Buffett’s Intangible Moats

July 2025

Executive Summary

Warren Buffett is often mischaracterized as an old-school value investor in the mold of Ben Graham. In reality, he long ago evolved beyond Graham’s focus on tangible book value – instead favoring asset-light businesses with wide intangible moats (e.g., Coca-Cola and Apple). Buffett’s long-term success is largely driven by systematic exposure to two key factors: Intangible Value and Quality. While there will never be another Buffett, his philosophy can be distilled into a simple, rules-based strategy – one that can be implemented using long-only factor building blocks and applied across a broader opportunity set than Berkshire itself can access today.

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Introduction

Warren Buffett Retires 🫡

Two months ago, Warren Buffett took the stage at the Berkshire Hathaway annual meeting, as he has every year for the past 60 years as its CEO. However, at the end of his 4.5-hour session, Buffett did something he had never done before – he announced his retirement.

Buffett’s farewell was met with a standing ovation from the over 20,000 adoring shareholders in attendance. Since 1965, $100 invested in Berkshire’s stock would have grown to $5.5 million, compared to just $39,000 had it been invested in the S&P 500. Incredibly, Berkshire’s stock could fall -99% and still be ahead of the S&P 500!

Exhibit 1

Berkshire Hathaway Returns

Source: Berkshire Hathaway, S&P, Sparkline. From 1/1/1965 to 12/31/2024.

Of course, Buffett is beloved not only for making his investors rich, but also for the indispensable wisdom he has shared over decades of investor letters and interviews. In this paper, we dissect his historical positions, performance, and writings to better understand the keys to his success. While Buffett himself may be retiring, he leaves behind many valuable and implementable lessons for future investors.

Buffett’s Intangible Evolution

Into the Archives 📜

Let’s begin by examining Buffett's historical stock picks. We focus on Berkshire’s public stock portfolio, which provides greater insight into Buffett’s investment philosophy than the firm’s non-marketable private equity holdings.

The following exhibit shows Buffett’s top stock position each year since 1978. It also includes snapshots of his top five holdings at the start of each decade.

Exhibit 2

Buffett’s Top Stocks (1978-2024)

Source: Berkshire Hathaway, SEC, Sparkline. From 12/31/1977 to 12/31/2024.

Initially, Buffett’s portfolio consisted primarily of insurance, newspaper, materials, retail, and advertising stocks. In addition to the Washington Post and GEICO, which he later fully acquired in 1996, Buffett held smaller stakes in firms such as SAFECO, Handy & Harman, F. W. Woolworth, General Foods, Time, Kaiser Aluminum & Chemical, and Interpublic.

Starting in the mid-1980s, Buffett added consumer products stocks, most notably Coca-Cola, but also Gillette, Guinness, Procter & Gamble, and Anheuser-Busch. He also expanded into more modern media holdings with Capital Cities/ABC and started buying BNSF, the railroad he later took private in 2010. Finally, he started building up core positions in three financials: American Express, Wells Fargo, and Moody’s.

Beginning in the 2010s, Buffett made his first foray into tech stocks. While he originally bought IBM, he later exited it in favor of Apple, which would eventually grow to represent 50% of his portfolio. He also maintained heavy allocations to consumer brands and financials, most notably adding Kraft Heinz and Bank of America into the mix.

Three Eras of Buffett 3️⃣

The historical record of Buffett’s portfolio provides insight into his evolving investment process. Broadly speaking, his career has unfolded in three main phases, corresponding to the industrial, consumer, and information ages.

Exhibit 3

The Hero’s Journey

Source: Sparkline. Reproduced from Intangible Value (Jun 2021).

From the 1950s to 1970s, Buffett followed the prescripts of his mentor, Ben Graham, buying stocks trading below net liquidation value. At the time, the economy was still mainly industrial, so tangible book value served as a decent proxy for intrinsic value. Berkshire first acquired GEICO, its biggest position during this era, far below tangible book value.

In the next phase of his career, Buffett adopted a more expansive definition of value, one that also incorporated intangible assets. This shift coincided with the consumer age, when iconic brands like Coca-Cola earned returns far in excess of what could be expected based on tangible assets alone. Buffett attributed this excess return to intangible assets, which he termed “economic goodwill.” 

In his 1983 letter, Buffett emphasized the rising importance of intangible assets in his investment process:

“My own thinking has changed drastically from 35 years ago when I was taught to favor tangible assets and to shun businesses whose value depended largely upon economic Goodwill… Ultimately, business experience, direct and vicarious, produced my present strong preference for businesses that possess large amounts of enduring Goodwill and that utilize a minimum of tangible assets.”

Finally, as the economy progressed into the information age, the relevance of tangible assets diminished further. At Berkshire’s 2018 shareholder meeting, Buffett observed:

“The four largest companies today by market value do not need any net tangible assets. They are not like AT&T, GM, or Exxon Mobil, requiring lots of capital to produce earnings. We have become an asset-light economy.”

Of course, one of the large, asset-light companies to which Buffett was referring was Apple, in which he had amassed a large stake over the past few years. Buffett called Apple, whose intangible moats also include intellectual property and network effects, the “best business in the world.”

