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Buffett Partnership Letter Series – December 24, 1962
Posted by: Value Study (IP Logged)
Date: June 11, 2013 11:13AM
In this article, we will take a look at the Buffett partnership letter dated Dec. 24, 1962.
This letter mainly deals with some important partnership tax information. However, it also touches upon 1) the performance of the stock market since November 1, 1962, and 2) partner capital accounts and commitment letters.
Since this letter is so short, I have reproduced it in its entirety below. After the text of the letter I will add a few short thoughts, and then close the article.
There are a few noteworthy items in this letter:
· Buffett provided tax information and guidance to his partners (and/or their tax advisors). While this may be something that any investment fund would do, he goes a step further. He advises them how to avoid possible penalties for underestimating tax payments. However, while doing so, I think he may also be providing a strategy for some partners to pay the minimum tax possible while avoiding penalties for underpayment. If partners make tax payments on the basis of actual 1962 tax, that might be less than they would ultimately owe in 1963 taxes if partner capital accounts have increased since 1962 (probable if you’re in the Buffett partnership) and proportionate share of partnership income increases in 1963 (also possible – Note: Partnership returns in all previous years of operation but one were higher). Thus, if partners pay lower tax throughout 1963 than is ultimately due, they can have that unpaid tax money working for their benefit until they have to settle up their 1963 tax bill with the IRS. I just keep thinking: Who wouldn’t want tax advice from Warren Buffett?
· The next item that I wanted to highlight is that Warren Buffett wrote a letter on Nov.1, to his partners. Unfortunately, I don’t have that letter, so I can’t comment on what he wrote on Nov. 1. However, he does say that “our margin of superiority over the Dow has narrowed somewhat” – which must mean that the partnership’s margin of superiority was higher on Nov. 1 than it is on Dec. 24. Buffett notes that as of Dec. 24, the “over-all return from the Dow is about minus 8 1/2%” and he estimates the partnership’s position “at approximately plus 11 1/2%.” This would indicate an approximate 20 percentage point advantage over the Dow as of Dec. 24. Thus, the partnership must have had a greater than 20 percentage point advantage over the Dow as of Nov. 1. Very impressive. (For your reference, as of July 6, 1962, the partnership held a 14.2 percentage point advantage over the Dow -- see my comments on the First Half of 1962).
· Lastly, I just plain find it interesting that, in the same year in which the overall return from the Dow was about minus 8 1/2%, a limited partner in the Buffett partnership could have withdrawn 6% of their 1962 beginning capital account (i.e. 1/2 of 1% monthly = 6% annually) and still had their ending capital account be 4% higher. It just goes to show you that the Buffett partnership really did operate differently than just owning the companies that made up the Dow.
Thanks for reading along. Next time, we’ll take a look at the 1962 partnership letter.
Links to other articles in the Buffett Partnership Series:
Previous article: Buffett Partnership Letter Series – First Half of 1962
Introduction: Buffett Partnership Letter Series
Guru Discussed: Warren Buffett: Current Portfolio, Stock Picks
Stocks Discussed: BRK.A, BRK.B,