Upon reading Warren Buffett’s letters to his hedge fund clients, one can see the vast difference between the way he ran his limited partnerships and Berkshire Hathaway. Buffett started these small partnerships before parlaying the funds into the shell of a textile company, Berkshire Hathaway, and disbanding the partnerships. Those who wanted to stay remained as shareholders of Berkshire Hathaway, and those who did not got their cash back.
The funds were started in the mid-fifties and invested very differently than how he invests today. Oftentimes, up to 35% to 40% of the portfolios were invested in one stock. He classified his investments in three manners. The first were “generals”, which were long-term holds of undervalued companies. The second were “workouts”, which were bankruptcies, mergers, and special situations. The third were “control situations”, which were buying controlling interest and installing his own choice of management. This is like activist investing without all of the name calling and nasty letters. Or maybe there was and we just don’t know about it. Now, Buffett does not get active unless invited by current management.
One interesting investment was Sanborn Map. Sanborn Map sold survey maps but had been in decline for a long time. However, it had an investment portfolio of stocks and the company was worth more broken up than the price the stock was trading for. This is what Marty Whitman of Third Avenue tries to do as he scours the globe looking for these types of deals.
One control situation was his investment in Dempster Mill. Buffett bought controlling interest and installed his own management. Even in his letters forty-five years ago, he was lauding the managers he installed and was making effusive comments about how great they were. Of course, the most famous control situation was Berkshire Hathaway.
There is some ambiguity in the statements he makes now and the way that he ran his business back then. He talks about how he never used margin but he actually did. Sometimes he would borrow up to 25%. He also berates fund managers for the fees they charge but his funds charged 25% of anything over 6%. He also had other fee schedules that would charge 1/3 of all profits (with no bogey). These high fees are where he made his original wealth that would allow him to be the largest shareholder of his current company and one of the wealthiest people in the world.
He has had the same office since the early nineteen sixties. At one point, his father shared the office with him. His father was a stock broker and a U.S. Congressman. He won office when Roosevelt tried to pack the Supreme Court with his own appointees. Roosevelt felt the Justices were slanted against him so he wanted to change the Constitution to allow him to increase the number on the Court. This move upset voters and allowed Republicans a good election year which swept Buffett Senior into office.
The precursor to KPMG audited his partnerships, Peat, Marwick, Mitchell, & Co. I wonder what they would charge now to audit a hedge fund with a few million dollars. It would probably be cost prohibitive.
He mentions “eating his own cooking” when talking about investing in his funds. He and his wife Susie had most of their net worth in these partnerships. What is amazing is that he amassed over $1 million by the time was 30. Not too bad for the early nineteen sixties! Also, he had many family members as clients who provided the seed money for these early partnerships. Buffett started off with $100 in the funds in 1956 before adding his subsequent earnings from fees.
Buffett spends a lot of time in the letters comparing his returns to that of the Dow Jones. He also compares his results to several large mutual funds of the day, one of those being the Massachusetts Investment Trust which is part still part of MFS. From 1957 to 1968, the Dow annualized 9.1%. His limited partners, after fees, got a return of 25.3%.
He wrote about how difficult it is to outperform the Dow long before John Bogle of Vanguard became famous. In one letter, he quotes a professor from the University of Chicago, James H. Lorie. “There is no evidence that mutual funds select stocks better than by the random methods.”
His writings back then were just as humorous as his writings today. He starts out one letter in response to Lydon Johnson’s program “Our war on Poverty was successful in 1965. Specifically, we were $12,304,050 less poor at the end of the year.” On the adverse effects of diversification, he quotes Billy Rose, “You’ve got a harem of seventy girls; you don’t get to know any of them very well.” When talking about a comment he read from an analyst “Securities must be studied on a minute-by-minute program.” Buffett retorted that he felt guilty to take time even for a Pepsi. The irony is that he would go on to be one of the largest shareholders of Coke.
Berkshire Hathaway has grown so large that Buffett cannot make the same investments he did fifty years ago. He would have never made an investment in something like Burlington Northern back then. Then again, it is hard to find companies in American trading at steep values like Sanborn Map. Buffett’s original investment thesis would be best described as a cross between Marty Whitman’s deep value approach, and Carl Icahn’s activist investing, with a huge concentration in one stock.