The Rise of Intangible Value ✨

Over his remarkable 70-year career, Buffett evolved the investment framework originally laid out by Ben Graham, adding intangible moats, such as brand equity, human capital, intellectual property, and network effects.

Exhibit 4

Buffett’s Intangible Moats

Source: Sparkline. Reproduced from Intangible Value (Jun 2021).

In Intangible Value (Jun 2021), we developed a quantitative metric for firm-level intangible value. In the next exhibit, we apply this framework to decompose the balance sheets of Buffett’s “Big Three” – GEICO, Coca-Cola, and Apple.

Exhibit 5

Three Eras of Buffett

Source: Sparkline.

As noted, these stocks symbolize the three eras of Buffett’s career. GEICO, as an insurance company, relies heavily on tangible assets. Coca-Cola mainly leverages brand equity, while also leaning on human capital (i.e., management). Apple, representing the capstone of Buffett’s career, incorporates all four intangible moats, most importantly intellectual property and network effects.

In the following exhibit, we broaden this analysis to show the decomposition of Buffett’s full stock portfolio over time.

Exhibit 6

Buffett’s Balance Sheet

Source: Berkshire, SEC, Sparkline. From 12/31/1977 to 12/31/2024.

In 1978, tangible capital still formed the foundation of Buffett’s portfolio companies’ value. However, over time it declined in importance as intangible assets took center stage. Brand equity was the first intangible pillar to gain prominence, followed by human capital. Only more recently with Buffett’s Apple investment have intellectual property and network effects come to the forefront.

Not Your Grandfather’s Value Investor 💼

Given his association with Ben Graham, Buffett is often viewed as an old-school value investor, using traditional metrics like price-to-book value (P/B) to identify stocks trading below net liquidation value.

However, by the time he took over Berkshire, Buffett had already begun moving beyond a strict interpretation of his mentor’s approach. In fact, throughout his Berkshire career, Buffett almost never actually bought stocks at a discount to book value. The next exhibit shows the distribution of P/B ratios for his top five holdings as of the start of each year since 1978.

Exhibit 7

Buffett Rarely Bought Stocks Below Book Value

Source: Berkshire Hathaway, SEC, New York Public Library, Moody’s, S&P, Sparkline. Histogram of price-to-book ratio of Buffett’s top 5 stock holdings each year-end. From 12/31/1977 to 12/31/2024.

Of the 240 stock-date observations, only 19 (i.e., 8%) had P/B ratios below one – mostly during the late-1970s bear market (e.g., GEICO, SAFECO). In contrast, 92% traded at a premium to book value. In fact, most of Buffett’s holdings were priced considerably above book value, with a median and average P/B ratio of 3.1 and 7.9, respectively.

Once again, Buffett’s “Big Three” offer a vivid illustration of this fact, while also highlighting his evolution over time.

Exhibit 8

Buffett’s Big Three: Price-to-Book Ratio

Source: SEC, NYPL, Moody’s, S&P, Sparkline. From 12/31/1975 to 12/31/2024.

In 1976, Berkshire bought GEICO as it emerged from near bankruptcy. Buffett was able to obtain the stock, which had fallen from $61 to $2, at a P/B ratio of just 0.44. However, rather than take profits as its valuation recovered, Buffett held on, ultimately taking GEICO private in 1996 at a P/B ratio of around 3. His decision to hold proved prescient – at this price, his original investment was a 48-bagger!

From here, Buffett never looked back. He first bought Coca-Cola in 1988 at 4.1 times book value. Importantly, he continued to hold Coke as his largest position through the 1990s, even as its P/B ratio surged above 22. In 2016, he began buying Apple at a similar P/B ratio of 4.6. Apple remains his top holding, even though it now trades at over 57 times book value after delivering a 10x return!

Buffett has tended to own stocks at a premium P/B ratio not only in absolute terms but also relative to the market. As the next exhibit shows, his portfolio has traded at a premium to the average S&P 500 stock in over 85% of years.

Exhibit 9

Buffett’s Holdings Relative Price-to-Book Ratio

Source: Berkshire Hathaway, SEC, New York Public Library, Moody’s, S&P, Sparkline. Price-to-book ratio of Berkshire’s stock portfolio relative to that of the average S&P 500 stock. From 12/31/1977 to 12/31/2024.

Buffett clearly recognizes that tangible book value is only one component of intrinsic value. Moreover, based on his willingness to pay many multiples of tangible book value for great businesses like Coca-Cola and Apple, he appears to view the other component – intangible value – as the more important of the two.

Intrinsic Value = Tangible Value + Intangible Value

Buffett’s growing emphasis on intangible value is evident in the following exhibit, which tracks the weighted average intangible value score of his stock portfolio over time.

Exhibit 10

Buffett’s Intangible Value Score

Source: Berkshire Hathaway, SEC, Sparkline. Exhibit shows the weighted average score of Berkshire’s stock portfolio. Intangible value score is normalized relative to the global stock universe at each point in time, such that the average stock in the universe has a score of zero and the best stock has a score around 6. From 12/31/1977 to 12/31/2024.

At first, Buffett’s portfolio did not materially differ from the median stock on intangible value. At the time, his portfolio was still anchored in traditional tangible value. But starting in the late-1980s, his focus shifted toward firms with high intangible value. Today, his portfolio scores in the top 20% of global stocks on intangible value.

