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Charlie Munger 1 (C) ValueWalk 2015 - All rights Reserved WARREN BUFFETT

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Warren Buffet 10 Part Series ValueWalk

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Charlie Munger Charlie Munger1 11(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT Charlie Munger11 2(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT PART ONECharlie Munger33(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT The First PartnershipFollowing the my last ten part series on the life and career ofCharlie Munger, Vice-Chairman ofBerkshire Hathaway Corporation and Warren Buffetts right hand man, in this series Im taking a look at Warren Buffetts early career.BeforeWarrenBuffettbecamewell-known,andbeforeheacquiredBerkshireHathawayInc.(NYSE:BRK.A) (NYSE:BRK.B), he ran a number ofpartnerships, investing the money offamily, friends and outside investors. Its these partnerships that helped build his reputation and provided the funds for him to ultimately acquire Berkshire Hathaway.This is the story ofWarren Buffetts early career, the years that laid the foundations for him to become the worlds greatest investor.Warren Buffett -- Part one: The First PartnershipIn1952,WarrenBuffettwenttoworkwiththegodfatherof valueinvesting,BenjaminGrahamattheGraham-Newman partnership. Here, Warren Buffett put his education from the Columbia University to work and learnt his trade as a value investor.Unfortunately,Graham-Newmanpartnershipcloseditsdoorsduring1956soBuffett,tookhissavings(around $174,000) and started the frst Buffett Partnership Ltd in Omaha.When he frst set out to invest money for others, Warren Buffett knew that he wouldnt be able to stand criticism from his partners ifstocks he selected started to fall. As Buffett was going to be the sole manager ofthe partnerships run by Buffett Partnership Ltd., there was nowhere to hide ifhe failed. With this being the case, Buffett only invited family and friends to invest in his frst partnership -- Buffett Associates, Ltd.In total, six other partners, plus Warren Buffett invested in Buffett Associates, Ltd. raising $105,100 in capital.TwomorepartnershipsweresetupinthemonthsafterBuffettAssociates,Ltd.startedtradingbringingthetotal number ofpartnerships controlled by Buffett to three by the end of1956.On September 1st, 1956, he raised $120,000 from Homer Dodge, a physics professor who had attended Har vard University. With it, Buffett setup Buffett Fund, Ltd.Then, on October 1, 1956, Warren founded another partnership for a friend ofhis, John Cleary, who washis fathers secretary in Congress. (Buffetts father served in the House ofRepresentatives.) It had $55,000in capital.These partnerships immediately made money for investors in their frst full year oftrading. As Warren Buffett wrote in his second annual letter to limited partners at the end of1957:In 1957 the three partnerships which we formed in 1956 did substantially better than the general market. At the beginning ofthe year, the Dow-Jones Industrials stood at 499 and at the end ofthe year it was at 435 for a loss of64 points. Ifone had owned the Averages, he would have received 22 points in dividends reducing the overall loss to 42 points or 8.470%... Charlie Munger44(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT All three partnerships held the same securities with similar weightings. Ill cover the stocks Warren was buying later in the series.All three ofthe 1956 partnerships showed a gain during the year amounting to about 6.2%, 7.8% and 25% on year end 1956 net worth. Naturally a question is created as to the vastly superior performance ofthe last partnership, particularly in the mind ofthe partners ofthe frst two. This performance emphasizes the importance ofluck in the short run, particularly in regard to when funds are received. The third partnership was started [in late] 1956 when the market was at a lower level and when several securities were particularly attractive. Because ofthe availability offunds, large positions were taken in these issues. Whereas the two partnerships formed earlier were already sub-stantially invested so that they could only take relatively small positions in these issues. -- Warren Buffett annual letter to partnersThree types of tradeIts here that I should introduce Warren Buffetts early trading strategies.Buffett had three main strategies: Firstly, Buffett has his generals, which were usually undervalued securities where he had nothing to say about corporate policies. Typical value plays in other words. Generals made up the bulk ofBuf-fetts portfolio.Then there were the work-outs, undervalued securities where corporate action was required for the market imbal-ance to correct itself. And fnally the control situations where Buffett aimed to infuence policies ofthe company in order to unlock value. In a number ofcases, Buffetts generals and work-outs quickly turned into control situations when Buffett either ran out ofpatience or decided that management had to go.At the end of1956, we had a ratio ofabout 70-30 between general issues and work-outs. Now it is about 85-15. During the past year we have taken positions in two situ-ations which have reached a size where we may expect to take some part in corporate decisions. One ofthese positions accounts for between 10% and 20% ofthe portfolio ofthe various partnerships and the other accounts for about 5%. Both ofthese will probably take in the neighborhood ofthree to fve years ofwork but they presently appear to have potential for a high average annual rate ofreturn with a minimum ofCharlie Munger Charlie Munger5 55(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT The compensation structure for Warren Buffetts partnerships was fairly simple. Investors received 6% interest on their money from the partnership and 75% ofprofts above this threshold. Ifthere were a loss, Buffett took 25% ofit himself. That means that even ifBuffet broke even; he lost money.Whats more, Buffetts obligation to pay back losses was not limited to his capital; it was unlimited.Buffett also had a little partnership with his father, called Buffett & Buffett. Warren charged no fee for the manage-ment ofthis partnership.risk. While not in the classifcation ofwork-outs, they have very little dependence on the general action ofthe stock market. Should the general market have a substantial rise, ofcourse, I would expect this section ofour portfolio to lag behind the action ofthe market. -- Warren Buffett 1957 annual letter to partners.Charlie Munger55 6(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT PART TWOCharlie Munger Charlie Munger7 77(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT ExpandingWarren Buffetts frst three partnerships, set up during, 1956 outperformed the market signifcantly during their early years and attracted plenty ofattention. As a result, more potential investors began to approach Warren and ask him to manage their money.So,tomeetdemandduringJuneof 1957,BuffettstartedanotherpartnershipcalledUnderwood,withoneof the original partners ofBuffett Associates, Ltd., Elizabeth Peters, with $85,000. Then, on August 5, 1957, Warren Buffett started his ffth partnership, which was called Dacee. Eddie Davis and his wife Dorothy Davis had Buffett manage $100,000 for themselves and their three children. The year after, on May 5, 1958, Dan Monen