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We all know Warren Buffett is a great investor. Since he took control of Berkshire Hathaway Inc. in 1965, it has generated 10 times the return of the S&P 500 index.

What’s not so well known, though, is how much Mr. Buffett’s performance has faded in recent years. Since 1998, Berkshire has beaten the S&P 500’s total return by only about a percentage point a year. Over the past 10 years, it has actually lagged behind the benchmark.

Has something permanently changed? Should investors ditch Berkshire and give up on Buffett-style investing?

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Maybe not. A recent analysis by Lawrence Hamtil of Fortune Financial Advisors LLC in Kansas City suggests that one of the biggest drags on Mr. Buffett’s returns over the past two decades was simply Berkshire’s lofty price at the beginning of the period.

To be sure, other factors may have played a role. As Mr. Hamtil notes, it’s possible that Mr. Buffett, at 87, is losing a step. It’s also possible that Berkshire has grown so big that it’s bumping up against the limits of growth.

Warren Buffett, CEO of Berkshire Hathaway Inc.

RICK WILKING/Reuters

But both of those explanations are really just guesses. To pinpoint more exactly what has caused the relative decline in Berkshire’s performance, Mr. Hamtil suggests that investors should begin by looking at what made Mr. Buffett so successful in the first place.

The most convincing account is provided by AQR, the Greenwich, Conn.-based money manager. It reverse-engineered the great investor’s returns back in 2012. The AQR researchers concluded that Mr. Buffett’s superb track record over the decades was largely a matter of consistently betting on cheap, safe, quality stocks, then adding a hefty dollop of financial leverage – that is, other people’s money.

If you accept this explanation, Mr. Buffett’s greatest stroke of genius was figuring out how to structure his investment vehicle. Berkshire can employ generous amounts of leverage because of its insurance “float” – the difference between the premiums that the company collects from insurance holders and the claims it pays out. The float provides an inexpensive source of funds that allows Berkshire to amplify the returns from cheap, safe, quality stocks.

So is Mr. Buffett really the all-seeing investor of legend? It depends on your perspective. He was perhaps the first to realize you can do well by raising money through cheap channels, such as insurance float, then using that money to hold a basket of the market’s most reliable stocks. This qualifies as genius.

But the notion that Mr. Buffett has a unique ability to spot winning businesses doesn’t bear up so well under the AQR spotlight. The authors of the paper created a hypothetical portfolio that picked stocks according to the factors they identified as being important to Mr. Buffett – that is, cheap, safe, quality names. They then examined what would have happened if you had leveraged these holdings in the same manner as Berkshire has in the past. They found this mechanical portfolio would have produced much the same results as Mr. Buffett’s stock picks did in reality.

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The AQR findings don’t detract from the brilliance of Mr. Buffett’s original insight. However, they suggest other investors can do much the same thing. “If one had applied leverage to a portfolio of safe, high-quality, value stocks consistently over this time period, then one would have achieved a remarkable return, as did Buffett,” the researchers write. “Of course, he started doing it half a century before we wrote this paper!”

One problem for Buffett followers today is that the financial industry is busily devising more and more ways to bet on the factors he favours. Any retail investor can buy exchange-traded values that automatically select stocks with low volatility, or value, or quality characteristics. All of this raises the competition for Mr. Buffett’s typical investments.

But Mr. Hamtil’s analysis suggests investors shouldn’t assume the allure of these stocks is exhausted. While value stocks and quality stocks are out of favour – a trend that is likely temporary – low volatility stocks have continued to shine.

The issue is how much you should pay to bet on these factors. Mr. Hamtil suggests a big reason for Berkshire’s lacklustre couple of decades is how expensive the company had become in the late 1990s, when enthusiastic investors bid it up to more than 2.5 times book value. “Not even Mr. Buffett himself can overcome such a high hurdle as an extremely high valuation when it comes to delivering subsequent excess returns,” he writes.

Does that mean Berkshire is now more attractive? Mr. Hamtil doesn’t offer an opinion. But at only about 1.4 times book value, it's certainly cheaper than it was in the late 1990s. If you buy the notion that Berkshire is really just a cleverly constructed machine for making leveraged bets on a few key factors, now may be a good time to bet on its rebound potential.

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