Buffett Partnership Letters: 1964 Part 1


Continuation of our series on portfolio management and the Buffett Partnership Letters, please see our previous articles for more details. Given the recent discussions/debates around taxes and potentially shifting tax rates, we thought it appropriate to share some historical Buffett wisdom on the topic.


“We do not play any games to either accelerated or defer taxes. We make investment decisions based on our evaluation of the most profitable combination of probabilities. If this means paying taxes – fine…”

“More investment sins are probably committed by otherwise quite intelligent people because of ‘tax considerations’ than from any other cause. One of my friends – a noted West Coast philosopher [Charlie Munger] – maintains that a majority of life’s errors are caused by forgetting what one is really trying to do…

What is one really trying to do in the investment world? Not pay the least taxes, although that may be a factor to be considered in achieving the end. Means and end should not be confused, however, and the end is to come away with the largest after-tax rate of compound…

If gains are involved, changing portfolios involves paying taxes. Except in very unusual cases…the amount of the tax is of minor importance if the difference in expectable performance is significant…

There are only three ways to avoid ultimately paying the tax: (1) die with the asset – and that’s a little too ultimate for me – even the zealots would have to view this ‘cure’ with mixed emotions; (2) give the asset away – you certainly don’t pay any taxes this way, but of course you don’t pay for any groceries, rent, etc., either; and (3) lose back the gain – if your mouth waters at this tax-saver, I have to admire you – you certainly have the courage of your convictions.

So it is going to continue to be the policy of BPL to try to maximize investment gains, not minimize taxes. We will do our level best to create the maximum revenue for the Treasury – at the lowest rates the rules will allow.”

Patience, Sourcing, Liquidity

“…I consider the buying end to be about 90% of this business…These stocks have been bought and are continuing to be bought at prices considerably below their value to a private owner. We have been buying one of these situations for approximately 18 months and both of the others for about a year. It would not surprise me if we continued to do nothing but patiently buy these securities week after week for at least another year, and perhaps even two years or more.”

In Buffett's biography The Snowball, I believe there is an anecdote that Buffett and his associates would go knocking on doors in small towns to seek out shares of XYZ stock for purchase. Based on the quote above, it would take years for him to accumulate full positions. How’s that for patience, not to mention liquidity implications?!

Most public market investors, who invest in liquid securities, don't spent a lot of time focused on sourcing. Could there be a hidden advantage for those who focus on obscure or illiquid issuances, and manage to creatively source them at bargain prices?