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.
Low Risk And High Reward Are The Way To Go
Buffett describes an arbitrage situation in which he invested that generated a 20%+ annualized return with little risk. When Union Oil announced it was buying Texas National Petroleum, Buffett noted that there were no anti-trust issues and the transaction was negotiated by controlling shareholders of the target. As such, he appraised the risk at virtually nil.
Don't Invest Based On Rumours
Buffett had heard about the above transaction before it was even announced. Had he invested then, he would have made much more money on this deal. However, he implies that rumours are often wrong, and that investing on this basis is "somebody else's business, not mine".
Stick With It
Buffett describes a situation where he purchased stock in a company trading at a sharp discount to its net current assets that did not see gains for five years! Eventually, Buffett accumulated so many shares that he was in a control situation, and was able to effect change from the inside. This was not his intent from the beginning, but the growth of his fund allowed him to continue to purchase more and more of the undervalued shares, and he did so despite the fact that the company performed poorly for five years in a row.
Large Funds Can't Keep Up
When comparing performance to some of the country's largest funds, Buffett notes that the returns of these funds mostly lag the market. Buffett expects large funds such as these to mostly generate the same returns as that of the market, as all they do is buy the largest companies. It bewilders him that they take credit for their strong returns when the market goes up, for they don't control the market's performance.