and his wife, Mary El-len, formed the basis ofWarrens next partnership, called Mo-Buff.They put in $70,000.The fve partnerships that were in operation during 1958 posted returns of36.7% to 46.2%. As Buffett wrote in his annual letter to partners at the end of1958:Thelattersentencedescribesthetypeof yearwehadin1958andmyforecast workedout.TheDow-JonesIndustrialaverageadvancedfrom435to583which, after adding back dividends ofabout 20 points, gave an overall gain of38.5% from the Dow-Jones unit. The fve partnerships that operated throughout the entire year obtained results averaging slightly better than this 38.5%. Based on market values at the end ofboth years, their gains ranged from 36.7% to 46.2%. Considering the fact that a substantial portion ofassets has been and still is invested in securities, which beneftverylittlefromafast-risingmarket,Ibelievetheseresultsarereasonably good. I will continue to forecast that our results will be above average in a declining or level market, but it will be all we can do to keep pace with a rising market. -- Warren Buffett 1958 annual letter to partners.Warren BuffettHowever, with the market rising, Warren Buffett was struggling to fnd opportunities, and its at this point that his investing methods started to take on an activist style.THE CURRENT SITUATIONThehigherthelevelof themarket,thefewertheundervaluedsecuritiesandIam fnding some diffculty in securing an adequate number ofattractive investments. I would prefer to increase the percentage ofour assets in work-outs, but these are very diffcult to fnd on the right terms.Charlie Munger77 8(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT The seventh Buffett partnership was called Glenoffand consisted of$50,000 contributed by a local businessman and two sons in one ofOmahas most prominent families. It was established in February of1959.Based on the compensation structure, as covered within the frst part ofthis series, by 1959, Buffett, who had only contributed $100 to each partnership, had earned fees, counting reinvested earnings, of$83,085 and owned approxi-mately 9.5% ofthe combined partnerships due to his performance.Compounding growthFrom the outset, Warren Buffett knew and understood that his focus should be to outperform the leading indexes on a long-term time horizon....Ihavepointedoutthatanysuperiorrecordwhichwemightaccomplishshould not be expected to be evidenced by a relatively constant advantage in performance compared to the Average. Rather it is likely that ifsuch an advantage is achieved, it will be through better-than-average performance in stable or declining markets and average, or perhaps even poorer- than-average performance in rising markets. I would consider a year in which we declined 15% and the Average 30% to be much superior to a year when both we and the Average advanced 20%. Over a period oftime there are going to be good and bad years; there is nothing to be gained by getting enthused or depressed about the sequence in which they occur. The important thing is to be beating par; a four on a par three hole is not as good as a fve on a par fve hole and it is unrealistic to assume we are not going to have our share ofboth par threes and par fves. The above dose ofphilosophy is being dispensed since we have a number ofnew partners this year and I want to make sure they understand my objectives, my measure ofattainment ofthese objectives, and some ofmy known limitations -- Warren Buffett 1960 letter to partners.Totheextentpossible,therefore,Iamattemptingtocreatemyownwork-outsby acquiring large positions in several undervalued securities -- Warren Buffett 1958 annual letter to partners.My continual objective in managing partnership funds is to achieve a long-term per-formance record superior to that ofthe Industrial Average. I believe this Average, over a period ofyears, will more or less parallel the results ofleading investment companies. Unless we do achieve this superior performance there is no reason for existence ofthe partnerships. -- Warren Buffett 1960 letter to partners.How was Buffett going to achieve this goal? By not losing money. Heres an extremely valuable piece ofadvice from the Sage ofOmaha, to any investors just starting out. (This was written to inform several new Buffett partners what they should expect when investing in the partnerships.)Charlie Munger99(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT Charlie Munger1010(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT PART THREECharlie Munger1111(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT GEICOAs more investors focked to Warren Buffetts partnerships during the late 50s and early 60s, his investing prowess re-ally started to show through. By 1960, Buffett had seven partnerships operating and had produced a cumulative return for partners of141% over three years from 1957 to 1960.These returns were generated by using a combination ofdeep value, and activist investing. In his trademark style, Buf-fett would buy a large percentage ofhis target company, with a large portion ofpartnership assets, isolating his good ideas and reaping the rewards as their valuations returned to normal levels.Warren Buffett details some ofhis biggest investments at the time in his letters to partners ofthe Buffett Partner-ships, from 1956 onwards. But he was also recommending investments as early as 1951.Early recommendationAt only 20 years ofage, the then unknown Warren Buffett penned an article that was published in the Commercial and Financial Chronicle. The article was titled The Security I Like Best and was published on Thursday, December 6, 1951. Buffett was pitching the Government Employees Insurance Company, or GEICO that had gone public three years before.Buffettrecognizedthefactthat,atonlyeighttimesearnings,GEICOsvaluationdidnotrefect: thetremendous growth potential ofthe company.The term growth company has been applied with abandon during the past few yearstocompanieswhosesalesincreasesrepresentedlittlemorethaninfationofpriceandgeneraleasingof businesscompetition.GEICOqualifesasalegitimate growth companyProbably the biggest attraction ofGEICO is the proft margin advantage it enjoys. The ratio ofunderwriting proft to premiums earned in 1949 was 27.5% for GEICO as compared to 6.7% [for the sector average]...During the frst halfof1951, practi-cally all insurers operated in the red on casualty lines...Whereas GEICOs proft mar-gin was cut to slightly above 9%...Earnings in 1950 amounted to $3.92 as contrasted to $4.71 on the smaller amount ofbusiness in 1949. These fgures include no allowance for the increase in the un-earned premium reserve which was substantial in both years. Earnings in 1951 will be lower than 1950, but the wave ofrate increases during the past summer should evidence themselves in 1952 earnings. Investment income quadrupled between 1947 and 1950, refecting the growth ofthe companys assets.At the present price ofabout eight times the earnings of1950, a poor year for the industry, it appears that no price is being paid for the tremendous growth potential ofthe company.Charlie Munger1212(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT You can fnd the whole article here.This article gives an invaluable insight into Warren Buffetts investment process. Even though he was only 20 at the time, he was still able to sniffout a bargain in the market and conduct the rigorous, but simplistic analysis that