Buffett Today 📅

So what does Buffett’s portfolio look like today? The next exhibit shows his top ten positions, which together account for 80% of his portfolio’s total value.

Exhibit 11

Berkshire Stock Portfolio

Source: Berkshire Hathaway, SEC, Sparkline. As of 3/31/2025.

The final column shows the current intangible value score of each holding. Notably, Buffett’s discretionary process seems to align with our quantitative methodology. Of his top ten holdings, only Moody’s scores below the average stock; most are in the top tier of our investable universe. At the portfolio level, the weighted average score is a robust 2.6 – placing it in the top 20% of stocks globally.

The second column classifies each holding by its primary balance sheet pillar (i.e., the pillar that comprises the greatest share of the company’s total value). For example, while Apple is strong all-around, intellectual property comprises the plurality of its value. The following exhibit presents Buffett’s full stock portfolio using this classification.

Exhibit 12

Berkshire Stock Decomposition

Source: Berkshire Hathaway, SEC, Sparkline. As of 3/31/2025.

As expected, Buffett still leans most heavily on brand equity, with positions in firms like American Express, Coca-Cola, and Kraft Heinz. He also invests in companies that rely on tangible assets (e.g., Chevron), human capital (e.g., Bank of America), and network effects (e.g., Moody’s). While intellectual property appears in the mix, its presence is solely attributable to his concentrated investment in Apple.

Berkshire Factor Analysis

Buffett’s Track Record 📈

Let’s now turn to Buffett’s historical track record. The next exhibit compares the returns of Berkshire Hathaway (BRK.A) to the S&P 500. It also shows the returns of Berkshire’s stock portfolio, which we estimate based on the firm’s holdings disclosed in regulatory filings and annual reports.

Exhibit 13

Buffett’s Track Record (1978-2024)

Source: Berkshire Hathaway, SEC, S&P, Sparkline. Red line: Berkshire Hathaway equity returns per the company’s annual report. Blue line: S&P 500 total return. Green line: returns of Berkshire’s stock portfolio, estimated using positions from regulatory filings and annual reports. Dotted green line: Berkshire’s stock portfolio leveraged 1.7 times, assuming financing at the risk-free rate. No other transaction or financing costs included. From 12/31/1977 to 12/31/2024. See important backtest disclosure below.

First, let’s compare Berkshire’s stock portfolio to Berkshire as a whole. Importantly, the firm’s stock portfolio is only one part of its total holdings; Berkshire also owns a large private equity portfolio (e.g., BNSF). In addition, it operates with an average of 1.7x leverage – much of it obtained at sub-market interest rates through insurance float.

Since 1978, Berkshire’s stock portfolio has underperformed Berkshire itself. However, this is mainly due to leverage; as the dotted line shows, if we were to apply 1.7x leverage to Berkshire’s stock portfolio, its returns would exceed those of Berkshire itself. While this ignores real-world frictions, such as taxes and trading costs, it is consistent with Frazzini et al (2019), who estimate that Berkshire earned 30% higher returns in its public than private equity portfolios.

Of course, the main reason Berkshire is able to run such high leverage in the first place is the cheap, non-recourse float generated by its privately-held insurance operation. Even if it earns lower returns, the private side of Berkshire remains integral to the firm’s overall business model.

Finally, since 1978, Berkshire’s stock portfolio has outperformed the S&P 500 by an impressive 3.0% per year. This accomplishment would easily put Buffett at the top of most fund manager league tables.

Buffett’s Factor Exposures 🔬

What explains Buffett’s remarkable outperformance? Is his success attributable to systematic exposure to certain types of stocks, such as value stocks or financials, or does it reflect a Buffett-specific investment edge?

To answer this question, we turn to a factor model. In this case, we use the “Six-Factor Model” introduced in Intangible Value: A Sixth Factor (May 2023). The following exhibit defines each of the six factors in the model.

Exhibit 14

Six-Factor Model Definitions

Source: Sparkline. Reproduced from Intangible Value: A Sixth Factor (May 2023).

The Market factor is simply a market-cap-weighted stock portfolio, funded at the risk-free rate. The other five factors are constructed as long-short stock portfolios. For example, the Quality factor buys stocks with high trailing profitability and sells those with low trailing profitability.

The next exhibit shows the returns of each factor since 1978.

Exhibit 15

Factor Returns (1978-2025)

Source: Ken French, Sparkline. Market and long-short portfolios constructed per the Fama-French Rm-Rf, HML, SMB, RMW, and MOM factors. Intangible Value follows HML methodology except it uses the intangible value factor. No transaction or financing costs. From 12/31/1977 to 5/30/2025. See full factor definitions and important backtest disclosure below. Reproduced from Intangible Value: A Sixth Factor (May 2023).

Since 1978, the Market factor has delivered the highest total return, followed by Momentum, Intangible Value, and Quality. While Value produced solid returns until 2007, it has been in a prolonged drawdown ever since. Meanwhile, Small-Cap has not generated any return over this period.

Next, we run a multi-factor regression to estimate Buffett’s exposure to each factor. The following exhibit presents the results, denoting statistically significant factors in bold.

