In 1956, at the ripe age of 25 years old, Warren Buffett formed Buffett Partnership, Ltd.
The business model was simple: he pulled together a combined $100,000 – from his mother, sister, aunt, father-in-law, brother-in-law, college roommate and lawyer – and invested it in companies he believed to be undervalued. He charged no management fee from his 7 limited partners, but enjoyed 25% of any gains beyond a 6% return. (source)
In 1957, Warren kicked off his second annual letter to shareholders by saying:
“My view of the general market level is that it is priced above intrinsic value. This view, if accurate, carries with it the possibility of a substantial decline in all stock prices. It appears to me that the decline in stock prices has been considerably less than the decline in corporate earning power under present business conditions. In any event I think the probability is very slight that current market levels will be thought of as cheap five years from now.”
By 1969, Buffett had achieved an annual return of 24.5% (after deducting his mgt fee). In other words, if you had invested $100,000 in the Buffett Partnership in 1957, it would have grown into $1.7M. The annual return of the Dow over the same period was 7.4%.
But, even after his incredible success over the previous 13 years, Warren Buffett, in his late thirties, was not happy with what he saw happening in the market. “This is a market I don’t understand,” he said. So, he decided to abruptly shut down his investment company because he “suspected that some of the juice has gone out of the stock market and that sizable gains are going to be harder to come by in the future,” according to Fortune.
Fortunately, for both Buffett and his loyal followers, he stayed in the market as Chief Executive of Berkshire Hathaway. Interestingly, Berkshire was just a textile manufacturing company trending in the wrong direction at the time and is now one of the most unique companies on the planet with full or partial ownership in companies like Wells Fargo, Fruit of the Loom, GEICO, NetJets, Kraft Heinz, Coca Cola, Bank of America and American Express, to name a few.
Over this time, Berkshire Hathaway’s share price has increased from $11 then to $274,000 today.
In early May (2020), Warren Buffett, now 89 years young with loads of experience and wisdom, hosted his first ever virtual shareholder conference. He had this to say:
- “We haven’t faced anything that quite resembles this problem, but the United States has overcome tougher problems in the past.
- I remain convinced that nothing can basically stop America. The American miracle, the American magic has always prevailed and it will do so again.
- In the end, never bet against America.” Buffett said.
In Closing
Even the most successful investor of our generation has frequently viewed the market as being overvalued, to the point where he wanted to give up entirely early in his investing career.
So, it’s perfectly reasonable and understandable for an average investor to face similar doubts, fears and frustrations.
If the trend is up and to the right, then we’ll consistently reach all time highs and the stock market will always feel overvalued.
Today, July 6 2020, Warren & team announced a $10B acquisition of Dominion Energy’s gas pipeline network.
