Investment Strategies employed by Warren Buffett in his Partnerships

Throughout the aforementioned paradigm shift incorporating corporate growth into valuation, Benjamin Graham continued to utilize his net asset based definition of value in managing money for limited partners/shareholders in his partnership. Benjamin Graham retired (and wound up his partnership) in 1956'


HISTORY OF BUFFETT'S INVESTMENT PARTNERSHIP

• In 1956,  the same year that Benjamin Graham retired, Warren Buffet started up his investment partnership, Buffett Partnership Ltd. 
• By 1960, Buffett had seven partnerships operating under Buffett Partnership Ltd, namely, Buffett Associates, Buffett Fund, Dacee, Emdee, Glenoff, Mo-Buff, and Underwood. 
• In 1962, Buffett merged all partnerships into one. 
• In 1966, he closed the partnership to new money. 
• In 1969, following his most successful year, Buffet liquidated the partnership and transferred their assets back to his limited partners (shareholders). He further recommended his partners to Bill Ruane who then founded Sequoia Fund. 

At his point, the stock market is simply roaring with growth stocks powering ahead until the 1973 oil crisis.



THE INVESTMENT STRATEGIES OF BUFFETT'S PARTNERSHIP

Of importance to us at this stage are the investment strategies employed by Buffet in his Partnership.

In one of his letters to his limited partners in 1962, Buffett explained in detail the strategies he used to generate excess returns. 

1.  Between 5% - 10% of his portfolio was invested in undervalued securities, a group of companies he referred to as ‘generals’. 

The group provided relative margin of safety at the time of purchase, but subsequently behaved just like the market. He expected this section of the portfolio to display limited downside in falling markets but have a very good chance of outperforming in upwardly drifting markets. 

A good example of this was the purchase of a company by the name of Dempster, a windmill manufacturing company in 1962. Buffett consulted his friend, Charlie Munger, to whom he was introduced in 1959, on this investment. Just a year later (1963), Buffett sells Dempster for three times (3x) the amount he invested. Dempster, almost worthless when Buffett bought it, had built a portfolio of assets worth over $2m during the time of Buffett’s investment! 

2.  The second group tended to focus on workouts – M&A, spin offs, reorganizations and liquidations. 

Because of this, such shares would be underpriced and would outperform in down years, but underperform in strong markets. 

For instance, Munger recommended that Buffett buy a company by the name of Harry Bottle in 1962. This move turned out to be very profitable as Bottle cuts costs, laid off workers, and moved into a cash rich position. 

3.  The third strategy was control situations where he would initiate a large enough position in a company to try and influence corporate policy. 

A famous control situation is Berkshire Hathaway which started out as an undervalued position (general) in 1962. Buffett arranged a business coup to take control of it at Berkshire’s board meeting in 1965. He appointed a new president, Ken Chance, to run it. After distributing (unbundling) Berkshire to his limited partners in 1969, Buffett, himself a partner, remained with 29% of the stock. 

There is a wealth of knowledge we learn from letters Buffett wrote to his limited partners (and after to his Berkshire Hathaway shareholders) on the pros and cons of the investment strategies employed during the partnership years (1956 to 1969).