The funds were started in the mid-fifties and invested very differently than how he invests today. Oftentimes, up to 35% to 40% of the portfolios were invested in one stock. He classified his investments in three manners. The first were “generals”, which were long-term holds of undervalued companies. The second were “workouts”, which were bankruptcies, mergers, and special situations. The third were “control situations”, which were buying controlling interest and installing his own choice of management. This is like activist investing without all of the name calling and nasty letters. Or maybe there was and we just don’t know about it. Now, Buffett does not get active unless invited by current management.
One interesting investment was Sanborn Map. Sanborn Map sold survey maps but had been in decline for a long time. However, it had an investment portfolio of stocks and the company was worth more broken up than the price the stock was trading for. This is what Marty Whitman of Third Avenue tries to do as he scours the globe looking for these types of deals.
One control situation was his investment in Dempster Mill. Buffett bought controlling interest and installed his own management. Even in his letters forty-five years ago, he was lauding the managers he installed and was making effusive comments about how great they were. Of course, the most famous control situation was Berkshire Hathaway.
There is some ambiguity in the statements he makes now and the way that he ran his business back then. He talks about how he never used margin but he actually did. Sometimes he would borrow up to 25%. He also berates fund managers for the fees they charge but his funds charged 25% of anything over 6%. He also had other fee schedules that would charge 1/3 of all profits (with no bogey). These high fees are where he made his original wealth that would allow him to be the largest shareholder of his current company and one of the wealthiest people in the world.
He has had the same office since the early nineteen sixties. At one point, his father shared the office with him. His father was a stock broker and a U.S. Congressman. He won office when Roosevelt tried to pack the Supreme Court with his own appointees. Roosevelt felt the Justices were slanted against him so he wanted to change the Constitution to allow him to increase the number on the Court. This move upset voters and allowed Republicans a good election year which swept Buffett Senior into office.
The precursor to KPMG audited his partnerships, Peat, Marwick, Mitchell, & Co. I wonder what they would charge now to audit a hedge fund with a few million dollars. It would probably be cost prohibitive.
He mentions “eating his own cooking” when talking about investing in his funds. He and his wife Susie had most of their net worth in these partnerships. What is amazing is that he amassed over $1 million by the time was 30. Not too bad for the early nineteen sixties! Also, he had many family members as clients who provided the seed money for these early partnerships. Buffett started off with $100 in the funds in 1956 before adding his subsequent earnings from fees.
Buffett spends a lot of time in the letters comparing his returns to that of the Dow Jones. He also compares his results to several large mutual funds of the day, one of those being the Massachusetts Investment Trust which is part still part of MFS. From 1957 to 1968, the Dow annualized 9.1%. His limited partners, after fees, got a return of 25.3%.
He wrote about how difficult it is to outperform the Dow long before John Bogle of Vanguard became famous. In one letter, he quotes a professor from the University of Chicago, James H. Lorie. “There is no evidence that mutual funds select stocks better than by the random methods.”
His writings back then were just as humorous as his writings today. He starts out one letter in response to Lydon Johnson’s program “Our war on Poverty was successful in 1965. Specifically, we were $12,304,050 less poor at the end of the year.” On the adverse effects of diversification, he quotes Billy Rose, “You’ve got a harem of seventy girls; you don’t get to know any of them very well.” When talking about a comment he read from an analyst “Securities must be studied on a minute-by-minute program.” Buffett retorted that he felt guilty to take time even for a Pepsi. The irony is that he would go on to be one of the largest shareholders of Coke.
Berkshire Hathaway has grown so large that Buffett cannot make the same investments he did fifty years ago. He would have never made an investment in something like Burlington Northern back then. Then again, it is hard to find companies in American trading at steep values like Sanborn Map. Buffett’s original investment thesis would be best described as a cross between Marty Whitman’s deep value approach, and Carl Icahn’s activist investing, with a huge concentration in one stock.
