Buffett Partnership: The Story Before Berkshire Hathaway

Buffett Partnership: The Story Before Berkshire Hathaway

Regarded as the investment guru, Warren Buffett once said Berkshire Hathaway was “one of his worst investments.” Don’t agree, right? He invested in the company in the early days of his long investment journey. In this story, we’ll have a look at the initial phase of Buffett’s investment journey and see if we too can get some inspiration for risk taking.

Crux of the Matter

A Timeline Of Buffett Partnership

1956

  • 25 year old Warren Buffett started Buffett Partnership Ltd. with 7 partners with capital of $105,000 of which $100 was his own.
  • His partners were: his mother, sister aunt, father-in-law-brother-in-law, college roommate, lawyer.
  • He charged no management fee, took 25% of gains beyond a cumulative 6%, and even absorbed all losses.

1962

  • With all partnerships consolidated into Buffett Partnerships Ltd, operations are moved to Kiewit Plaza, an office where they are located to this day!
  • Minimum investment is raised from $25,000 to $100,000.
  • Warren Buffett discovered and started buying stock of a Textile manufacturing company Berkshire Hathaway (BH) that was trading at $8.
  • Buffett once said BH was the dumbest stock he ever bought!

1963

  • Buffett sold Dempster, a windmill manufacturing company bought in 1962 for 200% profit.
  • Buffett Partnerships became the largest shareholder at Berkshire Hathaway.
  • Due to a fraud, American Express’ shares fell to $35, which Buffett bought while the world was selling.

1965

  • Buffett picked up 5% stake in Walt Disney for $4 million.
  • American Express traded at double the price from what Warren had bought.
  • Buffett took control of Berkshire Hathaway in board meeting, naming Ken Chace company’s President.
  • Warren’s personal net worth reached close to $7 million.

1967

  • Buffett Partnership was worth $65 million when Buffett wrote to his partners that he found no bargains in markets of 60s.
  • American Express was at $180/share – a $20 million profit on investment worth $13 million.
  • Berkshire Hathaway took over National Indemnity insurance for $8.6 million.
  • In 1968, Buffett Partnership earned more than $40 million in a year with total value at $104 million.

Liquidating Buffett Partnership
Buffett liquidated the assets of the partnership and in return gave shares of BH to his partners. Warren’s stake was valued at $25 million.

“I would continue to operate the Partnership in 1970, or even 1971, if I had some really first class ideas. I just don’t see anything available that gives any reasonable hope of delivering a good year and I have no desire to grope around, hoping to “get lucky” with other people’s money. I am not attuned to this market environment and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero.”

 Warren Buffett in a May 1969 letter

  • Buffett earned an annual return of 31.5% in comparison to Dow Jones’ 9.1%.
  • His goal was to outperform in bear markets and average performance in bull markets.
  • He favored a conservative approach, avoiding permanent capital loss.

“I make no attempt to forecast the general market — my efforts are devoted to finding undervalued securities.”

Warren Buffett

Want to know the key ingredient of Warren Buffett’s success? Click here to read about it in detail.

Summachar brings you this story in collaboration with Finmedium that can be found on Instagram at @finmedium and on the web here.

Curiopedia
  • Benjamin Graham was a British-born American economist, professor and investor. He is widely known as the “father of value investing”, and wrote two of the founding texts in neoclassical investing: Security Analysis (1934)  and The Intelligent Investor (1949).
  • In 1988, Buffett began buying The Coca-Cola Company stock, eventually purchasing up to 7% of the company for $1.02 billion. It would turn out to be one of Berkshire’s most lucrative investments, and one which it still holds.
  • In August 2014, the price of Berkshire Hathaway’s shares hit $200,000 a share for the first time, capitalizing the company at $328 billion. While Buffett had given away much of his stock to charities by this time, he still held 321,000 shares worth $64.2 billion.

What Is The Key Ingredient Of Warren Buffett’s Success?

What Is The Key Ingredient Of Warren Buffett's Success?

Warren Buffett is an American investor, business tycoon, philanthropist, and the chairman and CEO of Berkshire Hathaway. He popularized one of the most favoured market indicators, the Buffett Indicator (BI). But what exactly it is and how does it work? At a time when experts are cautioning investors of a stock market bubble, let’s find out what the indicator says.

Crux of the Matter

What Is Buffett Indicator?
The indicator is called the Buffett indicator (BI) due to its popularization by Warren Buffett. BI is one of the most favoured market indicators. It can indicate whether a particular market is overvalued or undervalued, and can help in forecasting the market

Buffett indicator = Stock Market Capitalization/Gross Domestic Product

Understanding The Terms
GDP
Gross Domestic Product is the final value of the goods and services produced within the geographic boundaries of a country during a specified period of time, normally a year.

Stock Market Capitalization
It is the value of all the publicly traded companies calculated by multiplying the total number of shares (of each company) by the current share price (of each company).

How It Came Into Prominence?
The use of the stock market capitalization-to-GDP ratio increased in prominence after Warren Buffett once commented that it was “probably the best single measure of where valuations stand at any given moment.”

Inferring Buffett Indicator
Through the Buffett indicator, if investors find a stock market in an economy undervalued, they should ideally buy stocks in that market by selling stocks owned in an overvalued economy. That way, the valuation will be set right and the investor is likely to profit.

BI Of India
However, determining the valuation of the market depends on the historical average of the Buffet Indicator.

  • For instance, Indian markets have had a BI Ratio of 75% on average and have rarely crossed 100%.
  • The low ratio is attributed to India’s unorganized sector that is unlisted.

Rise In India’s BI Ratio
Because India’s historical average has been between 70 – 80%, a 98% BI Ratio is cautioning investors that the market is overvalued.

The market cap-to-GDP ratio has been volatile as it moved from 79% in FY19 to 56% of FY20 GDP in March 2020 and now stands at 98% of FY21 GDP.

Motilal Oswal Securities

Markets Are High
Recently, the Indian benchmark index SENSEX touched the 50,000 mark for the first time. But the market has been spiralling downwards since then.

Summachar brings you this story in collaboration with Finmedium that can be found on Instagram at @finmedium and on the web here.

Curiopedia
  • Buffet founded The Giving Pledge in 2009 with Bill Gates, whereby billionaires pledge to give away at least half of their fortunes. As of August 2020, the pledge has 211 signatories from 23 countries with over $600 Billion in pledges.
  • Value investing is an investment paradigm that involves buying securities that appear underpriced by some form of fundamental analysis. High-profile proponents of value investing, including Warren Buffett, have argued that the essence of value investing is buying stocks at less than their intrinsic value.
  • According to the Forbes Global 2000 list and formula, Berkshire Hathaway is the eighth largest public company in the world, the tenth-largest conglomerate by revenue and the largest financial services company by revenue in the world.