WWII 043: How Warren Buffett's Investment Style Has Changed, Traditional IRA versus Roth IRA, US Companies Buying Overseas
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This episode is about the differences between how Buffett managed his partnerships in the 1950's and 1960's and how he runs Berkshire Hathaway
Main Topic: Differences between Warren Buffett in his early years and today
· Before acquiring Berkshire Hathaway, Warren Buffett ran an investment partnership from 1956 to 1969.
Partnership Structure Versus Berkshire Hathaway
· When he first set out to invest money for others, Warren Buffett knew that he wouldn’t be able to stand criticism from his partners if stocks he selected started to fall. As Buffett was going to be the sole manager of the partnerships run by Buffett Partnership Ltd., there was nowhere to hide if he failed. [i]
· With this being the case, Buffett only invited family and friends to invest in his first partnership — Buffett Associates, Ltd. Buffett Associates, Ltd., started on May 1, 1956, with seven limited partners, all of whom were close family and friends, began with $105,000 not including a $100 contribution from the general partner, Warren Buffett.
· The Buffett Partnerships were “blind”, meaning partners would not know what Buffett was buying. He set it up this way so as not to be dissuaded from buying securities he knew well.
Compensation Structure of Partnerships Versus Berkshire Hathaway
· The compensation structure for Warren Buffett’s partnerships was fairly simple. Investors received 6% interest on their money from the partnership and 75% of profits above this threshold. If there were a loss, Buffett took 25% of it himself. That means that even if Buffet broke even; he lost money.
· What’s more, Buffett’s obligation to pay back losses was not limited to his capital; it was unlimited.
Investment Operations in Partnerships versus Berkshire Hathaway
· The partnerships early on were not heavily concentrated, but ran more like Graham-Newman with a hundred or more positions across the three main strategies. Most investments would be considered “cigar-butts”, good for one last puff and then you would have to throw them away.
· Buffett had three main investment strategies:
o Firstly, Buffett has his “generals”, which were usually undervalued securities where he had nothing to say about corporate policies. Generals made up the bulk of Buffett’s portfolio. As long as the securities stayed undervalued, he would continue to accumulate them over a year or more.
o Category two were the “work-outs”, undervalued securities where corporate action would result in value being realized. These were tender offers, merger arbitrage, debt restructurings and so on.
o And the last category is “control” situations where Buffett aimed to influence policies of the company in order to unlock value. In a number of cases, Buffett’s generals and work-outs quickly turned into control situations when Buffett either ran out of patience or decided that management had to go.
· Contrast that with Buffett today as he runs Berkshire Hathaway.
o Large concentrated stock positions in large enterprises held for decades
o Wholly owned businesses
o Deals like preferred stock purchases like in Goldman Sachs and Bank of America.
o The size of capital Buffett is working with drives the need for the kinds of investments he is making today.
o Controls Berkshire and only answers to shareholders, not clients / partners.
Mentally we are always buying businesses. It’s just that sometimes we can buy all of them, and sometimes we can only buy pieces of them.”
Ask JB: Traditional IRA or Roth IRA and What Are The Differences?
submitted 4 days ago by TimmothyDrake
If your new employer offers a 401(k), fund it to the employer match. If not, you can fund to max your IRA, and contribute after-tax savings to a Roth.
There are a lot of people complaining about the taxes they have to pay when they take the Required Minimum Distribution from their traditional IRA. Taxes paid 30 years from now is very expensive money. However, taxes you pay each year as a result of not having contributed to an IRA are an opportunity cost for compounding. Balance is best.
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News: US Companies Are Going On A Buying Spree and Fannie and Freddie Shareholders are Stuck
JB Says: When companies go on a spending spree, arbitrage opportunities may be created. There may be ton of new deals, but most large acquisitions end up destroying shareholder value, rather than creating it.
The hedge funds that bought shares in Freddie Mac and Fannie Mae were essentially speculating that these companies would end up back in private hands. I've been against this trade from the beginning as I am terrible at predicting what the U.S. Government will do and therefore the outcome of this situation was too complex to predict. My crystal ball was too cloudy on this one.