A letter a day!

A letter a day.

Letter 8 #1963

Key learnings:

1. This is the 8th letter I read today. A commonality in all the letters which I have noticed till in the letters is the transparent way of communication. When Buffett is addressing his investors through letters, he is extremely straightforward regarding all the decisions and never shows a rosy picture. If we take an example from this letter, he said

“Our partnership’s fundamental reason for existence is to compound funds at a better-than-average rate with less exposure to long-term loss of capital than the above investment media. We certainly cannot represent that we will achieve this goal. We can and do say that if we don’t achieve this goal over any reasonable period excluding an extensive speculative boom, we will cease operation”.

I have been following a lot of good fund managers’ letters but have never come across this kind of bold statement of ceasing the operations on non-performance.

2. Investment decisions should be made on the basis of the most probable compounding of after-tax net worth with
   minimum risk. Always consider the impact of taxation.

3. Accepting advance money from the clients:

I don’t think any of the PMS houses follow this concept today or its relevance but it is interesting to read both the acceptance of advance payments and its withdrawals are at the same rate (6%). Why he does do so? He believes that rather than borrowing money from the banks, borrowing money from the clients at higher rates ( 4% rate if borrowed from the banks and 6% from partners) is advantageous to them since due to advance payments, investments options can be explored throughout the year rather than deploying them all at once. He also stated that in the longer term, they expect to earn better than 6%. On the withdrawals side, he looks at it as a means of giving some liquidity for unexpected needs. ( As on June 30, 1963, Buffett partnership had total advance withdrawals of $21,832.00 and advance payments of $562,437.11.)