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.
Add Value Or Don't Do It
Buffett's objective is to achieve long-term returns superior to those of the Dow Jones Industrial Average. If he is unable to do that, he notes that there is no reason for the partnership to exist. Capital would be mis-allocated.
What happens in any one year is irrelevant. In fact, during bull markets, Buffett expects his returns to be lower than those of the market. What's important is whether the partnership can outperform over several years, cumulatively. Buffett is "much more geared towards five year performance, preferably with tests or relative results in both strong and weak markets."
Asset Values Are Sometimes Ignored
Buffett discusses a stock in which he invested 35% of the partner's funds. The company, Sanborn Maps, had lost a lot of earnings power in recent years. However, the company had stockpiled cash during its good years, and therefore had a portfolio of investments adding up to way more than the stock price. The company was on sale for just 70% of its investments (in the form of blue-chip stocks), with the map business thrown in for free!
Patience Is Key
Buffett has begun open market transactions of a "potentially major commitment". As such, he hopes the stock does not increase in price for the next year, in order that he may accumulate more shares. A stagnant stock in which the partnership holds a large position would most assuredly hurt the partnership's short-term performance, but that is irrelevant in the long term.