What Is The Buffett Partnership?
What is the Buffett partnership? Warren Buffett's success as one of the most renowned investors of all time was largely due to a revolutionary investment partnership he established in 1956.
But what was the structure of his original partnership? How did it play a role in his success? Read on to find out.
What Is the Buffett Partnership?
The Buffett partnership refers to the investment partnership established by renowned investor Warren Buffett.
This partnership played a significant role in shaping Buffett's career and laying the foundation for his success as one of the most renowned investors of all time.
What Was Buffett’s Original Partnership Structure?
When Warren Buffett initially started his investment partnership in 1956, he structured it as a limited partnership.
This structure allowed him to pool funds from various investors who were interested in benefiting from his investment strategies. Buffett served as the general partner, responsible for making investment decisions, while the limited partners provided the capital.
The limited partnership structure offered several advantages. Firstly, it allowed Buffett to invest with a larger pool of capital, which provided him with greater flexibility and increased opportunities to generate substantial returns through activism. Secondly, the limited partnership structure limited the liability of the limited partners to the amount of their investment, protecting them from personal liability for the partnership's debts or obligations.
The fee structure was originally structured as follows:
There wasn't a management fee. In fact, it was the opposite. Initial investors, the limited partners, got 4% interest, which would be "charged as business expenses".
Every limited partner would get 4% interest on whatever balance their capital account showed on December 31st. On December 31, 1956, an adjusted 2% would be paid based on the original contribution amount because the partnership started in the middle of 1956.
Each limited partner would get 21/42 or 50% of any net profits, while Buffett would get the other 21/42 or 50% of net profits.
Based on the limited partner's previous year-end capital balance, Buffett was on the hook if the investment partnership didn't perform at 4% during the year. In terms of interest payments, it's unclear whether they'll fall behind or be deferred.
The original compensation structure looked like this:
Buffett gets 0% if the fund returns 4%. The 4% would go to interest payments to limited partners.
A 10% return would pay 4% of the interest payment to limited partners and the remaining 6% would be split 50/50 between the limited partners and Buffett.
Buffett would have to cover the 2% shortfall if the fund returned 2%.
Assuming Buffett returns 0%, he would have to come up with the 4% shortfall to make the 4% interest payment.
If the fund lost 40%, Buffett would have to cover 4% of that loss, and limited partners would lose 36%.
How Did Warren Buffett Start His Partnership?
Warren Buffett started his partnership with an initial capital of $105,000, contributed mostly by family and friends.
At the time, Buffett had already established himself as a successful investor, having achieved remarkable returns in his personal investment portfolio.
Over the years, the partnership expanded, attracting more investors who were eager to benefit from Buffett's investment acumen. By the end of the partnership's existence in 1969, it had grown to include funds totaling approximately $100 million.
One of the key aspects that set Buffett's partnership apart was his unique investment philosophy. Buffett focused on He invested in cigar butts such as net nets, NCAV, and NNWC stocks, seeking out undervalued companies with strong fundamentals. He was known for his patient approach to investing and his ability to spot opportunities where others saw challenges.
Throughout the tenure of the partnership, Buffett consistently outperformed the market, achieving an average annual return of over 30%.
This exceptional track record helped solidify his reputation as a skilled investor and laid the groundwork for his future success as the chairman and CEO of Berkshire Hathaway.
The Buffett partnership was a pivotal chapter in Warren Buffett's investment journey.
It started as a limited partnership, allowing Buffett to attract capital from investors interested in benefiting from his investment strategies.
With an initial capital of $105,000, Buffett went on to build a highly successful partnership, generating remarkable returns for his investors. His unique investment philosophy and exceptional track record set him apart as one of the most influential investors of our time.
Read next: Why Did Buffett Close His Partnership?
Article image (Creative Commons) by RDNE Stock project, edited by Net Net Hunter.
