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Using the letters Warren Buffett wrote to his partners between 1956 and 1970, a veteran financial advisor presents the renowned guru’s “ground rules” for investing—guidelines that remain startlingly relevant today. In the fourteen years between his time in New York with value-investing guru Benjamin Graham and his start as chairman of Berkshire Hathaway, Warren Buffett managed Buffett Partnership Limited, his first professional investing partnership. Over the course of that time—a period in which he experienced an unprecedented record of success—Buffett wrote semiannual letters to his small but growing group of partners, sharing his thoughts, approaches, and reflections. Compiled for the first time and with Buffett’s permission, the letters spotlight his contrarian diversification strategy, his almost religious celebration of compounding interest, his preference for conservative rather than conventional decision making, and his goal and tactics for bettering market results by at least 10% annually. Demonstrating Buffett’s intellectual rigor, they provide a framework to the craft of investing that had not existed before: Buffett built upon the quantitative contributions made by his famous teacher, Benjamin Graham, demonstrating how they could be applied and improved. Jeremy Miller reveals how these letters offer us a rare look into Buffett’s mind and offer accessible lessons in control and discipline—effective in bull and bear markets alike, and in all types of investing climates—that are the bedrock of his success. Warren Buffett’s Ground Rules paints a portrait of the sage as a young investor during a time when he developed the long-term value-oriented strategy that helped him build the foundation of his wealth—rules for success every investor needs today.
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Chapter 1: Introduction to the partnership
Chapter 2: Foundation rules
Chapter 3: General operating rules
Chapter 4: Financial rules
Table of Contents
When Warren Buffett set up his first partnership, he was very clear and up-front about what he planned to do. When it comes to investing, it pays to know and clarify exactly what you're trying to achieve.
"Speculation is neither illegal, immoral nor fattening (financially)."– Benjamin Graham
"If you can't forecast well, forecast often."– John Maynard Keynes
The "Ground Rules" which Warren Buffet shared with his original partners were:
1In no sense is any rate of return guaranteed to partners. Partners who withdraw one-half of 1% monthly are doing just that—withdrawing. If we earn more than 6% per annum over a period of years, the withdrawals will be covered by earnings and the principal will increase. If we don't earn 6%, the monthly payments are partially or wholly a return of capital.
2Any year in which we fail to achieve at least a plus 6% performance will be followed by a year when partners receiving monthly payments will find those payments lowered.
3Whenever we talk of yearly gains or losses, we are talking about market values; that is, how we stand with assets valued at market at year-end against how we stood on the same basis at the beginning of the year. This may bear very little relationship to the realized results for tax purposes in a given year.
4Whether we do a good job or a poor job is not to be measured by whether we are plus or minus for the year. It is instead to be measured against the general experience in securities as measured by the Dow-Jones Industrial Average, leading investment companies, etc. If our record is better than that of these yardsticks, we consider it a good year whether we are plus or minus. If we do poorer, we deserve the tomatoes.
5While I much prefer a five-year test, I feel three years is an absolute minimum for judging performance. It is a certainty that we will have years when the partnership performance is poorer, perhaps substantially so, than the Dow. If any three-year or longer period produces poor results, we all should start looking around for other places to have our money. An exception to the latter statement would be three years covering a speculative explosion in a bull market.
6I am not in the business of predicting general stock market or business fluctuations. If you think I can do this, or think it is essential to an investment program, you should not be in the partnership.
7I cannot promise results to partners. What I can and do promise is that:
a. Our investments will be chosen on the basis of value, not popularity;
b. That we will attempt to bring risk of permanent capital loss (not short-term quotational loss) to an absolute minimum by obtaining a wide margin of safety in each commitment and a diversity of commitments; and
c. My wife, children and I will have virtually our entire net worth invested in the partnership.
Buffett gave each person who wanted to invest a copy of the ground rules and carefully went through each point before he would take their checks. He then sent out letters every six months or so updating his partners on latest developments.
For the entire period the partnership existed, Buffett compounded the partner's capital at almost a 24 percent annual rate, significantly outperforming the growth of the Dow over that same period. And equally impressive was the fact Buffett never had a down year during that period.
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