he has become so well known for over his career.Warren Buffett pumped around 65% ofhis own personal wealth (around $13,000) into GEICO stock and he later wrote that with GEICO he was able to develop a depth ofconviction which I have felt few times since about any security.No mentionAt only 20 years ofage, the then unknown Warren Buffett penned an article that was published in the Commercial and Financial Chronicle. The article was titled The Security I Like Best and was published on Thursday, December 6, 1951. Buffett was pitching the Government Employees Insurance Company, or GEICO that had gone public three years before.Buffettrecognizedthefactthat,atonlyeighttimesearnings,GEICOsvaluationdidnotrefect: thetremendous growth potential ofthe company.This was the frst time that Buffett wrote about GEICO, but it certainly wasnt the last. Within a year-and-a-halfofBuffetts initial purchase, GEICOs share price doubled as growth continued.However, though Buffett owned GEICO in his personal accounts as early as 1951, he didnt start buying the stock for his partnerships or Berkshire, until several decades after. Theres no mention ofGEICO in Buffetts letters to partners from 1956 to 1970.Charlie Munger1313(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT Buffett makes his moveWarren Buffett didnt make his move on GEICO until it was teetering on the edge ofbankruptcy. A combination ofoverexpansion, infation, federal price controls, bad risks and questionable accounting had foored GEICO, and during 1975; the company reported its frst loss in 36 years. At was at this time that Shelby Davis, another renowned value investor, specializing in insurance stocks, started buying.GEICOundertookaheftyrestructuringintheyearsafter1975;DavidByrnewaspoachedfromGEICOsfellow insurer, Travelers Insurance, where he was executive vice president to initiate a turnaround. 3,000 ofGEICOs 7,000 employees were laid off. The company withdrew from markets with overbearing regulatory regimes, hiked rates by as much as 40% in some regions and tightened its insurance criteria.Unfortunately, even these drastic actions failed to shore up GEICOs balance sheet, and David Byrne has to take dras-tic action. He persuaded 27 competing insurance companies to contribute capital to help avert a GEICO bankruptcy, and along with the help ofWarren Buffett, issued $75 million in convertible preferred stock.It was at this point that Warren Buffett started buying GEICO common at $2 per share, investing an initial sum of$4.1 million. Five years later, GEICO stock hit $15; Buffett kept buying. Finally, in 1995 Berkshire purchased the rest ofGEICO for a total of$70 a share.Charlie Munger1414(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT PART FOURCharlie Munger1515(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT Unlocking Value So that you may better understand our method ofoperation, I think it would be well to review a specifc activity of1958. Last year I referred to our largest holding which comprised 10% to 20% ofthe assets ofthe various partnerships. Warren Buffett letter to partners 1958Theres a stark contrast between Warren Buffetts early investments and those oflater years. It was in 1972 that Warren Buffetts strategy really started to change, from a deep value activist approach to that oflong-term quality and value.This change was inspired by the $25 million purchase ofSees Candies. A deal Buffett was pushed into by Charlie Munger, as the two investors started to become friends and build a strong working relationship.Still, its Warren Buffetts early investments that are really interesting. Indeed, many view Warren Buffett as a passive deep value investor, whos incredible skill (and possibly some luck) at picking investments helped him to get to where he is today.But that is not the case. Many ofBuffetts early successes were driven by activist tactics. Buffett would devote most ofhis partners assets to one company, buy a controlling stake and then push for change. Granted, most ofthe compa-nies he targeted were trading below their net asset value and were deep value opportunities anyway. But Buffett wasnt prepared to wait for the market to correct the valuation gap.Commonwealth BankOne ofthe frst investments Warren Buffett wrote about wasnt an activist situation. This situation was Common-wealth Bank, which Buffett started buying during 1958. At $50 per share, Commonwealth was trading at a measly fve times earnings and had had an intrinsic value $125 per share computed on a conservative basis.Over time, approximately ten years, Buffett computed that the banks intrinsic value could rise to $250 per share. So, this was both a deep value and growth play.Over a period of12 months, Buffett acquired around 12% ofthe bank at a price of$51 per share, which made Buffett and his partners the banks second largest shareholder. The bank only had around 300 shareholders in total, the shares traded only around two times per month.However, during the latter halfof1958, Warren Buffett sold his entire commonwealth holding.Late in the year we were successful in fnding a special situation where we could becomethelargestholderatanattractiveprice,sowesoldourblockof Com-monwealth obtaining $80 per share although the quoted market was about 20% lower at the time.It is obvious that we could still be sitting with $50 stock patiently buying in dribs and drabs, and I would be quite happy with such a program although our perfor-mance relative to the market last year would have looked poor. The year when a situation such at Commonwealth results in a realized proft is, to a great extent, Charlie Munger1616(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT In other words, Buffett took his near 60% return -- in under a year -- and started to gobble up the stock ofanother deep value opportunity.Clearly, Buffetts involvement in Commonwealth did have some impact on the banks stock price. Its here that it starts to become clear that Buffetts success has not been wholly down to his stock selection strategies. The fve Buffett partnerships that were operating throughout the year gained between 36.7% to 46.2%, outperforming the Dow-Jones Industrial Average, which returned 38.5%. Buffett was paying close attention to the index at the time. He wanted to outperform, the reason he took his gains in Commonwealth and snapped up another opportunity.fortuitous.Thus,ourperformanceforanysingleyearhasseriouslimita-tions as a basis for estimating long term results. However, I believe that a program ofinvesting in such undervalued well protected securities offers the surest means oflong term profts in securities.Sanborn MapThe other opportunity was a company called Sanborn Map and at the end of1959, Warren Buffett had ploughed a total of35% ofpartnership assets into Sanborn stock.Warren Buffetts Sanborn trade (I consider Sanborn to be a short-term trade rather than the long-term investments Buffett has become known for) is well documented. Buffett hoped the situation would work out within a few years, and during 1960 he was proved right.As I said above, the trade is well documented so I wont go into too much detail here. Sanborn was a mapping com-pany that had, over the years, built a sizeable equity and bond portfolio with excess cash. At the time Warren Buffett started buying Sanborn stock, during 1958, the map business was evaluated at a minus $20 with the stock portfolio trading at