In the previous article, we learned how Buffett had considered liquidating his partnership, even though its investment performance was several times higher than Dow Jones. This time, we’ll see how he adjusted his investment strategy in response to the market conditions.

‍

This is the Next Level Academy, and we are on a mission to eradicate poverty from this world completely. If you like what we do, join our community.

‍

After careful consideration, in 1967, Buffett mentioned in his letter to the partners: "Basically, I can't fit into the current market environment because it's different from how I have always approached the market. I can't make significant changes immediately. But if I decide to adopt a new approach, even though it could lead to substantial profits, on the other hand, since this is not the method I am familiar with and I have no practical experience of success, the funds entrusted to me may face risks."

‍

Since the overall market atmosphere was speculative then, Buffett adjusted his performance targets. Prior to this, Buffett's annual goal was to outperform the Dow Jones by 10%. With the new target, he lowered it to outperform the Dow Jones by 5% annually or achieve 9% annually. 

‍

These two new targets were significantly lower than the original ones. Here, we can learn that the Stock God is very cautious when facing significant market changes and adjusting investment strategies. Interestingly, over the next three years, the partnership's investment performance continued to shine. In 1967, it outperformed the Dow Jones by 16.9%, in 1968 by 51.1%, and in 1969 by 18.4%. The three-year performance significantly exceeded Buffett's preset targets.

‍

‍

However, despite the strong profitability, Buffett still decided: "I cannot adapt to such a market environment, and at the same time, I am unwilling to play a game that I cannot fully understand. I don't want to leave indelible scars despite the excellent results so far." 

‍

So, in 1969, as he had informed the partners in advance, Buffett dissolved the partnership. Even so, the net worth of each partner multiplied several times, including Buffett himself, who became wealthy.

‍

‍

Buffett believed that in order for a company to be profitable and successful, any capital that the shareholders have invested must be returned to them if the managers are unable to do so. If necessary, capital could be repaid using other methods, such as fixed-return financial instruments. Buffett thought that giving the partners the freedom to decide was the best course of action when returning the capital.

‍

Buffett valued each partner greatly. Even after dissolving the partnership, he introduced a student of his mentor, Graham, named Bill Ruane, who established a new investment fund in 1970 - Sequoia Fund. The partners willingly invested a portion of their funds into it. Ruane faithfully managed this fund until the 1990s.

‍

At the same time as dissolving the partnership, Buffett also liquidated almost all of his stocks, leaving only his two most important companies for the future - Berkshire Hathaway Textile Mills and Diversified Retailing, with the main focus on Berkshire Hathaway. 

‍

At this point, if you were one of Buffett's former partners, what would you think? If you were an average person, you would likely continue to follow Buffett. Similarly, most partners followed Buffett and invested the majority of their funds in Berkshire Hathaway's stocks.

‍

With sufficient funds, Buffett no longer held Berkshire Hathaway through the partnership but directly held it with his personal funds. By 1970, he personally owned 29% of Berkshire Hathaway's shares, becoming its largest shareholder and chairman. 

‍

He began the world-renowned annual "Buffett's Letter to Shareholders" in subsequent corporate annual reports. To this day, this annual report is a must-read for almost all investors worldwide. However, this report is exclusively for shareholders, so many investors voluntarily become Berkshire Hathaway shareholders to read and learn from it!

‍

Even though Buffett's identity changed from the partnership's founder to Berkshire Hathaway's chairman, his management philosophy remained the same. In his "Letter to Shareholders," he declared: 

‍

"While our form is that of a public corporation, our attitude is that of a partnership. Vice Chairman Charlie Munger and I regard you as partners (meaning our bosses), and we consider ourselves operating partners. This company is not the ultimate owner of the business assets; the shareholders are. This company is simply a means to achieve that goal."

‍

As in the partnership era, members of the Berkshire Hathaway board, including Buffett, held a significant amount of Berkshire Hathaway stock, with more than half of their personal net worth invested. Therefore, the interests of the board and the shareholders were aligned. What was once considered a bankrupt company, Berkshire Hathaway, experienced a new opportunity under Buffett's leadership.

‍

It’s amazing to find out what Warren Buffett did to dissolve his partnership and arrange further investment opportunities and directions for his former partners. In the next article, we’ll learn about his most important partners in the next article. Stay tuned to find out what’s next for Berkshire Hathaway!

Learning from other people’s experiences is key. Access a FREE masterclass NOW to take your investing to the NEXT LEVEL!