Wednesday, 1 January 2014

Warren Buffet partnership letters: A treasure trove for a value investor

Since last few days, I have been reading and re-reading Warren Buffet's partnership letters written to its limited partners from 1958 to 1969 and oh boy, what a pleasure it has been reading them! These letters gives very useful insights into thought process of this legendary investor in formative years of his investment management career. However what is more striking is the candour and forthrightness coming out of these letters. WB clearly articulates his investment philosophy, sets the expectations and moderates them fabulously while striving to provide a realistic picture of investment operations, its pitfalls and how the performance of such investment operations should be measured. These letters not only demonstrates clarity of thoughts and perseverance to stick with them but also the extremely strong character. My words will sound pale and insufficient to describe the richness of character and knowledge these letters carry. Hence I shall rest my desire to write any further and share the compiled letters from 1958 to 1969 here. 

It would be great to receive views on what are the key learning from these letters? Few pointers from my side

1) He created a basket/portfolio of stocks along different investment methodologies such as

 Generals: Undervalued business when analyzed from how much a private owner would pay; 

Work outs: special situations with specific time tables such as mergers, take over, de-merger etc and

Controls : where they had a management control or say in the day to day operations (resulted out of sustained buying of generals for long period of time)

This "portfolio approach" was very useful in ensuring consistent returns

2) Work out as a category was important factor in ensuring that returns from partnership outperformed the market in down years

3) WB always made it clear that this approach will substantially outperform the Dow Jones in declining market while may just match the market performance or slightly under perform Dow Jones in advancing market! 

4) Warren buffet had set a goal of outperforming index by 10% over long run and in most of the years, he made that goal "look" conservative...!

5) From a diversified portfolio, he moved towards loading up around 1965. This worked out handsomely in favour as Amex investment, single handedly helped partnership significantly outperform the index, in spite of lack lustre performance in other two categories

6) When there is no opportunity in sight which fits the criteria set by him he gave it "pass" and chose not to invest. He rather declared his inability to find such opportunities and liquidated the partnership.. a brave call indeed.

I am sure as you read through, you will gain many more insights and it would be immensely helpful to all, if you can share the same through your comments!


  1. Arun Prakash Singh8 January 2014 at 15:56

    Hi Dhwanil

    I like clarity of your thought process hence posing this question to you. I have been reading and rereading buffet and graham and repeatedly getting this doubt. Buffet, as he progressed in his career became more and more selective and advocates same for all investors. Graham on the other hand was purely value oriented. If I as a value investor become so selective and put so many checks in place, don't you think there is high chance I might miss out on some really good opportunities. Buffet must have learnt a lot before he became this cautious and this ensures that whenever he acts, he almost always have a winner. We cannot be so sure of our selective plays.

    What do you feel?

    1. Hi Arun,
      I am sure this quandary that you are facing is faced by almost all value investors who have read and observed the way Buffet and Graham have evolved their investment philosophy. Though, I too have limited exposure in the market, let me share my views on the same.

      I think in Initial years, WB focused on more "puritan" Graham approach in initial years and generated more than 25% CAGR for around 15 years. If you read and reread these partnership letters, it is very clear that he gave more weight to quantitative factors without ignoring qualitative factors. On the other hand, in 1970's he saw importance of paying up "fair" price for values.

      Personally, what I do is create a portfolio which consist of allocation to undervaluation play or cigar butt; growth at reasonable price (GARP) and some high quality businesses at "fair" price. Now how much capital to allocate to which basket is an individual's decision.

      In last few years what I have observed is that undervaluation plays require lot of patience and perseverance to realize its full potential primarily because many of these cigar butts do not have trigger for rerating on the horizon. Another problem with undervaluation play is that if one is not alert, lot of time you end up in value trap.

      On buying high quality business, common mistake to avoid is "overpaying". I have seen many people getting gung-ho about the quality of businesses and justifying any price citing quality of business. Though, it may work out beautifully in few of the cases validating "paying up" but it doesn't protect you on the downside giving the investor "margin of safety". So, I am not averse to pay up reasonable price, but to "any" price.