only $0.70 on the dollar. Sanborn had a sales volume ofabout $2 million per year and owned about $7 million worth ofmarketable securities.Warren Buffett managed to get his hands on a large chunk of15,000 Sanborn shares from the widow ofa deceased president ofthe company. Her son had tried and failed, to instigate change at the company. Through open market purchases, Buffett increased his holding to 24,000 shares and pushed for change. To avoid a proxy fght, manage-ment caved, and Buffett got his way. The company was separated, and value was unlocked.About 72% ofthe Sanborn stock, involving 50% ofthe 1,600 stockholders, was exchanged for portfolio securities at fair value. The map business was left with over $l,25 million in government and municipal bonds as a reserve fund, and a potential corporate capital gains tax ofover $1 million was eliminated. The remaining stockholders were left with a slightly improvedassetvalue,substantiallyhigherearningspershare,andanincreaseddividend rate.A great example ofWarren Buffetts early activist activities.Charlie Munger1717(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT PART FIVECharlie Munger1818(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT A Lollapalooza Buffetts decision to limit his activities to a few kinds and to maximize his atten-tion to them, and to keep doing so for 50 years, was a lollapalooza. Buffett suc-ceeded for the same reason Roger Federer became good at tennis. Buffett was, in effect, using the winning method ofthe famous basketball coach, John Wooden, who won most regularly after he had learned to assign virtually all playing time to his seven best players. -- Charlie MungerWarren Buffett adopted the same mentality from an early age. I dont really have enough space to explore the topic in full here but ifyoure looking for further research on the topic, Michael J. Mauboussin has written an interesting paper on position sizing. He writes that:Position size is extremely important in determining equity portfolio returns. Two portfolio managers with the same list and number ofstocks can generate mean-ingfully different results based on how they allocate the capital among the stocks. Great investors dont stop with fnding attractive investment opportunities; they know how to take maximum advantage ofthe opportunities. As Charlie Munger says, good investing combines patience and aggressive opportunism.Warren Buffetts success over the years has been driven, in part, by his asset allocation strategy. This is extremely ap-parent in his early partnership letters.Position sizingIndeed, throughout the late 50s and 60s, Warren Buffett ploughed most ofthe assets ofhis partnerships into several keyinvestments;CommonwealthBank,SanbornMap,DempsterMillandBerkshireHathaway.Theseinvestments could account for as much as a third (or more) oftotal partnership assets at any one time.As the quote from Warren Buffetts right-hand man, Charlie Munger, at the top ofthis article indicates, it was this asset allocation strategy, coupled with Buffetts conviction in his ideas that helped turbocharge returns over the years.Its here that Im going to deviate slightly from Warren Buffetts history and look at the topic ofasset allocation and position sizing in general.Activist investorIfWarren Buffett had used a traditional asset allocation model, as advocated by his mentor, Benjamin Graham would he have been able to achieve the same returns over his career? It is unlikely. That being said, its unlikely that Buffett would have taken these large positions ifit were not for the fact that he was trying to gain control ofeach company.Indeed, in every case where more than a ffth ofpartnership assets were pumped into one stock, Buffett sought to take control ofthe company to unlock value -- somethingIll explore in part six ofthis series.This investing philosophy has more in common with activist investors, the likes ofCarl Icahn and Bill Ackman, rather than Graham alumni and Superinvestors ofGraham-and-Doddsville. In fact, it could be said that Buffett was, from Charlie Munger1919(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT To suppose that safety-frst consists in having a small gamble in a large number ofdifferent [companies] where I have no information to reach a good judgment, as compared with a substantial stake in a company where ones information is ad-equate, strikes me as a travesty ofinvestment policy.What about Warren Buffetts altered perception ofrisk? Well, heres a quote from Berkshire Hathaways 2007 annual meeting:The measurement ofvolatility: its nice, its mathematical, and wrong. Volatility is not risk. Those who have written about risk dont know how to measure risk. Past volatility does not measure risk. When farm prices crashed, [farm price] volatility went up, but a farm priced at $600 per acre that was formerly $2,000 per acre isnt riskier because its more volatile. [Measures like] beta let people who teach fnance use the math theyve learned. Thats nonsense. Risk comes from not knowing what youre doing. Dexter Shoes was a terrible mistake-I was wrong about the business, but not because shoe prices were volatile. Ifyou understand the business you own, youre not taking risk. Volatility is useful for people who want a career in teaching. I cannot recall a case where we lost a lot ofmoney due to volatility. The whole concept ofvolatility as a measure ofrisk has developed in my lifetime and isnt any use to us. -- Warren Buffettthe very start ofhis career, an activist investor.And to understand Warren Buffetts position sizing strategy you have to understand his perception ofrisk.Warren Buffett on riskJohn Maynard Keynes wrote in 1942 that:To put it simply, ifyou really know and understand the company youre taking a position in, the size ofthe position as a percentage ofoverall assets shouldnt matter.Charlie Munger2020(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT PART SIXCharlie Munger2121(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT Method Of OperationBy 1961, Warren Buffett had achieved a compounded gain of181.6% for his partners over the space offour years. To celebrate this fact, and point out how rare such outperformance was, Warren Buffett presented the following chart in his annual 1961 letter to partners.This chart shows the performance ofBuffetts limited partnerships compared to the Dow, the two largest common stock open-end investment companies at the time and the two largest closed-end investment companies.When Warren Buffett presented this data, the Massachusetts Investors Trust has net assets ofabout $1.8 billion; In-vestors Stock Fund about $1 billion; Tri -Continental Corporation about $ .5 billion; and Lehman Corporation about $350 million; or a total ofover $3.5 billion. At the beginning of1962 net assets belonging to the Buffett partnership group amounted to $7,178,500.00.Method of operationWarren Buffett notes that his method ofoperation is very different to that ofmutual funds and he then goes on to break down the various categories oftrades that he undertook for partners -- I touched on this briefy in part four. Buffett also uses this section ofthe letter to lay out his position sizing strategy.The frst section consists ofgenerally undervalued securities (hereinafter called generals) where we have nothing to say about corporate policies and no timeta-ble as to when the undervaluation may correct itself. Over the