Tag Archives: Value investing

A dozen lessons from reading Buffett’s early partnership letters (2/2)


  1. “A division of profits between the limited partners and general partner, with the first 6% per year to partners based upon beginning capital at market, and any excess divided one-fourth to the general partner and three-fourths to all partners proportional to their capital. Any deficiencies in earnings below the 6% would be carried forward against future earnings, but would not be carried back.” (1961)
    The Buffett Partnership fee structure is a thing of wonder (albeit only for superior investors). The structure was: zero management fees with a 25% performance fee above a 6% hurdle. This allowed a real partnership to form with a sticky capital base as Warren wouldn’t get paid if he didn’t produce above 6% return. He structured the fees so that he would be under less pressure during the down years- the riskiest time for the limited partners to liquidate their partnership, allowing him to stay invested during lean times and even deploying more capital at the more attractive market prices. Note that this fee structure is gaining more popularity with boutique funds (Mohnish Pabrai, Li Lu) as it truly aligned all parties’ interest. Personally, I use this structure when managing my family’s capital with a high watermark structure. Continue reading

A dozen lessons from reading Buffett’s early partnership letters (1/2)

I recently read Buffett’s early partnership letters from 1957-1970. It’s an amazing collection of letters that dispense wisdom in his typical folksy charm. His investment record was leaps and bounds better than the Dow Jones Index by the time he liquidated the partnership. When he started in 1957, his partnership began with capital of $105,100 (adjusted for inflation, it would amount to ~$900k). In 1969, the partnership had a net asset of ~$100m (~$700m in today’s dollar).

To show you how special he was even at this young phase:

  • Compounded results of 25.3% after management fees for 12 years
  • Operated predominantly by himself with no other investment team
  • He has said that in the early years, he had investment ideas “anywhere from 110% to 1000%” of the partnership’s capital.

I don’t think there will be another one like him.

However, we can all still learn something from him. Continue reading

Pros and cons of an individual investor in the microcap space

One of the things that compelled me to first dip my toes in investing was reading Peter Lynch’s One Up on Wall Street. The straightforward prose of the book, as well as its key conclusion- that average investors can do as well as, if not better than the professionals inspired me. It is the first book I always recommend to friends who wants to learn how to invest in the share market. Of course, as many of you have experienced, the theory is a lot more difficult to practice. Especially in microcaps, individual investors have significant disadvantages to institutional investors. In saying that, there are some key structural differences that evens the playing field for the individual investors.

So, I have put together some pros and cons of individual investors in the microcap space.

Note: I am assuming that the investors here are long-only and invests with no margin. Continue reading

In investing, thinking in probabilities is probably better than thinking in absolutes

“Risk means more things can happen than will happen.” Elroy Dimson

One of the most important lessons that I had early on in my investing experience is that it is more productive and profitable to think in probabilities, rather than absolutes. Unfortunately, it is a lesson that I sometimes need to re-learn. What I mean by that is thinking through the buying decision not as “is this stock definitely undervalued?” or “is this stock going to double?”, but rather as “is it more likely than not to be undervalued?” or “is the business more likely to be better in the future than it is now?” It is a subtle difference, but it re-focused my emphasis on not just the upside potential, but on the downside risk. Continue reading

20 Ticket Punch Card investing and why it is so important for me in micro-cap investing

“An investor should act as though he had a lifetime decision card with just twenty punches on it.” Warren Buffett.

“The success of Berkshire [Hathaway] came from two decisions a year over 50 years.” Charlie Munger.

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Lottery’s lollapalooza effect, a case study in hidden asset investing

Jumbo Interactive (ASX:JIN) is an Australian online lottery seller. It has a simple enough business model, yet it was the complete opposite of BPF in terms of its moat and the impact to my portfolio. It is (still) one of my best investments. The reason why it was misjudged by the market was due to 2 main reasons: internal short-term woes AND a misunderstanding of the strength of its business model.

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[#throwback] Small Caps and Micro Caps: An Outline

This is another old article I wrote for my uni investment club. I’ve learnt a lot since I wrote this piece, especially after working part-time during uni in a extremely well run microcap fund. (Although I am currently working full time as a management consultant, my interest in stocks and investments have never waned). An update to the below article:

  • My previous thinking to the advantages of micro-caps and small caps to uni students are just plain wrong.
    • 1) Cheaper brokerage cost per share does not create any advantages because on an absolute basis (the brokerage cost itself), there is no difference between microcaps and large caps. To effectively evaluate brok
      erage cost, you have to see it as a % of total amount.
    • 2) Amazing price growth potential is just looking at 1 side of the coin. Microcaps are by nature a more volatile and less liquid asset class than large caps. Hence, while it can have amazing price growth, it can also turn the other way very suddenly (as I have found out firsthand). The impact a large buyer/seller has on the share price is more pronounced in micro caps due to its illiquidity. Nevertheless, you can turn this proverbial lemon, into your lemonade. Due to the large swings in price, if you do your work and have patient money, you can find some undervalued gems.
      Some large-cap fund managers found out the high volatility the hard way when large swathes of insititutional money came to the smaller end of the ASX markets over the past few years. Now, they have reversed the tide and pulled the money back to the large-caps, leaving large falls in price in some microcap shares.
  • The only advantage that I think microcap has is that due to its structure, it is more inefficiently priced and attracts less large/more sophisticated investors
  • My portfolio is now predominantly micro caps and is more or less a highly concentrated portfolio. I am in Warren Buffett and Charlie Munger’s camp:
    • “If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification. If it’s your game, diversification doesn’t make sense. It’s crazy to put money in your twentieth choice rather than your first choice. . . . [Berkshire vice-chairman] Charlie [Munger] and I operated mostly with five positions. If I were running $50, $100, $200 million, I would have 80 percent in five positions, with 25 percent for the largest.” Warren Buffett
  • I hardly go into commodities investing. This is perhaps due to lack of research and my general laziness, but I have always found it a strange business where you can do everything right and have the lowest cost of production and the right deposit, but you are still at the mercy of the commodity price

It’s a bit of a long one, so without further ado here it is below…

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