those of safer ones (over longer term)". The definition of risk here, is "possibility of permanently loss of capital"
I adjusted the calculation, based on yearly performance, rather than monthly,with similar risk-free rate. The adjusted ratio, based on data from Mr. Buffett shareholder letter, from 1965-2014
BH: 1.2
S&P 500 : 0.5
For comparison, I calculated Yeoman Cap's 18 years data, the ratios were
YC: 0.4
Asia x-Japan : 0.2
One observation, Mr. Buffett's SD was lower than S&P 500, while almost double in return. In Yeoman Cap, its SD was higher than Asia ex-Japan, while double in return.
An interim conclusion of mine. Concentrated approach yield better result, if not similar, per unit of "real" risk. I am practicing it, and hope I am right, many years later.
All comments are welcomed.
(sharing interim finding of my own "researches")