Exhibit 16

Buffett Factor Exposures (1978-2025) 

Source: Berkshire Hathaway, SEC, S&P, Ken French, Sparkline. Results of a regression of the six factors on Berkshire’s stock portfolio returns, estimated using positions from regulatory filings and annual reports. Statistically significant variables at 1% bolded. Data bars truncated at -0.3 and 0.3. Daily returns from 12/31/1977 to 5/30/2025.

We find that Buffett’s portfolio has had significant positive exposure to the Market, Value, Quality, and Intangible Value factors – and slightly negative exposure to the Momentum factor. On the other hand, his Small-Cap loading was statistically insignificant.

These results are intuitive. As a long-only investor, Buffett has market beta close to one. All else equal, he also tends to favor companies with low P/B ratios, high profitability, and high intangible value. Conversely, he tends to avoid stocks with high trailing returns, as they are often overhyped.

Now that we have determined Buffett’s factor exposures, we can calculate the contribution of each factor to his Total excess returns. After summing up the factor contributions, we allocate the remaining unexplained return to Alpha, a residual representing his idiosyncratic stock-picking skill.

Exhibit 17

Buffett Factor Attribution (1978-2025)

Source: Berkshire Hathaway, SEC, S&P, Ken French, Sparkline. Return contributions based on estimated factor loadings of Berkshire’s stock portfolio from multivariate regression. Total excess return is Berkshire’s return net of market beta exposure. Alpha is total excess return minus sum of factor contributions. No transaction or financing costs. From 12/31/1977 to 5/30/2025. See important backtest disclosure below.

In total, Buffett outperformed his market beta by a robust 3.0% per year. However, 87% of this excess return can be explained by his factor exposures, with Intangible Value and Quality each contributing 1.1% per year, and Value adding a bit less at 0.7% per year. After accounting for these factors, his residual Alpha declines to an insignificant 0.4% per year – what initially appeared to be pure alpha may in fact largely reflect systematic exposures.

Buffett’s Evolution 🏃

As we saw earlier, Buffett evolved his investment process significantly over the course of a long career, moving far beyond the teachings of his mentor, Ben Graham. To better understand this evolution, we re-run our factor analysis over the more recent period starting in 1995. The next exhibit compares Buffett’s factor exposures over the two periods, with the final column showing the differences.

Exhibit 18

Buffett Factor Exposures: Recent vs. Full Period

Source: Berkshire Hathaway, SEC, S&P, Ken French, Sparkline. Results of a regression of the six factors on Berkshire’s stock portfolio returns, estimated using positions from regulatory filings and annual reports. Statistically significant variables at 1% bolded. Data bars truncated at -0.3 and 0.3. Daily returns as of 5/30/2025.

Buffett’s exposures to Value, Momentum, and Quality have remained stable over time. However, since 1995, his Small-Cap exposure has turned negative, as Berkshire has been forced out of small-caps due to its expanding capital base. Meanwhile, Buffett’s Intangible Value loading has increased by 50%, reflecting his growing preference for intangible-intensive businesses like Coca-Cola and Apple.

The next exhibit shows the return attribution since 1995. In total, Buffett’s stock portfolio outperformed the market by 0.4% per year. As before, Intangible Value and Quality contributed the bulk of returns, adding 1.3% and 1.1% per year, respectively. However, Value is no longer a statistically significant contributor. Moreover, Buffett’s Alpha is now negative -1.9% per year, implying that he underperformed his factor exposures over the past three decades.

Exhibit 19

Buffett Factor Attribution (1995-2025)

Source: Berkshire Hathaway, SEC, S&P, Ken French, Sparkline. Return contributions based on estimated factor loadings of Berkshire’s stock portfolio from multivariate regression. Total excess return is Berkshire’s return net of market beta exposure. Alpha is total excess return minus sum of factor contributions. No transaction or financing costs. From 12/31/1994 to 5/30/2025. See important backtest disclosure below.

The next exhibit re-casts this information, this time showing the full time series of each factor’s return contribution.

Exhibit 20

Buffett Factor Attribution (1995-2025)

Source: Berkshire Hathaway, SEC, S&P, Ken French, Sparkline. Return contributions based on estimated factor loadings of Berkshire’s stock portfolio from multivariate regression. No transaction or financing costs. From 12/31/1994 to 5/30/2025. See important backtest disclosure below.

Buffett has consistently maintained positive exposure to three factors: Intangible Value, Quality, and Value. However, while the first two contributed steadily to returns, Value only contributed until 2007 and has been a drag ever since.

In Intangible Value (Jun 2021), we discussed the struggles of the traditional Value factor, arguing that its demise stems from the diminishing relevance of book value and other accounting metrics in the face of the rising intangible economy. Interestingly, Buffett appears to have recognized this shift early, pivoting to include Intangible Value in his framework as far back as the 1980s.

Beyond the Value Factor 🧑‍🚀

One lingering question is why Buffett’s statistical exposure to Value remains positive, even though by the 1980s he had already moved beyond using book value to measure intrinsic value. One possibility is that this apparent loading is simply a byproduct of his sector preferences rather than evidence of a deliberate tilt toward low P/B stocks.

To test this, the next exhibit re-runs our factor regression with sector controls (e.g., financials, healthcare).

