Buffett Partnership Letters

I recently managed to get a hold of the letters of the original Buffett Partnership. In those letters Warren Buffett describes the investment strategies employed by the partnership, the structure of the partnership as well as the fees that the limited investors paid for performance.

These partnership letters are different than Berkshire Hathaway’s (BRK.a, BRKb) letters to shareholders. Buffett wrote them between 1959 and 1969 and sent them out to the limited investors of the Buffett Partnership. He also provides additional information, which allows aspiring value investors to better understand how the young Buffett made his investment decisions early in his career.

The fees that Buffett was charging his limited partners were solely based on his performance. After all the partnerships merged into a single one in 1962, Buffett would get 25% of any profits over 6% that he partnership generated. In other words, if the partnership earned less than 6%, which was most probably how much it could have earned in fixed income, Buffett would get not compensation.
In one of his 1962 letters to limited partners, Buffett explained in detail the strategies he used to generate excessive returns.

The first group of companies (generals) he invested in was undervalued securities, where his partnership would hold about 5-10% of total assets in 5-6 companies and smaller positions in another ten or fifteen stocks. This group of stocks provided a relative margin of safety when purchased but behaved just like the market. Overall his portfolio in this section was relatively diversified, and but had a very good chance to generate excessive returns in up markets. One site that provides good ideas on generals is Old School Value.

The second group of companies that Buffett Partnership LTD tended to focus on was workouts. Those were stocks affected by corporate events like mergers and acquisitions, spin-offs, reorganizations and liquidations. Buffett did mention that this strategy would produce relatively stable earnings from year to year, which would make this portion of his portfolio outperform the markets in bad years, but underperform in strong markets. An example of such activity is the Pfizer/Wyeth merger announced in January 2009.

The third strategy where the Buffett Partnership concentrated was control situations. These were events where the partnership would initiate a large enough position in a company and try to influence corporate policy. A famous control situation is Berkshire Hathaway (BRK.A), which started out as an undervalued position.

Another important fact is that Buffett put his money where his mouth was – most of his net worth was invested in the Buffett partnership. In my research of successful companies I have found out that management which has a large chunk of their net worth in company stocks, tend to deliver more and are less likely to de-fraud individual investors. Companies where owners hold a large chunk of their net worth include Bill Gates holdings in Microsoft (MSFT), Richard Kinders holdings in Kinder Morgan (KMP) and John D. Rockefeller’s Standard Oil in the late 19th and early 20th century.

You could download them all from this link.

Here’s a timeline of the life of the Buffett Partnership:

1956 - Benjamin Graham retired and closed his partnership. At this time Buffett's personal savings were over $174,000 and he started Buffett Partnership Ltd., an investment partnership in Omaha.
1957 - Buffett had three partnerships operating the entire year.
1958 - Buffett operated five partnerships the entire year.
1959, -The company grew to six partnerships operating the entire year.
1960 -Buffett had seven partnerships operating: Buffett Associates, Buffett Fund, Dacee, Emdee, Glenoff, Mo-Buff and Underwood. In
1962- Buffett merged all partnerships into one partnership.
1966 -Buffett closed the partnership to new money.
1969 - Following his most successful year, Buffett liquidated the partnership and transferred their assets to his partners. Among the assets paid out were shares of Berkshire Hathaway.

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