- Warren Buffett has more in common with quantitative traders than meets the eye, says Cliff Asness.
- Value investors and quants consider price a factor in their analyses, the AQR boss added.
- Buffett examines companies’ earnings, risks, valuations and many other elements of their businesses.
Warren Buffett is widely considered an old-school investor, but he has more in common with the modern breed of quantitative analysts than meets the eye, says Cliff Asness.
“No one would call Warren Buffett a quant,” the billionaire investor and head of AQR Capital Management said of the 92-year-old Berkshire Hathaway CEO on the latest episode of “Bloomberg Wealth with David Rubenstein.”
“Yet it is highly correlated with what quants would call the value factor, the low risk factor and the profitability factor,” Asness continued. “He buys companies that make a lot of money, aren’t very risky, and then he looks for a decent price. That’s not the first thing he looks for.”
Indeed, Buffett summed up his investment philosophy by buying “wonderful companies at a fair price.” It assesses everything from profitability and brand power to geopolitical risks and quality of management.
Asness also explained the difference between what quants call “value” and the practice of “value investing”. Quants use the term to describe how cheap a company’s stock is relative to fundamentals such as sales, earnings, or cash flow. Meanwhile, Buffett and other value investors look beyond those ratios to determine whether a company is a good deal or not, he said.
“It’s not the holistic measure of value that a guy like Warren Buffett, or any Graham and Dodd-style investor, would look at,” Asness said.
He noted that value investors consider not only price, but also the companies’ growth prospects, competitive moats, stability and external forces that might work in their favor.
Likewise, quants consider their definition of value a factor in their analysis of a company, he said.
Learn more: Warren Buffett’s businesses are facing an economic downturn and a major transition. 5 CEOs break down the value of Berkshire Hathaway ownership and offer fresh insights on Buffett’s successor.