Warren Buffett is most famed for heading conglomerate company Berkshire Hathaway, where he gained most of his $71.5 billion fortune. It is without a doubt his fabled investing techniques that got him where he is today; but, his investing days before Berkshire are often forgotten.
After Buffett’s mentor Benjamin Graham closed his partnership in 1956 where Buffett was working, so Buffett took his savings and started his own firm, Buffett Partnership Ltd. Even before Berkshire, Buffett was writing letters to his partners to keep them posted about what was going on. Similar to the shareholder letters, there are plenty of interesting tidbits hidden throughout the letters, but one thing stuck out to me: Buffett’s ground rules.
In a letter to partners dated January 18, 1963, Buffett explains that since his annual letters are getting longer and longer, he would outline certain points to be clear about. Hence, he dives into 7 “Ground Rules” so that there is no confusion. Here are the highlights:
“1. In no sense is any rate of return guaranteed to partners. Partners who withdraw one-half of 1% monthly are doing just that— withdrawing…”
Even at 33, this sounds the like the same Buffett we’ve come to know and love. He built Berkshire by making investments that he hoped to hold on to for a long time, and he has always wanted people to think of his company the same. He views the stock market as ever changing, but has enough faith in the American economy that be believes investments in solid business will end up stable.
“4. Whether we do a good job or a poor job is not measured by whether we are plus or minus for the year. It is instead to be measured against the general experience in securities as measured by the Dow-Jones Industrial Average, leading investment companies, etc. If our record is better than that of these yardsticks, we consider it a good year whether we are plus or minus. If we do poorer, we deserve the tomatoes.”
Buffett has always been careful with how value is perceived, and I think he hit the nail on the head with this ground rule. The most recent execution of this, and a great one at that, was probably from the 2008 recession; while the S&P 500 Indexes value dropped 37%, Berkshire’s book value fell only 9.6%. This ground rule is still in full operation with Buffett today.
“5. While I much prefer a five-year test, I feel three years is an absolute minimum for judging performance… If any three-year or longer period produces poor results, we all should start looking around for other places to have our money.”
It’s no secret that Buffett’s favorite holding period is forever, and that’s something he must have learned early on. He was quick to let his partners know this early on, and it’s definitely a rule that Buffett has kept dear with his career with Berkshire Hathaway.
There is plenty more interesting things to read throughout the letter, and you can read the entire letter here.