years, this has been our largest category ofinvestment, and more money has been made here than in either ofthe other categories. We usually have fairly large positions (5% to 10% ofour total assets) in each offve or six generals, with smaller positions in another ten or ffteen.Buffett notes that the generals tended to behave very much in sympathy with the Dow. Nevertheless, the generals as a group put in the best performance over the long-term.Our second category consists ofwork-outs. These are securities whose fnan-cialresultsdependoncorporateactionratherthansupplyanddemandfactors created by buyers and sellers ofsecurities. In other words, they are securities with a timetable where we can predict, within reasonable error limits, when we will get how much and what might upset the applecart. Corporate events such as merg-ers, liquidations, reorganizations, spin-offs, etc., lead to work-outs. An important Charlie Munger Charlie Munger22 2222(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT Work-outs, Buffett goes on to note, tend to move irrespective ofthe Dow. In a year where the Dow falls by a large percentage, the work-outs tended to help improve Buffett outperform. Further, Buffett notes that these work-outs were the one situation where it was permissible to use borrowed money to improve results:Overtheyears,work-outshaveprovidedoursecondlargestcategory.Atany given time, we may be in ten to ffteen ofthese; some just beginning and others in the late stage oftheir development. I believe in using borrowed money to offset a portion ofour work-out portfolio since there is a high degree ofsafety in this category in terms ofboth eventual results and intermediate market behavior...My self-imposed limit regarding borrowing is 25% ofpartnership net worth. Often-times we owe no money and when we do borrow, it is only as an offset against work-outs.And Warren Buffetts fnal category ofinvestments at the time was control situations. These situations saw Buffett take a large, controlling stake in the target company and attempt to infuence corporate policies.These positions tended to be the biggest single positions in Buffetts portfolio. His activist approach to control situ-ations allowed Buffett to take huge bets on these opportunities as the chances ofthe trade turning against him were almost non-existent.Dempster MillIn some cases, Buffetts generals turned into control situations and Dempster Mill Manufacturing Company was one such investment.Dempster Mill is an interesting case study ofBuffetts style. The position was frst purchased in the mid-50s, and Buf-fett brought his way onto the board in late 1961. As Buffett explains in his 1962 letter to partners:source in recent years has been sell-outs by oil producers to major integrated oil companies.Dempsterisamanufacturerof farmimplementsandwatersystems withsales in 1961 ofabout $9 million. Operations have produced only nominal profts in relation to invested capital during recent years. This refected a poor management situation, along with a fairly tough industry situation. Presently, consolidated net worth (book value) is about $4.5 million, or $75 per share, consolidated working capital about $50 per share, and at yearend we valued our interest at $35 per share. While I claim no oracular vision in a matter such as this, I feel this is a fair valua-tion to both new and old partners. Certainly, ifeven moderate earning power can be restored, a higher valuation will be justifed, and even ifit cannot, Dempster shouldworkoutatahigherfgure.Ourcontrollinginterestwasacquiredatan average price ofabout $28, and this holding currently represents 21% ofpartner-ship net assets based on the $35 value.Charlie Munger2222 23(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT After several months ofpushing for change at Dempster, Warren Buffett grew tired ofmanagements lack ofaction. So, on April 17, 1962, Buffett met with turnaround guru Harry Bottle, and by April 23rd Harry was sitting in Demp-sters presidents chair.Harry Bottle got straight to work, sold Dempsters unproductive assets and freed up capital. The change in Demp-sters asset value in just 12 months is highly impressive, as the two tables below show.Dempster Mill balance sheet 1962 (pre-Harry)Charlie Munger2424(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT PART SEVENCharlie Munger2525(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT Work-OutsAs covered in the last part ofthis series, Warren Buffett had three different types ofinvestments when he was manag-ing his partnerships. These three categories were: generals, workouts and control situations.Workouts, or special situations (corporate events such as mergers, liquidations, reorganizations, spin-offs,) are by far the most interesting ofthis group.Due to their nature, Buffett was able to predict what kind ofa return he would generate from each workout, over a specifed period oftime, and to some extent, this reduced risk.The gross profts in many workouts appear quite small. A friend refers to this as getting the last nickel after the other fellow has made the frst ninety-fve cents. However,thepredictabilitycoupledwithashortholdingperiodproducesquite decent annual rates ofreturn. This category produces more steady absolute prof-its from year to year than generals do.Warren Buffett considered some ofhis workouts to be so low risk -- Warren Buffett used the term high degree ofsafety -- that he often borrowed money to increase returns.In his 1962 letter to investors, Warren Buffett gave a detailed explanation ofhis workout plays undertaken during the year. And at the time, Buffett was fnding deals in the oil sector. Specifcally, sell-outs by oil producers to major integrated oil companies.Warren Buffett: Borrowing to increase returnsAt any one time, Buffett was involved in fve to ten workouts. Some just beginning and others in the late stage oftheir development.During1962,Buffettspartnershipsborrowedatotalof $1,500,000tofundworkoutsituations.Partnershipassets stood at $9.4 million at the end of1963. Buffetts self-imposed borrowing limit was 25% ofpartnership funds. In addition to using leverage, Buffett also made use ofshort selling during 1962 to hedge against market volatility while he was waiting for a workout to play out:One run-of-the-mill workout opportunity that Warren Buffett took was Texas National Petroleum, a workout that arose from Buffetts number one source ofworkouts, sellouts ofoil and gas producing companies.Early in 1962, Warren Buffett notes, there were rumors that TNP was discussing a deal with Union Oil ofCalifornia, although he failed to act on the opportunity. (Buffett makes it quite clear that he never acts on rumors). Unfortunately, this cost him a substantial amount ofmoney. Nonetheless in early April 1962 a deal was announced.TNP had three types ofsecurities:1.6 % debentures. Ofthe $6.5 million ofthese outstanding, Buffett purchased $264,0002.3.7 million shares ofcommon. 