      I personally have most money in the third basket "growth" at reasonable price. Companies growing in upward of 20%+, having decent parameters on leverage, returns and cash flows and available at P/E of 7-8 gives one an excellent middle ground between cigar butts and "never sell" businesses. And there may be many more opportunities in this space.

      When I started value investing, few years ago, my portfolio was highly tilted in favour of cigar butts. However, as of now the allocation is 20%- undervaluation; 40% GARP and 30%- High quality businesses at fair price and 10% cash. Again, this is reflection of both change in approach and available opportunity set.

      I know this doesn't directly answer the question, but may give some clues to you.

      Best Regards
      Dhwanil Desai

    2. Arun Prakash Singh8 January 2014 at 22:18

      Thanks Dhwanil. I believe this provides reasonable framework to build portfolio upon.

      Have you had a chance to look at bajaj corp recently? Got down to 52 weeks low recently and showing recovery. Market not happy with No Marks acquisition?

    3. Hi Arun,

      Yes, I did look at Baja Corp and am still tracking it. I think, considering increasing competition in light hair oil segment, and being pre-dominantly a single product company (even after No Marks acquisition) current valuation seem fair. Also, company seem to have lost the traction on earnings (though largely due to amortization of No Mark acquisition) which will continue for some time. I am adopting wait and watch and would monitor two things

      1) How the Almond oil segment grows moving forward especially after Dabur's aggressive ad campaign. It is the first time, company is facing significant competition for its mainstay product.

      2) How company is able to leverage its brand and network to increase No Mark sell?

      3) How much traction Kailash Parbat is getting going forward?

      I think, once we have some concrete data on the same in next couple of quarters on these aspects, I will take a view on what price is attractive for Bajaj Corp.

  2. Hi Dhwanil,

    I read that you met the management of Mazda,did you also meet the management of Astral??

    Wrong place to ask the question but was eagerly waiting for an update,I'll be grateful if you could share the key takeaways.

    Nikhil Moryani

    1. Hi Nikhil,

      Sorry for delayed response. I did attend Astral Q&A as well. I have taken notes but unfortunately due to limited bandwidth I have not been able to compile and put it up. However, I am planning to do so over this weekend. I will also check with Admin on updating the Management Q&A section.

      Overall, my take from the interaction was
      - Company seemed to be confident about maintaining 25-30% growth going forward if economy grows at 5-6%.
      - Current margins range of 13-15% should be maintained going forward as well.
      - Company had done some road show recently out side India to educate foreign investors about the Astral story and to increase FII participation in the stock.
      - The biggest risk to the growth is the economy. If it slows down below 5%, maintaining achieving even 20% growth may be tough. However on the other side, if economy grows at 7-8%, the growth may be much higher than 25%.
      - Company's new plant in south becoming operational is one of the major drivers as it will reduce transportation cost. A part of such cost saving will be passed on to the customer hence will be able to offer more competitive pricing and thus increase its market share going forward.

      Overall, I got an impression that company looks reasonably placed to achieve 25-30% growth, unless economy falters in a big way. However, I will revisit my notes and put up key take away on Astral thread, if compiling and putting up Management Q&A is going to take time.

  3. Hello Dhwanil,

    I have been following your blog since a couple of months. The way you analyze and write is amazing. I have been reading about value investing for some time now and have been hooked on this style of investing. I have analyzed an auto company based on these principals and have a few questions and need feedback on my analysis. Would appreciate if you can share your email id and I can send across my questions with the file.

    Chetan Chhabria

    1. Hi Chetan,

      Thanks for your kind words. Yes, value investing, once convinced, indeed is captivating..! So no wonder you are hooked!

      My e-mail is I will try to do my best to give my views on your analysis.

      Best Regards,
      Dhwanil Desai

  4. Thanks for your blog, I have read a few books about these guys but I guess these letters are better then anything else. Thanks for them let me go over them