Saturday, November 13, 2010

Buffett Partnership Letters: 1967

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.

Short-Term Results Can Conflict With Long-Term Results

Buffett discusses a security in which his fund invested that shows his temperament is quite different from that of his partners/investors. Even though Buffett's fund owned shares of this company, he hoped that the price of these securities would fall further. This would, of course, hurt short-term performance, but would allow him to purchase more shares at an even bigger discount. The shares ended up rising, which contributed significantly to results; but Buffett laments that had the price stayed lower, long-term results would have been much more pleasing.

Reporting Period Matters

Continuing on the theme of long-term investing, Buffett discusses the usefulness of more frequent reports (i.e. shorter reporting periods). Because some of his investments produce wild swings in price within short periods, shorter reporting periods would be more likely to capture these swings rather than the long-term trend. For this reason, Buffett calls frequent reporting "foolish and potentially misleading in a long-term oriented business."

Enjoy What You Do

In one 1967 letter, Buffett actually reduces his annual return goals. Instead of buying and selling businesses purely for profit, he seeks other, more satisfying objectives, even if they are not as profitable. For example, Buffett would prefer to use partnership funds "where I liked the people and the nature of the business" even though "more money would be made buying business at attractive prices, then reselling them."

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