40% ofwhich were owned by directors. Buffett purchases 64,0353.650,000 warrants to purchase common stock at $3.50 per share. Buffett purchased 13% ofthis issue.The risk ofstockholder disapproval was nil. The deal was negotiated by the controlling stockholders. There were no antitrust problems. The only problem was the obtaining ofthe necessary tax ruling. This delayed the deal but did not Charlie Munger2626(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT WhenwetalkedwiththecompanyonApril23rdand24th,theirestimatewas that the closing would take place in August or September. The proxy material was mailed May 9th and stated the sale will be consummated during the summer of1962 and that within a few months thereafter the greater part ofthe proceeds will be distributed to stockholders in liquidation. As mentioned earlier, the estimate was $7.42 per share. Bill Scott attended the stockholders meeting in Houston on May 29th where it was stated they still expected to close on September 1st.Thefollowingareexcerptsfromsomeof thetelephoneconversationswehad with company offcials in ensuing months:On June 18th the secretary stated Union has been told a favorable IRS ruling has been formulated but must be passed on by additional IRS people. Still hoping for ruling in July.On July 24th the president said that he expected the IRS ruling early next week.OnAugust13ththetreasurerinformedusthattheTNP,UnionOil,andUSC people were all in Washington attempting to thrash out a ruling.On September 18th the treasurer informed us No news, although the IRS says the ruling could be ready by next week.The ruling was received in late September, and the sale closed October 31stThe fnancial results ofTNP were as follows:(1)Onthebondsweinvested$260,773andhadanaverageholdingperiodofslightly under fve months. We received 6 % interest on our money and realized a capital gain of$14,446. This works out to an overall rate ofreturn ofapproxi-mately 20% per annum.(2) On the stock and warrants we have realized a capital gain of$89,304, and we have stubs presently valued at $2,946. From an investment or $146,000 in April, our holdings ran to $731,000 in October. Based on the time the money was em-ployed, the rate or return was about 22% per annum.threaten it. Warren Buffett describes the whole deal in his letter to partners:Charlie Munger2727(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT Charlie Munger2828(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT PART EIGHTCharlie Munger2929(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT Shaking Up Berkshire HathawayOn May 11, 1965 an article appeared in the The New York Times Company (NYSE:NYT) titled: TEXTILE CON-CERN CHANGES CONTROL; Berkshire Hathaway Policy Row Spurs Resignations. The article cited a curious case at a small, 76-year old textile company called Berkshire Hathaway. Two top offcers ofthe company had tendered their resignations, following, a policy disagreement with certain outside interests who have purchased suffcient stock to control the company.Seabury Stanton, president, a director and chairman ofthe executive committee, along with his son, John K. Stanton, vice president, treasurer and director were the offcers handing in their notices. The article in the New York Times continues:Although he did not state who had bought control ofthe company, Malcolm G. Chace Jr., chairman, said yesterday that a large interest had been purchased by Buf-fett Partnership Ltd., an Omaha investment company.Stealth positionBuffett frst mentioned Berkshire by name to his partners at the end of1965. However, the Buffett Partnerships had owned the stock, as one ofBuffetts generals since 1962. In true early-Buffett style, Buffett had become bored ofBerkshire Hathaways management, buying up a controlling stake in the company to help enforce change. Warren Buffett gave a full run-down ofthe Berkshire situation within his January1966 letter to partners:Although this article was published the frst halfof1965, Warren Buffett himselfdid not mention Berkshire Hatha-way by name in his letters to partners until November 1, 1965.The partnership owns a controlling interest in Berkshire Hathaway Inc., a public-ly-traded security...asset values and earning power are the dominant factors affect-ing the valuation ofa controlling interest in a businessOur purchases ofBerkshire started at a price of$7.60 per share in 1962. This price partially refected large losses incurred by the prior management in closing some ofthe mills made obsolete by changing conditions within the textile busi-ness (which the old management had been quite slow to recognize). In the postwar period the company had slid downhill a considerable distance, having hit a peak in 1948 when about $29 1/2 million was earned before tax and about 11,000 work-ers were employed. This refected output from 11 mills. At the time we acquired control in spring of1965, Berkshire was down to two mills and about 2,300 em-ployees. It was a very pleasant surprise to fnd that the remaining units had excel-lent management personnel, and we have not had to bring a single man from the outside into the operation. In relation to our beginning acquisition cost of$7.60 per share (the average cost, however, was $14.86 per share, refecting very heavy purchases in early 1965), the company on December 31, 1965, had net working capital alone (before placing any value on the plants and equipment) ofabout $19 per share. Berkshire is a delight to own.Charlie Munger3030(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT But this wasnt the whole story. The New York Times article, mentioned above sheds some more light on the situa-tion:In discussing the resignations ofthe two Stantons. Mr. Buffett said that Seabury Stanton was planningto resign at the end ofthe year; its possible that his son might have hoped to succeed him.It was learned, however, from Wall Street sources that Seabury Stanton and the Buffettgroupmighthavebeenatoddsoverthespeedwithwhichunproftable millsshouldbeclosed.Inaddition,Mr.BuffettandMr.Cowinweresaidtobe anxious to have younger men at the company to take over a bigger role in its man-agement. Berkshire Hathaway, a major northern mill, turned a proft in the latest fscalyear,endedSept.30,1964forthefrsttimeinfouryears.Thecompanys sales however, have slipped in each year but one since fscal 1959.Trouble aheadAfter Seabury Stanton left, Berkshire experienced two good years; 1965 and 1966. But by July 1967 performance had deteriorated once again. Buffett wrote in his July 1967 letter to partners:B-H is experiencing and faces real diffculties in the textile business, while I dont presentlyforeseeanylossinunderlyingvalues.Isimilarlyseenoprospectof a good return on the assets employed in the textile business. Therefore, this segment ofour portfolio will be a substantial drag on our relative performance (as it has been during the frst half)...Ofcourse, ifWarren Buffett had been working with Charlie Munger at the time, (Charlie Munger didnt join forces with Buffett on a full-time basis until 1978 when he closed his own investment partnerships) he would have been able to see the dire situation that Berkshire was in.