Exhibit 21

Buffett Factor Exposures (1978-2025)

Source: Berkshire Hathaway, SEC, S&P, Ken French, Sparkline. Results of a regression of the six factors (and sector controls) on Berkshire’s stock portfolio returns, estimated using positions from regulatory filings and annual reports. Sector controls use 12 industry portfolios from Ken French. Statistically significant variables at 1% bolded. Data bars truncated at -0.3 and 0.3. Daily returns from 12/31/1977 to 5/30/2025.

Once we control for sectors, Buffett’s Value exposure turns negative, falling from +0.24 to -0.06. This suggests that his apparent predilection for low P/B stocks is largely an artifact of the sectors he tends to favor, many of which trade at relatively low P/B multiples (e.g., financials). Within each sector, Buffett actually prefers stocks with slightly higher P/B ratios than their sector peers (e.g., American Express).

The next exhibit shows the attribution with sector controls. Intangible Value is now the largest contributor, adding 1.5% per year. Quality remains significant, though its contribution falls by half to only 0.6% per year. Importantly, Value is no longer additive. Finally, Buffett’s Sector Bias has not had a large impact on returns over this period.

Exhibit 22

Buffett Factor Attribution (1978-2025, Sector Controls)

Source: Berkshire Hathaway, SEC, S&P, Ken French, Sparkline. Return contributions based on estimated factor loadings of Berkshire’s stock portfolio from multivariate regression. Total excess return is Berkshire’s return net of market beta exposure. Sector returns are summed across all 12 industry portfolios from Ken French. Alpha is total excess return minus sum of factor contributions. No transaction or financing costs. From 12/31/1977 to 5/30/2025. See important backtest disclosure below.

Lastly, let’s run our sector-neutral regression over the more recent period since 1995. The next exhibit shows the results in column (4). For comparison, we include the results of the previous analyses in the first three columns.

Exhibit 23

Buffett Factor Summary Table

Source: Berkshire Hathaway, SEC, S&P, Ken French, Sparkline. Coefficients from a regression of the six factors (and sector controls) on Berkshire’s stock portfolio returns, estimated using positions from regulatory filings and annual reports. Sector controls use 12 industry portfolios from Ken French. Statistically significant variables at 1% bolded. Data bars truncated at -0.3 and 0.3. Return contributions based on above factor loadings. Total excess return is Berkshire’s return net of market beta exposure. Sector returns are summed across all industry portfolios. Alpha is total excess return minus sum of factor contributions. No transaction or financing costs. See important backtest disclosure below. Daily returns as of 5/30/2025.

Per the coefficients panel, Intangible Value and Quality are the only factors with consistently positive loadings across all four columns. Value becomes insignificant once adjusting for sectors, Momentum is consistently negative, and Small-Cap is also negative but only in the recent period.

The return attribution roughly mirrors these patterns. In line with their exposures, Intangible Value and Quality are the top contributors, although Quality’s impact is cut in half after sector adjustment. Value is additive in the original setup, but becomes insignificant either in the more recent period or once sector effects are controlled. Momentum is a small but persistent drag on returns.

Finally, both Total excess returns and Alpha are lower in the more recent period. While this is partially explained by Buffett's bias toward old-economy Sectors, which have lagged in recent years, it also reflects the gradual dulling of his investing edge, a topic we explore in the final section.

Intangible Value and Quality ☯️

Our regression results showed that, among the factors we tested, only Intangible Value and Quality exhibited consistently significant and positive exposures across time periods and model specifications. These two factors also contributed consistently to Buffett’s excess returns, even after controlling for sector biases.

In Intangible Value: A Sixth Factor (May 2023), we argued that Intangible Value and Quality are conceptually related. As Buffett has noted, intangible assets are what enable firms to generate high returns on tangible capital. Yet despite this conceptual overlap, we found these two factors to be empirically uncorrelated. We interpreted this apparent paradox as follows:

“[B]oth Quality and Intangible Value seek firms with wide moats, which often take the form of intangible assets, such as luxury brands or drug patents. However, building intangible moats requires large upfront investments that can take years to pay off (e.g., advertising, R&D). While Quality seeks firms that are profitable today, Intangible Value seeks those investing in profitability tomorrow.”

We supported this interpretation with the following exhibit, which shows that intangible investment leads to higher profitability, but often requires a multi-year payback period.

Exhibit 24

Intangible Value: The Quality of Tomorrow

Source: S&P, Sparkline. Bars represent the coefficients of regressions where Y = ROE (T+N) - ROE (T) and X = INTANGIBLE (T). N is the number of years in the future. ROE is "return on equity" and INTANGIBLE is "intangible value." Both are cross-sectionally Z-scored. Regression includes a constant. Analysis covers top 1000 U.S. stocks from 3/31/1995 to 3/31/2023. Reproduced from Intangible Value: A Sixth Factor (May 2023).

Together, these two factors capture what Buffett has long sought: businesses with wide, durable moats – whether demonstrated by strong present-day fundamentals or by underappreciated investments driving future profitability.

Buffett as a Factor Investor 🤖

Buffett's philosophy can be distilled into a simple, rules-based strategy focused on stocks with high Intangible Value and Quality. As we’ll show, this parsimonious two-factor model can largely replicate Buffett’s returns.

