From July 1961 Buffett start writing more than one letter for each year, As partners commented that once a year letter was “a long time between drinks” as per Buffett It is not difficult to find something to say twice a year, In first half of 1961 Dow gain was 13% Including dividend, while BPL return was moderately better than the average.

Buffett write two great points further….

Let me, however, emphasize two points. First, one year is far too short a period to form any kind of an opinion as to investment performance, and measurements based upon six months become even more unreliable. One factor that has caused some reluctance on my part to write semi-annual letters is the fear that partners may begin to think in terms of short-term performance which can be most misleading. My own thinking is much more geared to five year performance, preferably with tests of relative results in both strong and weak markets.

The second point I want everyone to understand is that if we continue in a market which advances at the pace of the first half of 1961, not only do I doubt that we will continue to exceed the results of the DJIA, but it is very likely that our performance will fall behind the Average.

The first point clearly shows, that short term performance which can be most misleading, As per Buffett opinion, five year performance is of use, which might test positive and negative markets, and one year and half year performance is of no use in investment performance, that’s why Buffett has a reluctance to write semi-annual letter, Buffett has a fear that partners start thinking about short term performance.

The second point is, about the performance against the Dow, Buffett has no doubt that BPL performance continue to exceed the result of Dow, but it is very likely that performance will fall behind the average.

Never test short term performance, and don’t try to beat the market every time.

I attempt to have a portion of our portfolio in securities as least partially insulated from the behavior of the market, and this portion should increase as the market rises.

Insulated is the important world, that is don’t buy Hot stock in Hot market, don’t buy IPO, which are aggressively priced, don’t buy on the NEWS, all these stocks are not at all insulated, because everyone act and behave in a same manner, and this portion should increase as the market rises, Buffett is clear about, what to do.

These Insulated positions, Buffett explained in future letters, these are Generals, Work-outs and control.. more on that in future letters….

Few large position Buffett take, which might not show the performance in short term but it gives strong promise of superior results over a several year period combined with defensive characteristics.

Buffett made some provisions towards combining all partners, these are………

(A) A merger of all partnerships, based on market value at yearend, with provisions for tax liability of unrealized gains, the merger will be tax free.

Buffett is more ethical towards tax liabilities, and partners should also understand that

(B) A division of profit sharing, between General Partner (Buffett) and Limited partner (Who contributed the fund), 6% per year to limited partner, based upon beginning capital at market, and excess divided 25% to General partner, and 75% to all partners proportional to their capital, below 6% would be carry forward, against future earnings, but not be carried back, Three profit arrangements have been optional to all incoming partners

 

Sr. No Interest Provision Excess to General Partner (Buffett) Excess to Limited Partners
1 6% 33% (1/3) 66% (2/3)
2 4% 25% (1/4) 75% (3/4)
3 None 16% (1/6) 83% (5/6)

 

The third arrangement is new, and its superior up to 18% per year, and 80% of partners selected the first two arrangements,

I think, in today’s capital market scenario, very few partnership or PMS has this kind of arrangements, Buffett has completely result driven arrangements, no fee to him, without results, If Buffet can’t produce more than 6% in a year, he can’t earn single percentage, but in today’s world, the fund perform or under-perform, you have to pay fees, loads, charges,,,,,

The above arrangements and overall BPL has a complete rational, ethical and result driven arrangements.

( C ) In the losses, there will be no carry back against the amounts previously credited to me as a General partner, that should be carry forward, against future earnings, However Buffett and his wife has largest single investment in the new partnership, around one sixth of partnership assets.

Buffett has largest and single investment in the partnership, he has more stake in the partnership.

(D) A provision for monthly payments at the rate of 6% yearly, based on beginning of the year capital valued at market. Partners not wishing to withdraw money currently can have this credited back to them automatically as an advance payment, drawing 6%, to purchase an additional equity interest in the partnership at yearend. This will solve one stumbling block that has heretofore existed in the path of consolidation, since many partners desire regular withdrawals and others wish to plow everything back;

6% yearly withdraw limit, based on the capital available at the beginning of the year, as many partners desire regular withdrawals.

(E) The borrowing limit is upto 20% of the value of the partnership interest, at 6% interest loans are available, which create liquidaty to the limited partners, Buffett has no desire to convert it into the bank, its only for, if any unexpected occurred during the period.

(F) If any small tax adjustment, made later in the years on the partnership returns will be assessed directly to Buffett, amounting $1000 of tax will be charged directly to Buffett

These are all the provisions Buffett makes for the partnership, All these arrangements are, performance driven, more rational, ethical and Buffett has more stake in it.

In 1960 (II) letter Buffett explains great points.

  • Five year performance is right yardstick of measuring of the performance
  • Performance will exceed or fall behind the average
  • Insulate few positions of your investment from general market behaviour
  • The Provisions are must read, which shows the Buffett transparency and ethicalness

 

(Disclaimer: All figures and data used from Buffett Partnership Letter 1960 (Dated, July 1961), I am not genius or clever to understand all things, I may be wrong in interpreting the data and letter, take your decision on your own)

To Your Success with Lot of Love!

 

Harish S Kawalkar

 

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