[The] textile business in New England was totally doomed because textiles are congealed electricity and the power rates were way higher in New England than they were down in TVA country in Georgia. A totally doomed, certain-to-fail busi-ness, -- SourceCharlie Munger3131(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT PART NINECharlie Munger3232(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT Berkshire Hathaway Starts To GrowAfter shaking up Berkshire Hathaway in the mid 60s, by mid-1967, after two years ofgood performance the textile business was beginning to deteriorate once again. As covered in part eight ofthis series, within his July 1967 letter to partners Buffett wrote that:B-H is experiencing and faces real diffculties in the textile business while I dont presentlyforeseeanylossinunderlyingvalues.Isimilarlyseenoprospectof a good return on the assets employed in the textile business. Therefore, this segment ofour portfolio will be a substantial drag on our relative performance (as it has been during the frst half)...National IndemnityTheNationalIndemnityacquisitionsturnedouttobetwoof Buffettsgreatestacquisitionsever.Today,basedon GAAP principles, these businesses are worth $111 billion, a value which exceeds that ofany other insurer in the world.Further, as Buffett made a note ofin Berkshires 50th-anniversary letter to shareholders National Indemnity provided Buffett with more than just an insurance business:But by this point Berkshire Hathaway was evolving. At the time, Buffett controlled around 70% ofBerkshire, so his partnerships effectively owned the business. During March 1967, Berkshire acquired National Indemnity and its sister company, National Fire & Marine, for $8.6 million.Through another entity, Diversifed Retailing, which Buffett and his partners owned 80% of, Buffett purchased As-sociated Cotton Shops. There was also Hochschild Kohn as mentioned earlier in this series.One reason we were attracted to the property-casualty business was its fnancial characteristics: P/C insurers receive premiums upfront and pay claims later. In ex-treme cases, such as those arising from certain workers compensation accidents, payments can stretch over many decades. This collect-now, pay-later model leaves P/C companies holding large sums money we call foat that will eventually go to others. Meanwhile, insurers get to invest this foat for their beneft. Though individual policies and claims come and go, the amount offoat an insurer holds usually remains fairly stable in relation to premium volume...-- Warren Buffett-Berkshire 2014 letter.Changing strategyAt the end of1967, Warren Buffett wrote to his partners informing them that the market was changing.Investing had become a popular past time, and more money was fowing into the market, chasing a shrinking number ofopportunities. Whats more, to meet the rising demand for brokerages services, the number ofanalysts on Wall Street was exploding. The number oflow-risk, high-return deep value opportunities available was shrinking.So Buffett started to invest differently.Charlie Munger Charlie Munger33 3333(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT National Indemnity and Diversifed Retailing were acquired as part ofthis changing strategy. Both companies achieved high returns on capital and generated plenty ofexcess cash for Buffett to grow his expanding Berkshire with. In Buf-fetts Jan 1969 letter to partners he wrote:ParticularlyoutstandingperformanceswereturnedinbyAssociatedCotton Shops, a subsidiary ofDRC run by Ben Rosner, and National Indemnity Com-pany, a subsidiary ofB-H run by Jack Ringwalt. Both ofthese companies earned about 20% on capital employed in their businesses. Among Fortunes 500 (the largest manufacturing entities in the country, starting with General Motors Com-pany (NYSE:GM)), only 37 companies achieved this fgure in 1967, and our boys outshonesuchmildlybetter-known(butnotbetterappreciated)companiesas International Business Machines Corp. (NYSE:IBM), General Electric Company (NYSE:GE), General Motors, Procter & Gamble, DuPont, Control Data, Hewl-ett-Packard, etcIstillsometimesgetcommentsfrompartnerslike:Say,Berkshireisupfour points - thats great! or Whats happening to us, Berkshire was down three last week? Market price is irrelevant to us in the valuation ofour controlling interests. WevaluedB-Hat25at yearend 1967 when the market was about 20 and31 at yearend 1968 when the market was about 37. We would have done the same thing ifthe markets had been 15 and 50 respectively. (Price is what you pay. value is what you get). We will prosper or suffer in controlled investments in relation to the operating performances ofour businesses - we will not attempt to proft by playing various games in the securities markets.Ifanything, this confrms Buffetts switch from activist hedge fund manager to businessman. And during 1969, Berk-shire Hathaway really started to grow. By the end ofthe year, the company had three main operating businesses:...the textile operation, the insurance operation (conducted by National Indem-nity Company and National Fire & Marine Insurance Company, which will be col-lectively called the insurance company) and the Illinois National Bank and Trust Company ofRockford, Illinois. It also owns Sun Newspapers Inc, Blacker Print-ing Company and 70% ofGateway UnderwritersWinding downBytheendof 1969,Buffetthadcommencedthewind-downof hispartnershipsandtheBerkshireHathawaywe know today was starting to take shape...stay tuned for the fnal part ofthis series.Charlie Munger Charlie Munger33 3433 34(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT PART TENCharlie Munger Charlie Munger34 3534 35(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT The following conditions now make a change in yardstick appropriate:1.The market environment has changed progressively over the past decade, resulting in a sharp diminution in the number ofobvious quantitatively based investment bargains available;2.Mushrooming interest in investment performance...has created a hyper-reactive pattern ofmarket behavior against which my analytical techniques have limited value;3.The enlargement ofour capital base to about $65 million when applied against a diminishing trickle of good investment ideas has continued to present...problems4.My own personal interests dictate a less compulsive approach to superior investment results than when I was younger and leaner.The frst point was Buffetts main concern. The numbers deep value opportunities in the market had dwindled by 1969; it was becoming increasingly diffcult for Buffett to make calculated, low-risk bets with a high percentage ofpartners capital. Buffett identifed two key reasons for this decline in bargain issues. Firstly, the number oftakeovers was increasing -- takeovers often focused on bargain issues. Secondly, the exploding ranks ofsecurity analysts that have helped investors identify opportunities with ease, eliminating the need to do the legwork themselves. At the end of1968, Buffett wrote that he was unable to fnd any potential ideas for his 1969 watch list.A hyper-reactive pattern ofmarket behavior was another driving force behind Buffetts decision to move away from the deep-value side ofinvesting. He wrote:IhavealwayscautionedpartnersthatIconsideredthreeyearsaminimumin determining whether we were performing. Naturally, as the investing public has taken the bit in its teeth the time span ofexpectations has been consistently re-duced to the point where investment performance...is being measured yearly, quar-terly, monthly, and perhaps sometimes even more frequently.In my opinion what is resulting is speculation on an increasing scale....I do believe certain conditions that now exist are likely to make activity in mar-kets more diffcult for us [in] the intermediate future.Warren Buffett Abandons Deep ValueOn October 9 1967, Warren Buffett wrote to the partners ofhis Buffett Partnership group announcing that he was changinghisstrategy.Uptothisdate,Buffetthadsoughtoutdeep-valueplays,withaself-imposedperformance hurdle of10% above the Dows annual return. This was becoming