The market is unkind to the impatient. To endure violent market travails with robotic control is a cruel quest. Even more complex is mastering the counter-intuition that calls rising stocks a sell, and declining equities a buy. Inarguably, no one has mastered the art of "wait" like Warren Buffett. Widely known is the wealth generated from his Berkshire Hathaway outfits. In less circulation are the original partnerships that served as training ground for what would be accomplishments of unimaginable scale.
Buffett Partnership, Ltd. was in operation from 1957-1969. It consisted of a small group of invited partners for whom Buffett invested, and managed assets. During this time, multiple well-written partnership letters were produced. A diligent reading of his words almost 50 years later leaves one with a new found respect, not for his wealth, but his mind. If success leaves clues, Buffett has unknowingly provided a forward-leaning past. He sheds a wisdom that could seamlessly be inserted into a Wharton classroom. Let’s magnify closer his inadvertent investment guide.
Mercurial Market Sentiment
We may be viewing today’s market technology through a wildly deceptive filter. True “special situation” research has been replaced with merger and statistical arbitrage boxes. These tools can now analyze at light speed, make trades and book profits before releasing the “Enter” button. This haste to make and take profits is antique. While there was no official short-term, intraday market strategy as defined today, there were hasty “month” and “quarter investors” going back to the 1950’s. The Buffett partnership letters from 1957-1959 dealt strongly with this dangerous approach. His critique has condemning implications for today’s over-hyped, steroidal lust for market action.
Buffett termed this group of pop investors, “mercurially-tempered.” He goes into detail on the negative affects such short-term sentiment has on market intrinsic value. An educated, fundamental approach to undervalued securities makes no allowance for the masses that will justify investing at any cost. The general public has an untamed bias towards making profits quickly and effortlessly. More prudent investors must bear the weight of this foolish approach, and the only weapon of defense is time. In many ways, the strategy of patience that matured in the Ltd. partnership resulted as much from Buffett’s attention to human psychology, as from his market intuition.
The overarching recommendation in this slice of letters is leveraging time, time and time again. Although the solicited partners in his fund were sophisticated investors, he was constantly reminding each to avoid the luring tendency of instant results from long-term money.
Genetically-tanned Sheep
It isn’t totally clear when and where the principle of averaging down became a genetically-tanned sheep, but it needs re-examination. Partnership letters from year end 1959 to year end 1960 detail pain-staking, elongated processes where long positions were accumulated as they declined in price. Other notable purchases included equity in the Commonwealth Trust Co., a well-managed bank in Union City, New Jersey. With this one transaction, Buffett seemingly violated numerous tenets of prudent portfolio management. But as the world would later find out, when you’re Buffett, the rules follow you.
The partnership’s holding in Commonwealth represented 20% of total assets. His stated timeline for a solid return on the investment was 1 to 10 years. Initial reasons for this purchase were; very strong defensive market characteristics, solid value build up at a satisfactory pace and evidence to the effect that value would eventually be unlocked. Sounds generic to those of us worth less than $60 billion. So how does he, with confidence, buy into companies everyone else views as pedestrian? And how do these companies, more times than not, make him a fortune? Patience. A year after its purchase, the Commonwealth position was liquidated at $80 on cost basis of $51.
Conservatism, a Synthetic Short
The last few market years have been very revealing as to the flaws in long/short portfolios. Regardless of asset class, strategy, systems or the skill of personnel…consistently beating the market is a monumental task. For the modern money manager, it has become common to directly take short positions. Before shorting became confused with manager competence, the old-fashioned method was supremely more effective. Partnership letters from 1961-1962 highlight the genius of the Buffett methodology. His conservatism was his hedge. Often mentioned in letters during this period was the fact he expected to do better in bear market years than in bull markets. In other words, his long holdings were particularly designed to first mitigate losses, allowing profits to take care of themselves. This is exactly how the returns played out in the first 4 years of partnership.
1957 Buffett 10% vs. Dow -8%
1958 Buffett 40% vs. Dow 38%
1959 Buffett 25% vs. Dow 20%
1960 Buffett 23% vs. Dow -6%
A stated preference was to “sustain the penalties of over-conservatism than face the consequence of errors, perhaps with permanent capital loss.” Partners were encouraged to balance their interest in Buffett Ltd. with third party holding that mimicked the Dow. This is because the portfolio was designed to partially, if not wholly be insulated from the behavior of the general market. In other words, this was one of the first absolute return funds.
Care for the Dying….Company
Google earth is so 50 years ago. Because 50 years ago an eerily similar service was being offered by a Nevada company, Sanborn Map. Sanborn was another proportionately “inappropriate” investment. It represented 35% of total portfolio holdings. This company was unique in that it had organized and assembled extremely detailed maps of every city in the United States. One volume of one city could weigh over 50 pounds, do the math. The maps included forensic details of structures, contours and terrain. They even detailed new construction, occupancy changes, fire facilities along with other details considered futuristic at the time.
The information was updated annually until pasting over previous edits became too convoluted. This happened about once every 20 years, at which time another 2,500 pounds of volumes were produced. The greatest value of this service was recognized within the insurance and underwriting industries for the purposes of risk evaluation.
As in all cases, competitors entered the space and all but eliminated Sanborn’s yearly profits. Enter contingency, 20 years prior to the market downturn, Sanborn accumulated an investment portfolio that leveled out the industry softness with market strength. Between board opposition, SEC rulings, and intense negotiations, Buffett acquired nearly 50% or 46,000 shares of Sanborn. The company assets were monetized and its map business re-tooled to be customer-friendly. In the end, Buffet’s care for a dying company again resulted in partnership value.
Remain Calm and No One Gets Hurt
“There will be good and bad years. There is nothing to be gained from getting enthused or depressed about the sequence in which they occur.” This was wisdom offered to partners during the peak performance years between 1961 and 1962. The clear strategy was to underplay great performance with caution, a psychological hedge. It is this type of discernment, among many other acts, that catapulted Buffett into the stratosphere.
We can take away several gems from the Buffett letters. First, do your research, do it again, and then once more. Second, invest with the longest timeframe possible, but be ready to liquidate when respectable profits are in hand. Ironically, his net worth tells us very little about his wealth. His words tell us everything.
Read the original Buffett Partnership letters below...and Subscribe to Independent Financial Advice by Email
Buffett Partnership Letter, Feb 1959
Buffett Partnership Letter, Feb 1960
Buffett Partnership Letter, Jan 1961
Buffett Partnership Letter, July 1961
Buffett Partnership Letter, Jan 1962
Buffett Partnership Letter, July 1962