If you invested with Warren Buffett in 1957, and until his partnership was dissolved in 1969, an investment of 10,000 USD would have grown into more than 160,000 USD.
If, on the other hand, you had invested in the US stock index Dow Jones, it would only have grown to a bit more than 25,000 USD.
Warren Buffett began investing for friends and family in 1957, and he got a stunning 25.9% compounded annual return.
This is referred to as the Warren Buffett “partnership.”
How did his partnership work, and what can we learn from it.
What can be copied? What did he do?
Here are the ten most important takeaways.
1. You Can Start Small
In 1956, he set up his first partnership.
The partners consisted of seven friends and acquaintances: his sister and her husband, an aunt, his father-in-law, an old roommate, the roommate’s mother, and Warren Buffett’s own lawyer.
These seven people put in 105,000 USD, which corresponds to about one million in today’s value. Buffett only put in 100 USD.
More partners were gradually added. His old professor Ben Graham closed down his fund and pointed to Warren Buffett as an option.
In early 1957, the different partnerships he ran amounted to 300,000 USD. This corresponds to around 3 million USD today.
What can we learn from this?
It’s fine to start small with friends and family. People will be attracted when you do well.
- He Didn’t Have a Track Record
He had studied with and worked for Benjamin Graham, but Warren Buffett had no real track record himself.
He still had to prove that he was able to manage other people’s money.
Benjamin Graham recommended him, but only one or two took the bait initially because he looked like an 18-year-old kid.
As the money manager Lou Green said at the time (as quoted in Roger Lowenstein’s book Buffett: The Making of an American Capitalist),
“Graham-Newman can’t continue because the only guy they have to run it was this kid named Warren Buffett. And you’d ride with him?”
3. These Were His Terms
One of Buffett’s first outside partners was a urologist named Edwin Davis.
Here’s the deal they cut:
- Davis, as a limited partner, would get all of the profit up to 4%.
- The remaining profit would be shared like this: 75% to Davis and 25% to Warren Buffett.
- Warren Buffett didn’t get any management fee, which was and still is very unusual. A hedge fund today usually takes a 2% management fee of the whole amount and 20% of all profits. This means that Buffett would get no money to cover the costs or nor salary if he didn’t make more than 4%.
- Davis could only withdraw money once a year – on the last day of the year.
- Warren Buffett would only make a yearly summary of the result and disclose nothing about how the money was invested.
4. This Was His Goal
Warren Buffett’s target was set relative to the Dow Jones stock index. In the beginning, his goal was to beat the Dow Jones by 10%.
Starting in 1967, when the market was a strong bull market, Buffett became nervous. From then on, he aimed at beating the Dow Jones by 5% or getting 9% in average annual return – whichever he hit first.
5. This is How Well He Did
In his first full year, 1957, he got a return of 10%, while the Dow Jones fell 6%.
I’m curious – so how much did he earn in the first year of investing other people’s money?
The first 4% was “free,” so he only earned 25% of 6% of 300,000.
That means he earned 4,500 USD. In the beginning, running the partnership was not a fat deal.
This is how it went afterwards:
1958: + 40.9% against Dow Jones +38.5%
1959: +25.9% against Dow Jones +19.9%
1960: +22.8% against Dow Jones -6.3%
1961: +45.9% against Dow Jones +22.2%
1962: +13.9% against Dow Jones -7.6%
1963: +38.7% against Dow Jones +20.6%
1964: +27.8% against Dow Jones +18.7%
1965: +47.2% against Dow Jones +14.2%
1966: +20.4% against Dow Jones -15.6%
1967: + 36% against Dow Jones 19%
1968: +59% against Dow Jones 9%
1969: + 7 % against Dow Jones -11 %
If you had invested 10,000 USD in the Dow Jones in 1957, it would have given you a profit of 15,260 USD. If you had, on the other hand, let Warren Buffett invest your savings, it would have given you a return of 150,270 USD – even after Buffett’s pay.
His partnership had an average annual return of 29.5% against Dow Jones 7.4% in the period.
(All data from Roger Lowenstein’s book Buffett – the Making of an American Capitalist)
6. He Was Frugal and Worked From His Bedroom
Warren Buffett was very concerned about keeping the cost of the partnership down.
He did the bookkeeping himself and worked from the family bedroom to save money.
It wasn’t until 1962 that he rented an office and hired a secretary.
Also, Warren Buffett didn’t use many experts.
He probably felt that outside input from experts confused him more than it clarified matters.
He has made major acquisitions without the help of experts. Other funds would conduct due diligence. He did his own due diligence in his mind and settled matters with a handshake.
7. He Educated His Partners
The purpose of the annual letters to his partners seemed to be to keep their interests aligned with his.
As many of the partners were friends, family, neighbors, and acquaintances (plus a growing number of outsiders), the tone was informal.
He spoke to them as one who teaches his disciples. He has said somewhere that he imagined he wrote to his sister.
The original partnership letters are a really worthwhile read even today.
He also invited the partners home for dinners in groups, evenings that the partners looked forward to.
8. His Investment Ideas Were Kept Secret
Benjamin Graham gave all students and co-investors plenty of stock tips, but Warren Buffett didn’t.
He treated his investment ideas as trade secrets.
At one point, he was so secretive that he didn’t even talk about work with his wife Susan.
If a partner showed up at the office unannounced to ask about the investments, they would be thrown out of the partnership.
Just like that.
There were no exemptions.
9. He Saw Stocks as Businesses
He avoided trying to predict how the stock market would do.
He also avoided being influenced by other people’s analyses and opinions.
He analyzed the long-term perspectives of each business – not the stock movements.
He assessed a stock based on whether he would want to own the entire company without being able to sell the stocks again.
He asked himself if he would buy the shares if he were forced to buy the entire business.
He also asked himself whether he would buy the shares if he landed on an island and couldn’t check the stock for ten years.
10. His Portfolio Was Unusual and Concentrated
He sometimes bought entire companies that were not listed on the stock exchange.
This was unusual for a fund manager.
He also invested large amounts in individual companies.
At one point, 40% of the portfolio was invested in one share, American Express.
What about spreading the risk?
Warren Buffett calls diversification “risk management for dummies.” He believes in being thorough and focused.
Knowing what you invest in is better risk management, he says.
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