increasingly diffcult to achieve for the following reasons, as laid out in Buffetts letter:Charlie Munger3535 36(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT ...Iamlikelytolimitmyself tothingswhicharereasonablyeasy,safe,proftable and pleasant...The long-term downside risk will not be less; the upside potential will merely be less....out longer term goal will be to achieve the lesser of9% per annum or a fve per-centage point advantage over the Dow. Thus, ifthe Dow averages -2% over the next fve years, I would hope to average +3% but ifthe Dow averages +12%, I will hope ofachieve an average ofonly +9%.Deteriorating On May 29 1969, Buffett followed up his frst letter, issued at the beginning ofOctober 1967. Buffett noted that the situation in the markets had deteriorated further:...opportunities for investment...have virtually disappeared, after rather steadily dry-ingupoverthepasttwentyyears...our$100millionof assetsfurthereliminatesa largeportionof thisseeminglybarreninvestmentworld,sincecommitmentsofless than about $3 million cannot have a real impact on our overall performance...this virtually rules out companies with less than about $100 million common stock at market valueAlong with these factors, Buffett noted once again that the markets were becoming increasingly short-term focused, and he was struggling to devote 100% ofhis time to the running ofthe Partnership interests. With these problems laid out, Buffett revealed to his partners that he intended to announce formally his resignation before the end of1969.This was the end ofthe Buffett Partnerships and the beginning ofBerkshire Hathaway as we know today.A retreatSo,anincreasingnumberof investorschasingadwindlingnumberof securities,coupledwithincreasingshort-termism, a rising value ofasset under management and request for more personal time were the key reasons behind Buffetts decision to retreat from the deep-value game. At the same time, Buffett reduced his yardstick performance water mark.Charlie Munger3737(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT PART ELEVENCharlie Munger3838(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT The End Of An EraAbouteighteenmonthsagoIwrotetoyouregardingchangedenvironmental and personal factors causing me to modify our future performance objectives.TheinvestingenvironmentIdiscussedatthattime(andonwhichIhavecom-mented in various other letters has generally become more negative and frustrat-ing as time has passedThe October 9th, 1967 letter stated that personal considerations were the most importantfactoramongthosecausingmetomodifyourobjectives...publishing aregularrecordandassumingresponsibilityformanagementof whatamounts to virtually 100% ofthe net worth ofmany partners, I will never be able to put sustained effort into any non-BPL activity.Therefore, before yearend. I intend to give all limited partners the required for-mal notice ofmy intention to retire... -- Warren Buffett May 29th, 1969 letter to partners.During November of1969, Warren Buffett formally announced his intention to wind up his investment partnerships. He made this decision for several reasons. Firstly, as mentioned above, undervalued securities were becoming harder to fnd. Secondly, the size ofthe partnership was becoming a problem.At the time he announced his retirement, the partnerships were managing over $100 million in assets, with gains ofover $40 million during 1968 alone. And thirdly, managing Berkshire alone with its subsidiaries as well as partnership assets, become too much for Buffett.But for those that wanted to keep their money in the market, Buffett offered a replacement; Bill Ruane. Bill Ruanes managed his own set ofpartnerships and in the years to the handover achieved returns of40% on average per annum for shareholders. Ifyou want to fnd out more about Bill Ruane, his investment process and returns for partners, head over the ValueWalk Bill Ruane resource page.Outsized returnsTherehasalwaysbeenplentyof talkaboutWarrenBuffettsabilitytocompoundshareholderequityatBerkshire, although its the returns that he achieved during his years running the partnerships that are really impressive.Over ten years, Buffett turned less than $1 million into more than $100 million, achieving a compound annual return of31.6% during the period.Charlie Munger3939(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT This record eclipses Berkshires growth.Buffett summed up the performance ofthe Buffett Partnerships in one ofhis fnal letters to partners.Buffett Associates, Ltd., the initial predecessor partnership, was formed May 5, 1956withsevenlimitedpartners(fourfamily,threeclosefriends),contributing $105,000, and the General Partner putting his money where his mouth was by in-vesting $100. Two additional single-family limited partnerships were formed dur-ing 1956, so that on January 1, 1957 combined net assets were $303,726. During 1957,wehadagainof $31,615.97,leadingtothe10.4%fgureshownonpage one. During 1968 I would guess that the New York Stock Exchange 127 was open around 1,200 hours, giving us a gain ofabout $33,000 per hour (sort ofmakes you wish they had stayed with the 5-1/2 hour, 5 day week, doesnt it), or roughly thesameasthefullyeargainin1957.OnJanuary1,1962weconsolidatedthe predecessor limited partnerships moved out ofthe bedroom and hired our frst Charlie Munger4040(C) ValueWalk 2015 - All rights ReservedWARREN BUFFETT Buffett takes the helm at BerkshireAs the Buffett Partnerships controlled the majority ofBerkshire Hathaway, it wasnt until the partnerships were dis-solved that Buffett began to manage Berkshire himself.Berkshires 1970 letter to shareholders was written and signed by Kenneth V. Chace, President. Berkshires 1971 letter to investors was signed by Warren E. Buffett Chairman ofthe Board.Even though Buffett had wound down his partnerships citing the lack ofopportunities and scope for return in the market, he was immediately able to achieve an outsized return at Berkshire.Berkshires 1971 operating earnings, excluding capital gains amounted to more than 14% ofshareholders equity. Con-siderably above the average ofAmerican industry. Below are Warren Buffetts frst three letters to Berkshire stocks holders as the companys Chairman. To the Stockholders ofBerkshire Hathaway Inc. 1971 To the Stockholders ofBerkshire Hathaway Inc.1972 To the Stockholders ofBerkshire Hathaway Inc.1973Thats the end ofthis series on Warren Buffetts early years. Stay tuned for the next exclusive ValueWalk famous inves-tor series. full-time employees. Net assets at that time were $7,178,500. From that point to ourpresentnetassetsof $104,429,431 wehaveaddedonepersontothepay-roll. Since 1963 (Assets $9,405,400) rent has gone from $3,947 to $5,823 (Ben Rosner would never have forgiven me ifI had signed a percentage lease) travel from $3,206 to $3,603, and dues and subscriptions from $900 to $994. Ifone ofParkinsons Laws is operating, at least the situation hasnt gotten completely out ofcontrol.By Rupert Hargreaves for (C) ValueWalk 2015 - All rights reserved. All materials in this PDF are protected by United States and international copyright and other applicable laws. You may print the PDF website for personal or non-proft educational purposes only. All copies must include any copyright notice originally included with the material and a link to ValueWalk.com. All other uses requires the prior explicit writtenpermission by ValueWalk.