Warren Buffett Story [Part 24] Dissolution of Buffett Partnership
In the previous article, Buffett chose to closely supervise and understand Berkshire, and also resulting in opening up a different mindset for American corporate managers. Let's continue to discover more about his leadership in transforming Berkshire!
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At Berkshire, Buffett held the position of chairman of the board of directors and was responsible for overseeing the team. By 1966, his partnership company celebrated its 5th anniversary. Warren Buffett already had personal assets of $6.85 million, at the age of 36.
Berkshire's affairs became burdensome as he also saw the emergence of problems within the partnership. He said, "This is a new platform. Although I initially achieved good results, I still see hidden crises. If I don't start making changes now, the continuous growth will slow down and may even stop due to the inability to find new breakthroughs."
You may recall that when the partnership was first established, there were only about 10 shareholders, consisting of Buffett's friends and family. However, due to the superior investment performance compared to the market, many partners rushed to join every year.
By the time Buffett saw the problem, the number of shareholders in the partnership had exceeded 99 (the original limit was 99). For Buffett, this greatly affected the decision-making speed and efficiency of the company.
On the other hand, Wall Street's stock market began a rare bull market trend, and with the increasing use of computers, Graham's theory, which Buffett's mentor had widely accepted, was input into computers for calculations and analysis. Buffett's investment approach suddenly encountered more and more competitors, and the threats became increasingly significant.
At this time, Buffett started to take special measures to protect the confidentiality of his investment strategy. However, he realized that this alone was not enough. He saw that the key was the management style. So, when the bull market pushed the stock market to break through 1,000 points, Buffett decided to meet his mentor Graham. He wanted to discuss the future trend of the stock market while also discussing his own situation and seeking advice. However, the final decision reached at the meeting was for Buffett to liquidate the partnership in 1969!
Buffett told the investors of the partnership that they had two options: either cash out all the profits or continue investing but not within the partnership. Because Buffett felt that "achieving the same results as in previous years (beating the market average return) every year was becoming unlikely."
This is what he said to the partner investors every year. However, the fact was that the partnership's annual returns still outperformed the market average return, maintaining a high growth rate even in the late 1960s. The record here is that from the establishment to the end of the partnership, not a single year was a loss compared to the Dow Jones Industrial Average. The average annual return for the partners reached 29.5%, while the Dow Jones index had only 7.4% per year.
Due to this, the operating capital of the partnership expanded significantly to $105 million in 1968! Buffett's personal assets accounted for $25 million. If we go back to when the partnership was first established, if you had invested $10,000, after deducting the fees paid to Buffett that year, the assets increased to $150,000. Did you see that? In just a few years, the profit rate was 1,500%! 15 times the initial capital! However, if at the same time, you had invested $10,000 in the Dow Jones index, the total asset increase after the same period was only 1/10 of the partnership, which was $15,000.
After achieving outstanding performance in his partnership, Buffett began to feel restless. This was because at that time, with the inauguration of the Kennedy administration, the American stock market represented by Wall Street began a period of sustained economic growth in the 1960s.
Companies like IBM, Xerox, and Polaroid, known as the "Fifty Superb Companies," became popular investment trends. The parameter called the "price-earnings ratio" (P/E ratio) began to be widely used as a reference for stock valuation during that time, which is the price per share divided by the after-tax earnings per share of the previous year. In the stock market of that time, there were many good companies with P/E ratios exceeding 50 times, so the market began to shift towards speculation. Before that, the average P/E ratio for most companies after the war was only 14 times.
Buffett started to ponder how he could change his investment strategy in a market dominated by speculation. Despite the partnership's investment performance being significantly better than the Dow Jones, Buffett thought about selling it, as was revealed in this article. Let us find out more in the following article about how he modified his investment approach!
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