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Transcript of Horse
The Buffett Partnership
1957-1969 The 'Husker Horse Structure Investments The Talent Code Framework Keys to Success Life Cycle:
Signposts & MOT's Ignition Deep Practice Master Coach Structure Personality Traits Investment Philosophy Other Observations Incentive Alignment Permanent Capital Flexibility Fees GP Capital Team Concentration Capital Preservation Contrarian Investment Characteristics Portfolio Management Generals Workouts Humbleness Accessibility Critical Self-Reflection Leverage Rejection Akward Childhood Business School Risk/Reward Handicapping Horses Business Deals Use of Time Reading Leave Time to Think Bill Scott & John Harding
Located in Omaha, NE Team Family Life Mother never expressed love Introverted
Shy around girls Blackboard arithmetic in grade school
Timed routes against himself in newspaper delivery job Commercial minded Sold gum at 6 yrs old
Sold golf balls age 9
Sold peanuts and popcorn at games age 10
Paper route age 12
Bought farm and leased to tenant farmer age 15 Father, Howard, was stock broker
2 uncles would join Warren at brokerage
Trip to NYC at age 10, Sidney Weinberg of GS asked Warren what stock he liked
Same trip to NYC, saw NYSE and immense wealth of one of the exchange members
Age 12, bought first stock Childhood Young Adult Working Life Competitiveness Read biographies on great businessmen
Read newspapers and industry publications
Read "How to Win Friends and Influence People" Reading Businesses Stamp & Coin Collections
Gum, Golf balls
Pinball machine business
Made $53k in today's dollars by the time he was 16 Combined collecting information with math
Learn how to read tip sheet
Understand the odds being offered versus expected At age 16, rejected from HBS (too young) Education Wharton, then Univ. of Nebraska
Columbia Business School - accepted without interview Reading The Intelligent Investor, Ben Graham
Garfield Drew, odd lot stock trading
Security Analysis - memorized 700 pages
"Haunted" the Columbia library Other Attended shareholders meetings in NYC Benjamin Graham CBS Class members were an audience to a duet
Margin of safety
Stock is a piece of whole business
2 years at Graham Newman '54-56 Graham Newman Rejected Buffett post CBS graduation because they only hired Jews Reading Ten thousand pages of Moody's Manuals - twice
"Just sits in his office and reads" -Ian Jacobs Teaching Buffett taught at Univ. of Omaha at night:
-Investing for Women LP Base Only Friends and Family Charlie Munger Buffett met him in 1959
Enduring competitive advantage
Great businesses - Phil Fisher approach Terms Annual liquidity, but ability to borrow or lend within the year
Fees: 0% management; 25% incentive fee above a 6% hurdle LP's Initially 7 LP's
Mostly friends and family No set structure
Would invest in undervalued companies through:
1) Generals - market purchases
2) Workouts - mergers, spin-offs, stubs (special situations) Warren Buffett Education: Columbia Business School
Published Track recorcd: None
Endorsements: Ben Graham, Jerry Newman, Walter Schloss Warren recounting a story about the Keoughs (1962):
"The Keoughs were wonderful neighbors. It's true that occasionally Don would mention that, unlike me, he had a job, but the relationship was terrific. One time my wife, Susie, went over and did the proverbial Midwestern bit of asking to borrow a cup of sugar, and Don's wife, Mickie, gave her a whole sack. When I heard about that, I decided to go over to the Keoughs' that night myself. I said to Don 'Why don't you give me twenty-five thousand dollars for the partnership to invest?' And the Keough family stiffened a little bit at that point, and I was rejected.
I came back sometime later and asked for ten thousand dollars and got a similar result. But I wasn't proud. So I returned at a later time and asked for five thousand dollars. And at the point, I got rejected again.
So one night, in the summer of 1962, I started heading over to the Keough house. I don't know whether I would have dropped it to twenty-five hundred dollars or not, but by the time I got to the Keough household, the whole place was dark, silent. There wasn't a thing to see. But I knew what was going on. I knew that Don and Mickie were hiding upstairs, so I didn't leave.
I rang that doorbell. I knocked. Nothing happened. But Don and Mickie were upstairs, and it was pitch-black.
