Warren Buffett started his investment partnership in 1956 with $105,100 of capital made up of his own funds and investments from family and close friends. According to the BLS inflation calculator, initial capital was $840,920 measured in 2010 dollars, which would be a very small sum to start a modern day hedge fund. What is even more remarkable was the fee structure of the Buffett Partnerships. Mr. Buffett, as the general partner, took 25 percent of all profits in excess of 6 percent. There was no “2 and 20″ structure in which the general partner received any guaranteed payment. With nearly all of his net worth invested in the fund and a young family to support, it obviously took a very self confident 25 year old to start this venture.
Mr. Buffett’s early letters to partners have become investment classics and required reading for value investors. By reading the letters in chronological sequence, one can see how Mr. Buffett’s investment philosophy evolved over the years. It is particularly interesting to note that many of the same themes that continue to appear in recent Berkshire Hathaway (BRK.A) annual letters were regularly appearing in partnership letters during the 1960s.
On an annual compounded basis, the Buffett Partnership returned 23.8 percent/year to limited partners over its history compared to 7.4 percent/year for the Dow Jones Industrial Average. The limited partners only had one year (1958) in which their results failed to match the Dow Industrials. (See The Superinvestors of Graham-and-Doddsville for more details.)
In his letter to partners in 1969 announcing his “retirement” (pdf), Mr. Buffett had the following to say:
“As long as I am “on stage”, publishing a regular record and assuming responsibility for management of what amounts to virtually 100% of the net worth of many partners, I will never be able to put sustained effort into any non-BPL [partnership] activity. If I am going to participate publicly, I can’t help being competitive. I know I don’t want to be totally occupied with out-pacing an investment rabbit all my life. The only way to slow down is to stop.”
Partners who elected to take part of their final partnership distribution in Berkshire Hathaway stock probably did not notice much of a “slow down” in subsequent years.
I was recently contacted by Frank Gifford, a Berkshire Hathaway shareholder who has studied the partnership letters and agreed to share his notes with readers of The Rational Walk. Mr. Gifford provides a great 20 page introduction to the letters which is very useful for someone looking for a concise summary.
Disclosure: The author owns shares of Berkshire Hathaway.