Buffett's investment strategy: it was systematic all along

New research has decoded Buffett's investment strategy. 87% of his outperformance came from systematic factor exposures, not stock-picking genius, and his approach is more accessible than the legend suggests.

Everyone wants to know how Warren Buffett did it.

If you've spent any time advocating for evidence-based investing, you've faced the question. Markets are efficient, you say. Active managers can't beat indices consistently, you explain. And then someone asks: "What about Buffett?"

It's a fair challenge. $100 invested in Berkshire Hathaway in 1965 would be worth $5.5 million today. The same $100 in the S&P 500? Just $39,000. That's not noise. That's not survivorship bias. That's a track record that demands explanation.

For decades, the explanation has been: genius. Uncanny instinct. A gift that can't be taught. Business schools analyse his annual letters like sacred texts. Investors make pilgrimages to Omaha hoping some wisdom might rub off. The assumption has always been that Buffett's investment strategy could not be replicated. You either have his talent or you don't.

But what if that assumption is wrong?

New research from Sparkline Capital has reverse-engineered Buffett's returns. Think of it like documenting the recipe behind a legendary chef's signature dish. For years, everyone assumed the secret was ineffable talent. Now researchers have identified the ingredients, measured the proportions, and shown that the dish can be made at home.

Buffett's success isn't mystical. It's systematic. Quantifiable. And genuinely accessible.

The myth of the bargain hunter

Buffett is almost universally described as a value investor. Buy stocks trading below their intrinsic worth. Find companies the market has mispriced. It's the Ben Graham playbook, and Graham was Buffett's professor at Columbia, his mentor, his intellectual father.

The narrative makes sense. Buffett started his career as a strict Graham disciple, hunting for "cigar butts": cheap, beaten-down companies with one good puff left in them. He bought stocks trading below their net liquidation value. Tangible assets were the anchor. Book value was the benchmark.

This is still how he's taught in business schools. It's how he's portrayed in documentaries and profiles. Value investor. Bargain hunter. The patient contrarian who buys when others are fearful.

There's one problem: it hasn't been accurate for over 40 years.

As Kai Wu's research demonstrates, Buffett evolved far beyond Graham's framework decades ago. In his 1983 shareholder letter, Buffett was explicit about the shift: "My own thinking has changed drastically from 35 years ago when I was taught to favour tangible assets and to shun businesses whose value depended largely upon economic Goodwill."

That was 1983. The bargain-hunter image has persisted for another four decades anyway.

What the data shows

Only 8% of Buffett's stock purchases since 1978 were made below book value.

That number alone demolishes the bargain-hunter myth. Wu's analysis examined Buffett's top holdings across nearly five decades. Of 240 stock-date observations, just 19 traded below tangible book value. The rest? All purchased at a premium. The median price-to-book ratio was 3.1. The average was nearly 8.

Look at his three defining investments. Buffett bought GEICO in 1976 at 0.44 times book value, near bankruptcy. Classic Graham. But he held on as the valuation recovered, eventually taking the company private in 1996 at 3 times book. Then came Coca-Cola in 1988, purchased at 4.1 times book. He kept holding even as it surged above 22 times book in the 1990s. And Apple? He started buying in 2016 at 4.6 times book. It now trades above 57 times.

These aren't the moves of someone obsessed with tangible assets.

Only 19 of 240 stock purchases since 1978 were made below book value. The bargain-hunter label doesn't fit the data

The shift goes deeper than valuations. Wu decomposed the balance sheets of Buffett's holdings over time, tracking where the value comes from. In 1978, tangible capital dominated. Factories. Equipment. Physical stuff you could touch. But decade by decade, the composition changed. Brand equity grew. Human capital became more important. And with Apple, intellectual property and network effects took centre stage.

The composition of Buffett's holdings has transformed over five decades — from factories and equipment to brands, IP, and network effects

Today, Buffett's portfolio scores in the top 20% of global stocks on intangible value. In the late 1970s, it was close to average. That's not drift. That's deliberate evolution.

Buffett's portfolio now ranks in the top quintile for intangible value. In 1978, it was close to average

At Berkshire's 2018 shareholder meeting, Buffett made the point directly: "The four largest companies today by market value do not need any net tangible assets." He was talking about the economy. He was also describing his own portfolio.

The factor decomposition: 87% explained

Here's where it gets interesting. Run Buffett's returns through a factor model and most of the magic disappears.

Wu found that Buffett's stock portfolio outperformed its market beta by 3% per year since 1978. Impressive. But 87% of that excess return can be explained by exposure to identifiable factors. The residual alpha (the part attributable to Buffett's stock-picking genius) comes to just 0.4% annually. Statistically insignificant.

Nearly nine-tenths of Buffett's outperformance can be attributed to identifiable factor exposures. The unexplained residual? Statistically insignificant

The main ingredients? Intangible Value contributed 1.1% per year. Quality added another 1.1%. Traditional value (the Graham-style book value metric) contributed 0.7%. Together, these systematic exposures account for almost everything that looked like unexplainable skill.

This finding isn't isolated. A 2018 paper by Frazzini, Kabiller, and Pedersen reached similar conclusions using different factors. They found that Buffett's alpha "becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors." Same destination, different route.

The recent period is even more striking. Since 1995, Buffett's intangible value loading has increased by 50%. He leaned harder into the factor that worked. But his residual alpha turned negative: -1.9% per year. He underperformed what a simple rules-based implementation of his own strategy would have delivered.

What does this mean? Not that Buffett got lucky. It means his edge consists largely of systematic exposure to certain types of stocks. Companies with strong brands, intellectual property, and network effects. Businesses with high profitability and durable competitive advantages. These characteristics can be identified, measured, and captured without discretionary judgment.