Too dark to read, and too early to go to sleep. And I remember that day as if it were yesterday. That was June 21st, 1962." Significance June 21st, 1962: Don & Mickie Keough 'hiding' upstairs
March 21st, 1963: Clarke Keough is born
May 1985: Clarke Keogh graduates from the University of Notre Dame
1986-1991: Don Keough serves as Board Chair for University of Notre Dame Board of Trustees
September 1996: Keough Hall is dedicated
May 2003: Paul Buser becomes most decorated Keough Hall resident in history
May 2009: Santiago Montoya becomes second most decorated Keough Hall resident in history Float National Idemnity
Fire & Casualty Insurance Came to have over 90% of net worth in partnership Only incentive fees over a hurdle; No management fees No constraints on types of investments besides position limits (first 25%, then 40% of capital) Initially, Graham-type investments; priced below liquidation value, high margin of safety, cigar butts
Over time, these Graham investment opportunities diminished as competition increased
Later, high quality businesses, led by honest and competent managers, with good long term prospects Looking for low risk investments with high margin of safety
Found in merger arbitrage, spin-offs, bankruptcy exits, etc
Uncorrelated with the market; provided steady stream of returns in down markets Ability to Judge People Learned at age 12 - bought Capital Cities stock for himself and his sister. Initially the stock declined by 30% and he never forgot the regret he felt for having lost his and his sister's money
"Rule No. 1: Never lose money
Rule No. 2: Never forget Rule No.1" Initially had position limits of 25% but eventually raised it to 40%
"Wait for the fat pitch" - however, through most years of the partnership, Buffett had more ideas than capital Management Complete emotional detachment from what the market was doing
"Be fearful when others are greedy. Be greedy when others are fearful." Buffett sought to focus as little as possible on control investments
He believed in putting a hard working, incentivized manager in charge to implement plans Limited use of leverage
Only time leverage was used was in workout situations
Maximum of 25% of partnership net worth was the limit “Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy." Constantly underestimates his ability to generate returns
"I would like to emphasize that, in my judgement, our current margin over the Dow is unattainable over any long period of time" - spelled out in every annual letter
Also lives a very humble lifestyle "Let me know if anything needs clarifying"
Open door policy to LPs to visit him in his office
Believes that honesty is the best way to attract a shareholder base "You are always entitled to know when I am wrong as well as right"
"Our policy of measuring performance in no way guarantees good results - it merely guarantees objective evaluation" Made a bid for Hochschile, Kohn, & Co. on the spot with 1 pg term sheet
"It also does not seem sensible to me to trade known pleasant personal relationships with high grade people, at a decent rate of return, for possible irritation, aggravation or worse at potentially higher returns" Constantly thinking about the risk and reward
Mostly focused on downside Reads an immense amount
Hardly ever reads non-fiction and never reads fiction
Mostly financials, stock reports, newspapers, etc "I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think."
Location in Omaha, NE to a certain extent affords him this luxury Proof of Concept
1958-1960 Events & Performance Signposts Moment of Truth
December 1960 5 Partnerships; assets of $105,100 (about $3.7mm in today's terms)
Buffett's stake in the fund: $100
Running partnership out of bedroom office in Omaha, NE
Expect "superior results in bear markets and average performance in bull markets" 1958 1959 1960 6 partnerships
Team: Buffett, Bill Scott, Secretary
Made an investment that was 25% of partnership assets (Sanborn Map)
"Perhaps other standards of valuation are evolving which will permanently replace the old standards. I don't think so"
"I would rather sustain the penalties resulting from over-conservatism than face the consequence of error, perhaps with permanent capital loss" 7 partnerships; end of year assets of $4mm (about $120mm in today's terms)
Open to accepting new capital at each year end
"To the extent that partnership funds continue to grow, it is possible that more opportunities will be available in 'control situations'" Selective LP base
Strong adherence to philosophy
Small capital pool
Expectation of returns playing out
High concentration Warning signs:
Strong desire to grow assets
Moving into activist situations and go-privates
Buffett has limited investment in fund Ability: Would ND be able to invest?
Probably not - Size, institutional nature Willingness: Would ND want to invest?
Uncertain - great reputation, would like to see more of partner's capital in fund, starting to stray outside of core competencies Replication
1961-1962 Events &Performance 1961 1962 Merging all partnerships into one partnership at year end; AUM of $7.1mm ($215mm in today's terms)
Buffett is now largest investor in the fund
Moved into new office at 810 Kiewitt Plaza
"One year is far too short a period to form any kind of an opinion as to investment performance"
"My own thinking is much more geared to five year performance"
On size: "passive investments, where we do not attempt by the size of our investment to influence corporate policies, larger sums hurts results" but "in the case of control situations increased funds are a definite advantage"
Realized dollar gains to realized dollar losses is 100 to 1. AUM of $9.4mm (about $260mm in today's terms)
Advised by attorneys to accept no more than 12 new partners each year (for tax reasons)
Includes a performance comparison to 4 mutual fund companies
Borrowed $1.5mm to finance workout situations, but won't go above 25% leverage on partnership assets
Replaced management at Dempster Co. (Control situation)
"Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results" Signposts Institutionalization - moved into office and formed single partnership
Buffett now fully aligned - invested and fees
Long term mindset is now evident
Honest assessments of partnership
Repeatable performance witnessed Warning signs:
Ugly management fight at Dempster is a distraction
Should Buffett be doing control situations?
