Compounding Machines

Buffett Partnership, Ltd. – Dec. 31, 1962

with one comment

I look forward to two things on the first Saturday in May.  First, the Berkshire Hathaway annual meeting in Omaha and second, buying the newest version of Andy Kilpatrick’s Warren Buffett biography, Of Permanent Value. I recommend buying this book as there is no more detailed biography available on Buffett.  You can buy it on Amazon, or as I plan to, you can have Andy sign a copy at the next Berkshire annual meeting.

One of the most interesting parts of the book for me is an image of the 1962 year end statement for Buffett Partnership, Ltd. The portfolio had a total value of $9,856,297 and about 50 long and 4 short positions. The top 5 positions accounted for 52.7% of the total portfolio value, while the top 10 positions represented 72% of the portfolio.

The reason the year-end statement was published in Kilpatrick’s book is that 1962 was the year Buffett first purchased shares in a New England textile company named Berkshire Hathaway. At the end of 1962 the Partnership owned 30,752 share of Berkshire at $7.56/share.  Note: If you’re keeping track at home…those 30,752 shares are worth about $3 billion today, or about a 22.8% compounded return over 46 years.

During the partnership years, Buffett would get his ideas from the Moody’s Manuals which contained a brief summary of basically every business in America.  In those days, he was not too concerned with the quality of a business as much as he was looking for statistical bargains. Heavily influenced by the teachings of Benjamin Graham, he was looking for stocks selling below estimated liquation value, or below net working capital. Buffett now refers to this process as looking for “used cigar butts.” They are soggy and repulsive, but they are free and you can usually get one good puff out of it before you move on to the next used cigar butt (the antithesis of looking for compounding machines). Berkshire was a cigar butt in 1962.

I was able to obtain a copy of the 1962 Moody’s Industrial Manual from the library.  Out of curiosity I wanted to see just how cheap some of the stocks were that Buffett was buying in the 1950s and 1960s. Below is the Berkshire Hathaway page which shows that at $7.56 per share, it was selling well below its net working capital of $12.35 per share.

berkshire-hathaway_moodys-1962_page_12berkshire-hathaway_moodys-1962_page_22

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Written by sdinvest

December 24, 2008 at 12:28 am

One Response

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  1. sdinvest,

    Studying the history of Mr. Buffett is undoubtedly a hobby of mine too. Thanks for posting the analysis, now back to making our own history (cigar butt hunting).

    Alexander

    Alexander P. Stanonis

    August 22, 2010 at 5:08 am


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