Berkshire Hathaway's letters to shareholders are oft-quoted and Berkshire's annual shareholder meeting is well-followed, as value investors try to glean the wisdom of the world's greatest investor. But before he ran Berkshire, Warren Buffett was far less followed and ran his partnership with a sum of money much smaller than he employs today. The issues he faced then are probably far more relevant to the individual investor today than are Berkshire's current challenges. The following series attempts to summarize the key takeaways from Buffett's partnership letters.
No Need to Forecast the Market
Buffett describes the market in the late 1950's as exuberant, as "investors" believe they can make easy money in the market. He does not know how long these speculators will be able to add to their numbers and keep prices moving higher, but he stresses that he does not attempt to forecast the market.
Illiquid Investments Not A Problem
Buffett notes that during bull markets, he would be satisfied just to match the performance of the general market. However, during bear markets he believes it is likely his fund will outperform. This is because he owns a lot of securities that don't move with the general market, including tiny companies that are owned by few people and don't trade often.
Willing to Sell Cheap To Buy Even Cheaper
Buffett describes one particular large investment his fund sold out of in the previous year. Buffett purchased a bank stock for around $50/share that he believed was worth $125/share. (It had earnings of $10/share.) Because he was so confident in his estimates, he wanted the stock price to remain low so that he could continue to purchase shares at a low price. He ended up selling out at $80, which is still undervalued in his estimation, in order to take advantage of an even more compelling situation.
Willingness To Bet Big
Buffett was willing to invest 35% of the partnership's assets in the new situation!
Buffett did not consider this investment more undervalued than some of his other securities. However, becoming the largest shareholder of this stock, which comprised of investments worth substantially more than the stock price, has benefits that he hoped would help realize large profits in the following year.