While our earlier analysis used long-short factors, this is impractical for most investors. Instead, we create a simpler portfolio that allocates 50% to Intangible Value Stocks and 50% to Quality Stocks. We define each group as the top 20% of the stock universe on the relevant factor.

Exhibit 25

Buffett Long-Only Factor Portfolio

Source: Sparkline.

The next exhibit shows the performance of this Buffett replication strategy. Since 1978, the two-factor portfolio has delivered returns similar to Buffett’s actual portfolio, with both handily beating the S&P 500.

Exhibit 26

Buffett Factor Replication (1978-2024)

Source: Berkshire Hathaway, SEC, S&P, Sparkline. Red line: returns of a portfolio of 50% quality stocks + 50% intangible value stocks, each defined as the top 20% of the U.S. stock universe on their respective metrics, cap-weighted. Blue line: S&P 500 total return. Green line: returns of Berkshire’s stock portfolio, estimated using positions from regulatory filings and annual reports. No transaction or financing costs. From 12/31/1977 to 12/31/2024. See important backtest disclosure below.

In the next exhibit, we zoom in on the more recent period since 1995, focusing on relative returns. As the black line shows, Berkshire’s stock portfolio produced roughly the same return as the S&P 500. However, this masks a key divergence, which becomes clear once we decompose the spread into its two underlying components.

As the yellow line shows, the two-factor portfolio has continued to consistently beat the S&P 500. Unfortunately, as the gray line shows, these gains have been offset by underperformance in Berkshire’s actual holdings relative to the two-factor portfolio. This is consistent with our earlier finding that Buffett has delivered negative alpha relative to his factor exposures since 1995.

Exhibit 27

Buffett Factor Replication (1995-2024, Relative Return)

Source: Berkshire Hathaway, SEC, S&P, Sparkline. Black line: Berkshire’s stocks relative to S&P 500. Yellow line: two-factor replication relative to S&P 500. Gray line: Berkshire’s stocks relative to two-factor replication. No transaction or financing costs. From 12/31/1994 to 12/31/2024. See important backtest disclosure below.

However, it’s important to note that much of the academic research on factor investing was not formally published until the 1990s. To his great credit, Buffett “discovered” these factors organically through trial-and-error, putting them into practice at huge scale long before they were embraced by the broad investment community (and we would argue that intangible value still remains an underappreciated factor).

Conversely, our ability to replicate Buffett’s historical returns benefits from hindsight, and we make no claim that this could have been achieved in real time. That said, if the goal is to replicate Buffett’s process moving forward, we believe this two-factor model offers a simple and effective roadmap.

Note: This section draws inspiration from Frazzini et al (2019). In the appendix, we show our results are robust to their setup.

Buffett’s Legacy

Berkshire’s Trillion Problems 🐘

As he steps away, Buffett leaves Berkshire on a high note. Its stock has enjoyed a strong run over the past few years, most recently showing resilience amid rising trade tensions. In fact, Berkshire recently achieved a $1 trillion market cap, making it the tenth-largest company in the world.

However, as Greg Abel takes the reins as Berkshire’s next CEO, he inherits several challenges. As the following exhibit shows, Berkshire has failed to outperform the S&P 500 since 2008 – a sharp reversal after four decades of dominance.

Exhibit 28

Diminishing Returns

Source: Berkshire Hathaway, S&P, Sparkline. From 1/1/1965 to 12/31/2024.

For his part, since at least the 1980s, Buffett has repeatedly cautioned his shareholders not to expect a continuation of Berkshire's past outperformance due to the detrimental impact of its growing capital base. From his 1999 letter:

“Please note that I spoke of hoping to beat the S&P ‘modestly.’ For Berkshire, truly large superiorities over that index are a thing of the past. They existed… because we then had a much smaller capital base, a situation that allowed us to consider a much wider range of investment opportunities than are available to us today.”

At a $1 trillion market cap, Berkshire’s investable universe is effectively limited to large-cap stocks; small-caps no longer move the needle. Moreover, even for those stocks with sufficient capacity, Berkshire must enter and exit carefully to avoid adverse market impact. As Buffett lamented in his latest letter, “[At] Berkshire’s present size … We can’t come and go on a dime. Sometimes a year or more is required…”

This challenge is compounded by a booming stock market. After years of strong returns, valuations among the large-cap U.S. stocks Berkshire favors remain broadly elevated, further limiting the pool of attractive investment opportunities.

In response, Buffett has opted to let cash accumulate rather than relax his standards. As the next exhibit shows, cash now accounts for a record 30% of Berkshire’s total assets. This rising cash pile reflects the growing challenge of maintaining Buffett’s long-standing “margin of safety” in the face of an increasingly constrained opportunity set.

Exhibit 29

Buffett’s Rising Cash Hoard

Source: S&P, SEC, Sparkline. From 12/31/1999 to 3/31/2025.

Expanding the Circle of Competence 🎯

In his 1997 letter, Buffett analogized investing to baseball, arguing that each investor has specific regions of his strike zone where he is more likely to succeed:

“In his book The Science of Hitting, Ted [Williams] explains that he carved the strike zone into 77 cells, each the size of a baseball. Swinging only at balls in his ‘best’ cell, he knew, would allow him to bat .400; reaching for balls in his ‘worst’ spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors.”

