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.
You Can Be Too Big OR Too Small
This is the year Buffett closes the partnership to new members. He believes the size of the fund (at $46 million at the end of 1965) will now become a disadvantage in generating returns superior to those of the Dow. But he also believes the fund was large enough to take advantage of opportunities he couldn't have otherwise (i.e. control situations); as a result, if the fund were too small, he also doesn't believe it would have had the returns it has had to date.
Buffett is willing to invest up to 40% of the partnership's capital in a single investment. While he would prefer that 50 investments exist of which he is extremely confident in generating excellent returns, he argues that the market just doesn't work like that. In response to those who argue that investors should diversify, he agrees in principle qualitatively, but he has yet to see a convincing argument of just how many stocks constitute proper diversification and why.
Don't Base Investment Decisions On Predictions For The General Market
When the market falls, Buffett gets calls from his investors suggesting he sell stocks until such time as the outlook becomes more clear. This idea sounds ludicrous to Buffett, since he believes one cannot tell in which direction the market is going and therefore it makes no sense to sell undervalued businesses based on some observer's guess. Buffett refers the reader to Ben Graham's The Intelligent Investor for more discussion of this topic.