Buffet's partnership days were more akin to hedge fund behavior than they were to deep value investing.
So, for that matter, were some of the Graham-Newman trades. See for example the cocoa bean/common stock arbitrage in "Living La Vida Cocoa: Warren Buffett, Berkshire Hathaway and the Chocolate Wars (BRK.A; BRK.B; CBY; KFT; HSY)", it pretty much puts the lie to the Efficient Market Hypothesis.
Warren Buffett now manages billions of dollars. He needs big ideas. Small ideas are no good to him. And he buys businesses for keeps. Would he do the same thing if he was starting over today? Or would he do the same things he did when he ran his partnership?
Someone who reads my articles sent me this email:
In the last Berkshire meeting somebody asked: “I am 26. If you were me and had the chance to start over, what areas would you like to get into and do you think that my generation has the same number of opportunities as yours?” Warren: “I think you have all types of opportunities. I would very much do what I did, start earlier, and do it a little better. I would try to develop an audited record of performance as early as I could. I would try to get something a lot more interesting, buying companies to keep. I establish relationships with people, I want to be for keeps. That’s been enormously satisfying, but it takes some capital to get into that business. I built it through managing money for myself and others. I would get past that as fast as I could then buy businesses, then spend the rest of my life doing it.”
When he said: “I would get past that as fast as I could then buy businesses” (seems like he doesn’t enjoy managing money that much), I understand it as I would buy net-nets until I got enough money to buy a business that would let me snowball. Is that what you think?
No. That’s not exactly what I think. Net-nets can snowball. You just have to keep flipping them. And not everything Buffett did in his partnership years was a net-net. He owned a lot of Disney (DIS). And he bet huge on American Express (AXP).
Warren Buffett was trained by Ben Graham. Ben Graham ran a fund called Graham-Newman. And Graham-Newman didn’t just do net-nets. In fact, if you look at the portfolio of Graham-Newman the top heaviness of the portfolio would surprise you. Graham-Newman bought everything it thought was a bargain. So it had an insane number of stocks.
The median position size was tiny. But there were often about five stocks or so at the top of the portfolio that were big. Never as big as what Buffett would later do. But they were big.
Some were special situations. But others were controlled companies. Graham-Newman did a little capital redeployment. Kind of what might be called activism today. And that had an influence on Buffett. Although I think he learned from others by watching them in his partnership years.
Buffett doesn’t mean net-nets don’t snowball. He really didn’t buy many companies at all until after the partnership years. So, we’re talking about 15 years of just investing in stocks – not buying whole companies.
That’s the part Buffett would shorten. You said it sounded like he didn’t like managing other people’s money. That’s true. He quit that. And you can tell in the last letters he wrote during the partnership that he loved owning businesses. He loved the idea of Berkshire Hathaway (BRK.A)(BRK.B). He loved businesses as enduring things rather than stocks you flipped.
But there’s a lot of money in flipping stocks. And he made a lot of money flipping stocks. Both Graham-Newman (where Buffett trained) and the Buffett partnership made money by getting in and out of some stocks in a couple years at big gains. That is a good way to make money....MORE