As Larry Swedroe noted in his analysis of Wu's research for Morningstar, the intangible value and quality factors work together intuitively. Quality identifies companies profitable today: established competitive advantages already generating strong returns. Intangible value finds companies investing heavily in future profitability through R&D, brand building, and other intangible investments. One captures proven moats. The other captures moats under construction. Buffett has consistently favoured both.

Why this doesn't diminish Buffett

Explaining Buffett's returns doesn't reduce his achievement. It clarifies it.

Buffett identified what works and implemented it at massive scale decades before academic research caught up. The quality factor wasn't formally documented until the 1990s.

Intangible value remains under-appreciated even now. He was running the playbook before anyone had written it down.

Frazzini and his co-authors put it well: explaining Buffett's performance with the benefit of hindsight "does not diminish his outstanding accomplishment. He decided to invest based on these principles half a century ago."

And there's something else. Knowing what works isn't the same as doing it consistently.

Buffett stuck to his approach through brutal drawdowns. Through periods when his style was deeply out of favour. Through the late 1990s tech bubble, when everyone said he'd lost his touch. He operated with significant risk over decades while other investors retreated, rethought, and abandoned their strategies at precisely the wrong moments.

That takes conviction. It takes temperament. It takes a time horizon that most professional investors don't have, because they're worried about quarterly performance reviews and client redemptions.

The genius wasn't in seeing the future. It was in recognising what works, building a system around it, and having the discipline to maintain that system when it hurt. Buffett wasn't a fortune-teller. He was a system designer.

And that reframe matters. Systems can be studied. Systems can be replicated.

Replicating Buffett's investment strategy

Wu constructed a simple test. Take 50% of stocks scoring highest on intangible value. Take 50% scoring highest on quality. Rebalance systematically. No discretion. No Buffett required.

The result? This two-factor portfolio has closely tracked Berkshire's stock returns since 1978. Both substantially beat the S&P 500.

A simple two-factor portfolio has tracked Berkshire's returns for nearly five decades — and outperformed since 1995

Since 1995, the systematic version has done better than Buffett's own picks. That's not a criticism. It's validation. The principles work for Warren Buffett selecting individual stocks. They work for a rules-based algorithm screening the entire market.

Wu tested the approach beyond Buffett's usual hunting ground. US large-cap tech. US small-caps. International equities. The two-factor model worked consistently across all of them. Buffett's principles aren't limited to his personal "circle of competence". They're universal.

This is how Buffett invested when he could invest freely. And it's more accessible now than it was for him.

Berkshire faces constraints that individual investors don't. At a $1 trillion market cap, small-caps no longer move the needle. Entering and exiting positions takes months. Cash piles up because opportunities at sufficient scale are scarce. You don't have these problems.

Quality factor exposure is readily available to UK investors through UCITS ETFs from providers like iShares and Xtrackers, accessible via ISA or SIPP with competitive costs. Intangible value is trickier.

US-listed options like Sparkline's Intangible Value ETF target the factor directly, but UK retail investors face regulatory restrictions that limit access. Multi-factor products offer partial exposure, though none currently isolate intangible value the way the research defines it. That is likely to change.

But here's the thing: access isn't the real barrier.

The catch: discipline is the real edge

Factors go through brutal periods. Traditional value has been in a prolonged drawdown since 2007. Quality underperforms in speculative rallies. Intangible value can lag when the market rotates to cyclicals.

Knowing this intellectually doesn't help when you're living through it.

Most investors chase recent performance. They pile into whatever worked last year. When their chosen approach struggles — and every approach struggles eventually — they abandon it. Buy high, sell low, repeat. The behaviour gap between what markets return and what investors actually capture is well documented. It's not small.

Buffett understood this. "The stock market is a device for transferring money from the impatient to the patient," he's said repeatedly in shareholder letters and meetings over the years.

His real edge was discipline: sticking to his approach for 50 years. He didn't time his style shifts tactically. He chose an approach, held it for decades, then evolved gradually when the economic landscape genuinely changed. That's very different from switching strategies every time something stops working.

Can you hold a quality and intangible value portfolio through a three-year stretch of underperformance? When your brother-in-law is boasting about his meme stock gains? When the financial press is writing articles about how your approach is outdated?

Most people can't. That's the real barrier. Not access. Not knowledge. Discipline.

What Buffett himself recommends

The legendary chef whose recipe has finally been decoded has one last surprise: he thinks most people should skip the cooking entirely.

Buffett has been remarkably consistent on this point. In his 2013 shareholder letter: "A low-cost index fund is the most sensible equity investment for the great majority of investors." At the 2020 annual meeting: "For most people, the best thing to do is to own the S&P 500 index fund." In his 2016 letter: "My regular recommendation has been a low-cost S&P 500 index fund."

The greatest stock-picker in history tells people not to pick stocks.

Once you understand what drove his returns, this makes sense. If even Buffett's edge is largely systematic factor exposure, and maintaining that exposure through inevitable drawdowns is the hardest part, then capturing broad market returns cheaply and consistently is the rational choice for most investors.

Remember the question that started this: "What about Buffett?" Now you have the answer. His success validates evidence-based investing rather than contradicting it. He identified systematic factors before academics named them, built a disciplined process around them, and stuck to it for half a century. And his advice to everyone else? Buy the index.

The $5.5 million wasn't magic. It was a system, applied with extraordinary discipline, over an extraordinary timeframe. You probably can't replicate the discipline. Buffett says you don't need to try.

Resources

Wu, K. (2025). Buffett's intangible moats. Sparkline Capital.

Frazzini, A., Kabiller, D., & Pedersen, L. H. (2018). Buffett's alpha. Financial Analysts Journal, 74(4), 35-55.

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