So what is Buffett’s sweet spot? As noted, small-caps are structurally off-limits. On top of that, Buffett has imposed two additional constraints of his own. First, Buffett almost exclusively invests in U.S. companies, adhering to his unwavering belief to “never bet against America.” Second, he has long considered tech stocks to be outside his “circle of competence.” In a 1995 lecture, Charlie Munger explained:

“Warren and I don’t feel like we have any great advantage in the high-tech sector… we tend to avoid that stuff, based on our personal inadequacies… You’ve got to play within your own circle of competence.”

The next exhibit shows a stylized depiction of Buffett’s strike zone, with his sweet spot of U.S. large-cap non-tech stocks.

Exhibit 30

Buffett’s Strike Zone

Source: Sparkline.

While only swinging at pitches in his sweet spot has served Buffett well in the past, that opportunity set has narrowed over time. Small-caps are increasingly off-limits due to scale, while old-economy sectors are shrinking as technology eats the world. While it may have been okay to let tech pitches go by in 1995, as the next exhibit shows, technology has since become an unavoidable part of the economy.

Exhibit 31

Technology: No Longer Optional

Source: Ken French, Sparkline. Technology industries include hardware, software, chips, drugs, medeq, labeq, and hlth. From 12/31/1926 of 12/31/2024.

Due to its narrowing opportunity set, Berkshire is finding it increasingly challenging to identify attractive investments. As such, our humble and unsolicited advice for Greg Abel: focus on expanding Berkshire’s “circle of competence.” Broadening the opportunity set increases the odds of encountering a fat pitch. In fact, Berkshire appears to have already begun moving in this direction in recent years.

In tech, we believe Buffett’s large purchase of Apple marked a turning point. After earning Berkshire over $120 billion, Buffett quipped: “Tim Cook has made Berkshire a lot more money than I've ever made.” With Buffett now taking profits on his Apple position, its success may well pave the way for further investment into this growing, intangible-rich sector.

Internationally, Buffett has also taken small but meaningful steps. Starting in 2019, with Abel’s help, he built a 10% stake in five Japanese trading companies. In his last letter, Buffett wrote: “I expect that Greg and his eventual successors will be holding this Japanese position for many decades…”

We believe international expansion is a particularly prudent move. Non-U.S. stocks currently trade at a roughly 50% discount relative to their U.S. peers, providing a richer hunting ground for long-only value investors like Berkshire.

Exhibit 32

The Foreign Discount

Source: Global Financial Data, Meb Faber, Sparkline. CAPE10 is the 10-year cyclically-adjusted price-to-earnings ratio. Chart shows the CAPE10 ratio of international vs. U.S. stock markets. From 1/31/1980 to 12/31/2023.

As Berkshire’s opportunity set continues to narrow, we view expansion into new sectors and geographies not as a departure from Buffett’s philosophy – but as perhaps the only way to preserve it.

Beyond Berkshire 🚀

Of course, it can take many years for a battleship to change course – especially one as large as Berkshire. Fortunately, investors don't actually need to own Berkshire Hathaway stock to get access to Buffett’s timeless wisdom. 

As we’ve shown, Buffett's investment framework can be distilled into a simple, two-factor portfolio consisting of Intangible Value and Quality stocks.

Exhibit 33

Buffett Long-Only Factor Portfolio

Source: Sparkline.

What makes Buffett’s approach powerful is not the specific stocks he picked, but the principles behind them. While these principles were distilled from a track record built mainly in U.S. large-cap non-tech stocks, they generalize far more broadly. In fact, the same two-factor model performs well across a wide range of sectors, sizes, and geographies.

The next exhibit shows how this approach performs in each of the four major regions of the global equity universe. For each region, we plot the excess return of the two-factor model relative to its corresponding benchmark.

Exhibit 34

Expanding the Strike Zone

Source: S&P, Sparkline. Portfolios of 50% quality stocks + 50% intangible value stocks, each defined as the top 20% within their respective universe (e.g., U.S. large tech, International). Charts show returns of these portfolios relative to those of the broader applicable universe. No transaction or financing costs. From 12/31/2009 to 12/31/2024. See important backtest disclosure below.

As it turns out, Buffett’s principles are not only timeless but universal. Intangible Value and Quality have worked well not only in U.S. large-cap non-tech stocks, but also in U.S. large-cap tech, international equities, and U.S. small-caps.

This universality highlights a key point: Buffett’s historical avoidance of technology and international stocks reflects not a limitation in the generalizability of his framework, but a conscious decision to specialize – driven by finite human bandwidth, not lack of opportunity.

We believe this factor-based approach offers an interesting alternative to owning Berkshire directly. Although it forgoes some advantages, most notably access to insurance float, it also sidesteps the diseconomies of a $1 trillion capital base. And while it won’t benefit from Abel’s discretionary stock-picking alpha, we saw earlier that even Buffett struggled to outperform a simple, rules-based implementation of his own strategy at scale.

