As I have covered in the first few parts of this series, between 1957 and 1970 Warren Buffett managed a series of investment partnerships for investors.
Managing these investment vehicles allowed him to refine his investment process, spending years researching companies and then waiting for the opportune moment buy. The additional capital also allowed Buffett to take so-called ‘control’ positions in companies, where he could buy enough stock to take an activist approach, shake up management and unlock value. As covered in the last part of this series, Dempster Mill was one of these ‘control’ situations that worked out very favourably for investors.
Managing the partnerships helped Warren Buffett established a reputation for himself in the investment community, and make a small fortune at the same time. The returns he achieved while managing these early partnerships for outside investors are some of the best ever achieved by any investors even to this day. Between 1957 and 1969, the Warren Buffett partnerships returned 29.5% per annum for investors after deducting fees.
However, by the end of the 1960s, the market had changed significantly and Warren Buffett decided that it was time to get out of the deep value business. This is one of the most defining moments in the career of the Oracle of Omaha.
Closing the partnerships
In 1967, he told his partners that he was considering winding up the Investment Partnerships. Then in 1969, Buffett announced his firm decision to move on from managing outside investors’ money. He gave three reasons why:
“(1) opportunities for investment that are open to the analyst who stresses quantitative factors have virtually disappeared…(2) our $100 million of assets further eliminates a large portion of this seemingly barren investment world, since commitments of less than about $3 million cannot have a real impact on our overall performance…3) a swelling interest in investment performance has created an increasingly short-term oriented and (in my opinion) more speculative market.”
Winding up the partnerships was not a simple process. In 1970, they owned control positions in several businesses, including Berkshire Hathaway and the Diversified Retailing Company.
Rather than trying to sell the unwanted holdings, Buffett decided to return the stock directly to his investors and leave the decision of whether to sell, hold or buy more, up to them. To help his former investors make their decision, Buffett sent out a letter detailing the prospects and asset values of both businesses.
“This letter is to supply you with some published information relating to our two controlled companies (and their four principal operating components), as well as to give you my general views regarding their operations.”
Buffett concluded this letter by stating that he would have no input in the management of either company. However, as we now know, this was the beginning of the next chapter in his life, the transformation of Berkshire Hathaway from a failing textile business into one of the world’s largest conglomerates.
Disclosure: The author owns shares in Berkshire Hathaway.