Use of leverage raises possibility of substantial losses
Clear that Buffett wants to take on more partners Moment of Truth
December 1962 Ability: Would ND be able to invest?
Yes - Institutionalized, audited financials Willingness: Would ND want to invest?
Uncertain - Size is in sweet spot and performance is strong, but starting to become more of a public figure (Dempster Co) and investments range from public equity to special situations to activism Replication
1963-1965 Events & Performance Signposts 1963 1964 1965 AUM of $17.5mm ($465mm in today's terms)
"Ground Rules" letter shows up
Disclosure of Dempster Co. Financials
Texas National Petroleum merger arb
"In my judgement, our 17.7 margin over the Dow shown above is unattainable over any long period of time"
"We cannot talk about our current investment operations" Buffett now has 90% of net worth in partnership
Buffett's father passes away
Increased office space from 682 sq ft to 909 sq ft
Introduces concept of relative value trades - shorts on Caterpillar, Alcoa
"We derive no comfort because important people, vocal people, or great numbers of people agree with us"
Buffett believes that his differentiation from other funds lies in 1) No group decisions 2) Don't have to conform to any policies 3) No need to be 'safe' 4) No need to diversify 5) No inertia AUM of $43mm ($990mm in today's terms)
John Harding joins Bill Scott on operations
Plans to close to new investors at year end
Changed concentration limits to 40% (American Express)
"Our present setup unquestionably lets me devote a higher percentage of my time to thinking about the investment process than virtually anyone else in the money management business"
Bought an interest in Berkshire Hathaway
"We did not have a great quantity of ideas, but the quality was very good"
Ben Graham-type investments are now virtually non-existent Culture and partnership solidified through "Ground Rules"
Continued humbleness regarding results
Modest increase in office space
Contrarian viewpoint is more evident Warnings signs:
Open about discussing general performance, but closed when discussing specific investments
Size is becoming an issue
Begins shorting securities Moment of Truth
December 1965 Ability: Would ND be able to invest?
Yes - last opportunity before hard close Willingness: Would ND want to invest?
Probably - Repeatable process, strong culture, ability to adapt, but size is now limiting the investable universe Replication
1966-1969 Events & Performance Signposts 1966 1967 1968 1969 Bought Hochschile, Kohn, & Co. (retailer) - first negotiated purchase of entire business
"Even if the price had been cheaper but the management had been run-of-the-mill, we would not have bought the business"
"We now find very few securities that are understandable to me, available in decent size, and which offer the expectation of investment performance"
Factors causing limited opportunities are 1) market environment 2) increased size of BPL 3) more competition
"We will not go into businesses where technology which is way over my head is crucial to the investment decision" AUM of $68.1mm ($1.3B in today's terms)
Buffett begins talking about non-economic interests drawing his attention
Need to "reduce the speed of the treadmill"
Bought National Idemnity (insurance co)
"We normally enter each year with a few eggs relatively close to hatching; the nest is virtually empty at the moment AUM of $104mm ($1.9B in today's terms)
Investors pull $1.6mm - first time BPL sees net withdrawals
Buffett is treasurer of McCarthy's Nebraska presidential campaign
Buffett is first gentile accepted to Omaha's jewish country club
Notes a speculative mania in the financial scene
"Backlog of ideas for 1969 is virtually nil" and "I can't emphasize too strongly that the quality and quantity of ideas is presently at an all time low" Liquidation and return of all capital due to lack of ideas
Environment has "generally become more negative and frustrating as time has passed"
"Documenting one's boners is unpleasant business. I find selective reporting even more distasteful"
"I know I don't want to be totally occupied with outpacing an investment rabbit all my life" Outperformance continues
Exceptional judgement of management character
Strict adherence to value philosophy Warning Signs:
Ideas seem to be at all time low
Outside distractions are increasing
Motivation seems to be lacking Moment of Truth
December 1969 Ability: Would ND be able to invest?
Partially, through public Berkshire Stock Willingness: Would ND want to invest?
Probably not - All communication indicates a wind down of the fund and Buffett's involvement in the investment arena (but actions speak louder than words) Philosophy Classic value investor
Discount to intrinsic value
Margin of safety
Ignored, unloved securities