Moreover, this approach can be applied seamlessly across the entire global equity universe, free from the limits of Berkshire’s size, analyst bandwidth, and institutional constraints. In fact, a wide range of low-cost funds already exist offering long-only exposure to Quality and Intangible Value in key regions. With these factor building blocks, investors can mix and match exposures to meet their goals.

In this way, even as he retires, Buffett’s legacy lives on – not only through Berkshire, but also through the many valuable and implementable frameworks he shared with us.

Conclusion

On a personal note, we are deeply indebted to Buffett, from whom we’ve learned a great deal over the years. To us, his greatest strength is his growth mindset, reflected in his ability to continually evolve his process over a remarkable 70-year career. A close second is his gift for communicating that philosophy clearly in both writings and interviews.

While there will never be another Warren Buffett, many of his most important lessons can be distilled into simple rules-based strategies. Specifically, investors seeking to replicate his long-term success should focus on companies with high Intangible Value and Quality.

Importantly, this approach is not limited to Berkshire’s unique context. It can be implemented using simple, long-only factor building blocks across most major sectors, sizes, and geographies – making Buffett’s timeless wisdom more accessible than ever.

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Factor Definitions

We use the Fama-French definitions for the traditional five factors. Complete definitions for MKT-RF, SMB, HML, and RMW are here and the definition for MOM is here. We construct IHML as follows:

IHML (Intangible High Minus Low) is the average return on the two high intangible value portfolios minus the average return on the two low intangible value portfolios,

IHML = 1/2 (Small High Intangible Value + Big High Intangible Value)

            - 1/2 (Small Low Intangible Value + Big Low Intangible Value)

The Big universe is of the top 1,000 U.S. stocks by market cap, while the Small universe is the next 2,000. High Intangible Value is the top 33% and Low Intangible Value is the bottom 33% of stocks in the applicable universe. Portfolios are cap-weighted.

Buffett’s Alpha Replication

The “Berkshire Factor Analysis” section draws inspiration from a well-known paper by researchers at the investment firm AQR called Buffett’s Alpha. In this paper, the authors ran a similar analysis of Buffett’s stock portfolio but with AQR’s preferred factors.

In addition to using slightly different formulations of the standard factors, AQR introduces a new factor – Low Beta (“Betting Against Beta,” or BAB) – that favors stocks with lower statistical risk (i.e., beta) based on trailing returns. In the next exhibit, we incorporate AQR’s Low Beta factor into our model (bottom panel), comparing the results to our original model (top panel).

Exhibit A1

Buffett’s Factor Summary Table (7 vs. 6-Factor Model)

Source: Berkshire Hathaway, SEC, S&P, Ken French, AQR, Sparkline. Coefficients from a regression of the seven factors (and sector controls) on Berkshire’s stock portfolio returns, estimated using positions from regulatory filings and annual reports. Sector controls use 12 industry portfolios from Ken French. Statistically significant variables at 1% bolded. Data bars truncated at -0.3 and 0.3. Return contributions based on above factor loadings. Total excess return is Berkshire’s return net of market beta exposure. Sector returns are summed across all industry portfolios. Alpha is total excess return minus sum of factor contributions. No transaction or financing costs. See important backtest disclosure below. Daily returns as of 4/30/2025.

Broadly speaking, the results are the same whether or not we include the Low Beta factor. Across all four specifications, all of the original six factors retain coefficients between -0.04 and +0.04 of their starting values after adding Low Beta. As for Low Beta itself, the factor is significant in the first column, but it loses significance once we add sector controls and focus on the more recent period.

Disclaimer

This paper is solely for informational purposes and is not an offer or solicitation for the purchase or sale of any security, nor is it to be construed as legal or tax advice. References to securities and strategies are for illustrative purposes only and do not constitute buy or sell recommendations. The information in this report should not be used as the basis for any investment decisions. 

We make no representation or warranty as to the accuracy or completeness of the information contained in this report, including third-party data sources. This paper may contain forward-looking statements or projections based on our current beliefs and information believed to be reasonable at the time. However, such statements necessarily involve risk and uncertainty and should not be used as the basis for investment decisions. The views expressed are as of the publication date and subject to change at any time.

Backtest Disclosure

The performance shown reflects the simulated model performance an investor may have obtained had it invested in the manner shown but does not represent performance that any investor actually attained. This performance is not representative of any actual investment strategy or product and is provided solely for informational purposes.

Hypothetical performance has many significant limitations and may not reflect the impact of material economic and market factors if funds were actually managed in the manner shown. Actual performance may differ substantially from simulated model performance. Simulated performance may be prepared with the benefit of hindsight and changes in methodology may have a material impact on the simulated returns presented. 

The simulated model performance is adjusted to reflect the reinvestment of dividends and other income. Simulations that include estimated transaction costs assume the payment of the historical bid-ask spread and $0.01 in commissions. Simulated fees, expenses, and transaction costs do not represent actual costs paid.

Index returns are shown for informational purposes only and/or as a basis of comparison. Indexes are unmanaged and do not reflect management or trading fees. One cannot invest directly in an index.

No representation or warranty is made as to the reasonableness of the methodology used or that all methodologies used in achieving the returns have been stated or fully considered. There can be no assurance that such hypothetical performance is achievable in the future. Past performance is no guarantee of future results.