"Be fearful when the world is greedy and be greedy when the
world is fearful."
- Warren E. Buffett
Warren Buffett´s career in value investing began around 1950 when he
read Ben Graham ´s Security Analysis and The
Intelligent Investor. After getting turned down by Harvard,
Buffett decided to go to Columbia University for a Master of Economics
degree. A big part of the Columbia choice was because Graham was on
the Columbia Business School Faculty.
Buffett was Graham ´s best student and absorbed everything he could
from the master and expressed an interest in working at Graham-Neumann
Partnerships under Ben Graham. Ben turned him down explaining that
Jews were discriminated against on Wall Street and he wanted to try to
help his fellow Jews by giving them the few jobs available at
Graham-Neumann. Buffett was very disappointed. He returned to Omaha
and became a stock broker - something he never enjoyed. A couple of
years later Graham called and told him there was an opening. Buffett
immediately went to New York with his family without asking Ben
anything about salary or compensation. He worked at Graham-Neumann for
2 years and, when Ben decided to wind down the partnership, he
returned to Omaha and started his first Buffett Partnership in 1956.
He ran the Buffett Partnerships from 1956-1969. The partnerships
started with eight investors putting in a total of $105,000 and
Buffett investing $100. The fee structure of the partnership was
typically no fee until a 6% return. Buffett got ? and
investors got ? of the annual returns above 6%. Buffett
reinvested all his fees back into the partnership.
By the end of 1956, Buffett had five small partnerships running
with $500,000 invested in all of them combined. Buffett had a liquid
net worth of $140,000 in 1956. He put $100 of this into his first
partnership. As a goal Buffett set about trying to beat the DJIA by an
average of 10% a year.
By the end of 1962 he had $7.2 Million under management. Of
this $1 Million was Buffett ´s money. He had 90 investors at this time
- up from the original 7. He merged all the individual partnerships
into one in 1962 and moved out of his home into Kiewit Plaza - the
location that today serves as Berkshire Hathaway headquarters. Warren
made his first investment in Berkshire Hathaway in 1962 at $7.60 per
share. At the time Berkshire was 100% in textile manufacturing - men
´s suit liners to be precise.
By the mid-sixties, Buffett was finding it increasingly
difficult to find value in the markets. In early 1966, he closed the
partnership to new partners.
Buffett informed his partners that some of the new mutual funds
had better results than his. He also told them that his stream of new
ideas was down to a trickle. His perspectives were diametrically
opposed to Wall Street ´s. The markets were climbing; there was lots
of optimism and euphoria in the air. In 1966 and 1967, Buffett bought
his first private businesses for the partnership. He bought 100% of
two retailers for a total of $15 Million. Towards the end of 1967, the
partnership had $65 Million in assets.
Assets under management increased by 59% to $104 Million. He
beat the Dow by over 50%. 1968 turned out to be Buffett ´s best year.
He was, however, finding it very very difficult to find great
investment ideas in the overheated bull market. Buffett had amassed
$25 Million for himself over the preceding 13 years.
In May 1969, Buffett stunned his partners with the news that he
was liquidating the Buffett Partnership. He offered two suggestions to
his limited partners regarding how they might invest the proceeds.
Buffett gave them the name of the Sequoia Fund (www.sequoiafund.com),
which was being setup by his former classmate Bill Ruane. The
partnership liquidated all but two of its investments: Berkshire
Hathaway and Diversified Retailing. Thus, each partner could take
their proportional stake in stock of these two entities or opt to cash
out. Buffett would take the stock. At the time, Buffett encouraged his
limited partners to take stock with the following statement:
I think both securities should be very decent long-term holdings and
I am happy to have a substantial portion of my net worth invested in them.
Thus ended the era of the Buffett Partnerships and began the era of