Warren Buffett is of course the most famous “investor” ever. Most people know the “Grampa Warren” character that has come to prominence over the last say fifteen years but miss a lot of the most interesting parts of his life. For example, most people don’t know the Warren ran one of the earliest hedge funds ever started. Warren launched the hedge fund at roughly 25 years old in 1956 after already saving enough money to “retire”.
For small investors, how Warren ran his hedge fund for 13 years (through 1969) is much more important. Warren’s partnership letters have been available on the internet for years, but one author, Jeremy Miller, decided to take the letters and turn them into a book with commentary around key themes. We have read the letters multiple times over the years but the book did a wonderful job of bringing it all together in one place. The book is called, Warren Buffett’s Ground Rule: Words of Wisdom from the Partnership Letters of the World’s Greatest Investor, and can be purchased here if interested.
So what did we learn and/or refresh that helps us in investing:
- Margin of Safety – This is a common concept for “investor investors” but the gist is that you should only be making investments in businesses where the price is obviously wrong. In other words the price is so wrong you can be very off on your valuation and still make money. This sounds simple but it is incredibly difficult to wait for prices that are clearly incorrect. We all tend to “reach” and our results suffer. Buffett rarely did this.
- Investment Flexibility – Buffett grouped his investments into four buckets (i) generals - private owner (typically micro-cap companies that were very very cheap where if they stayed cheap he would keep acquiring shares until he could influence management), (ii) generals - relatively undervalued (cheap businesses that were often too large for him to be able to acquire a controlling stake), (iii) workouts (called arbitrage today these were investments that were typically based on some sort of transaction like a merger completing), (iv) controls (companies he literally took over.
What is key about the investment flexibility is that he did not create artificial rules for himself. He went where the best value was. When a lot of workouts were available at attractive prices he went there. When there were a lot of generals he loaded up on those. Eventually he was running enough money that the “compounders” began to take over the portfolio but until then his flexibility and lack of dogma was amazing
- Activism – No one points it out these days but Buffett was absolutely an activist when he was much smaller. Imagine a 28 year old Buffett joining the board of a company and forcing them to do what he wanted…this happened. He also took over a company, brought in new management, effectively liquidated the assets to buy securities and then sold the company. When management refused to do what he wanted, he was not shy in terms of doing what was necessary. ‘
Conclusion: Buffett’s skill, integrity, humor and energy comes through in the partnership letters. This book and the letters themselves are a highly recommended read, particularly for small fund managers, as he offers a roadmap for how to operate, find good stocks and treat your partners with integrity.