GS vs. BX - The two famous money managers and how to evaluate them

Goldman Sachs Group (NYSE: GS) and Blackstone Group (NYSE: BX) are two of the most prominent, leading money managers in the U.S. Considering any of these two stocks as your investment should be a safe choice with promising return, but which one is better?
Goldman Sachs was founded by Marcus Goldman in 1869 with its headquater placed in New York City, and later on Samuel Sachs joined the firm. Its function and services include global investment banking, investment management, securities, and other financial services, mostly with institutional clients. As of 2013, report said there are 31,700 people employed by Goldman Sachs worldwide.
Blackstone was founded in 1985 in New York City, 116 years later than Goldman Sachs was. The founders were Peter George Peterson and Stephen A. Schwarzman. The group functions as a multinational private equity, alternative asset management and financial services. Their specialties are in private equity, credit and hedge fund investment strategies. Blackstone grew rapidly and became the largest alternative investment firm in the world in 2013.
While accessing monthly data of Goldman Sachs and Blackstone for the period from 1/2012 to 1/2017, I ran some analysis and found these results:

Both of the two stocks produce higher return than SPY. BX being on the upper hand, also carries more risk (higher standard deviation). If we do a regression to know which one is "better" or "worse" according to CAPM theories, we have the two betas representing systematic risks.

Now this looks interesting. Both of them behave better than the market (> 1). However, it indicates here that GS has higher systematic risk, so it should be "rewarded" with higher returns. However, we clearly see that BX has better average return! In order to find out if any of these stocks really "beat the market", I ran another regression and made some calculations.

Comparing these two, BX has more abnormal return (alpha), and all of its measurements: Sharpe Ratio, Treynor's Measure and Information Ratio are also better. GS on the other hand carries negative abnormal return and thus does not beat the market. With this, the myth is no longer. Blackstone is a better choice for your investment, and this is my recommendation of this week.

Is Berkshire Hathaway Inc. Class A the best choice in the world?

Continuing from last week, our topic today is about Berkshire Hathaway Inc. that is run by the legend Warren Buffett. “Berkshire Hathaway Inc. is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States. The company wholly owns GEICO, BNSF Railway, Lubrizol, Dairy Queen, Fruit of the Loom, Helzberg Diamonds, FlightSafety International, Pampered Chef, and NetJets, and also owns 43.63% of the Kraft Heinz Company, an undisclosed percentage of Mars, Incorporated, and significant minority holdings in American Express, The Coca-Cola Company, Wells Fargo, IBM and Restaurant Brands International.”(Wikipedia) The list goes on and on, just to show how powerful Berkshire Hathaway Inc. is. Needless to say, Warren Buffett is not only a famous investor but also a self-made billionaire who leads Berkshire Hathaway to its glory. We can talk about him or the Berkshire Hathaway Inc. all day long, however, for now we should not indulge ourselves in amazing Mr. Buffett too much, but to keep a cool head and think whether his Class A stock (BRK-A) is really worth it. Let’s see how good BRK-A is in comparison to our last week SPY, and whether to invest in BRK-A or not.

I collected historical monthly data of BRK-A and SPY from Yahoo! Finance, for the period from 01/01/2000 to 01/01/2017. Here is the result after some simple analyzing.

As we can see, when putting together, BRK - A outperforms SPY in return, however it also has higher risk (higher standard deviation). So are you thinking you clearly have an upper hand with BRK - A? Please hold on, because I have an option that is even better than BRK - A!!!

How can I come up with a good option like that? I mix the 2 stocks - BRK-A and SPY - together, by making 100 portfolios that have different allocation of these 2 stocks. Let's see the results in a scatter plot graph:

The X-axis represents risk, or standard deviation, while the Y-axis shows the return. What is the best portfolio among these? I pick the one that has highest risk with lowest return, or in other words, the one that has highest Sharpe Ratio. Here is a part of that mixing result in number:

The one highlighted produces the best outcome (also known as the Optimal Risky Portfolio) and has 87% of BRK - A and 13% of SPY. This is also my recommendation. If you want to invest in BRK-A, please consider buying 87% of BRK - A and 13% of SPY for your portfolio to archieve a better result.

Back to the question from beginning, now we can answer for sure that BRK - A is still not the best investment in the world. By mixing stocks together and create more diversified portfolios, we can always archieve better results than investing in individual stocks.

Data set and calculations can be found here.