Buffett Partnership Letters: 1964 Part 2


Continuation of our series on portfolio management and the Buffett Partnership Letters, please see our previous articles for more details. Cash

“If a 20% or 30% drop in the market value of your equity holding (such as BPL) is going to produce emotional or financial distress, you should simply avoid common stock type investments. In the words of the poet – Harry Truman – ‘If you can’t stand the heat, stay out of the kitchen.’ It is preferable, of course, to consider the problem before you enter the ‘kitchen.’

I had a discussion a few months ago with a friend about the difference between “Cash” vs. “CASH.” In my asset allocation context:

  • “Cash” is readily deployable into securities and assets when opportunities arise, whereas
  • “CASH” should never be exposed to the vicissitudes of any capital market that has any chance of loss (bonds, equity, or otherwise)

People often discuss Buffett’s habit of keeping plenty of cash on the sidelines awaiting opportunities, but they rarely point to the difference between a stash of dry powder ready for redeployment anytime, versus a worst case scenario nest egg that supports basic living necessities.

Based on the quote above, Buffett advised his clients to consider something similar before giving him any capital to manage.

So ask yourself, have you ever considered the difference between “Cash” vs. “CASH,” and if so, do you have a figure in mind? After all, as Buffett suggests, it’s preferable to consider this before entering the heated kitchen of the financial markets.

Expected Return

“The gross profits in many workouts appear quite small. It’s a little like looking for parking meters with some time left on them. However, the predictability coupled with a short holding period produces quite decent average annual rates of return after allowance for the occasional substantial loss.”

As we have discussed in the past, and see again in the quote above, Buffett kept close tabs on the future expected return of his portfolio.

Interestingly, here, he takes this concept one step further by introducing something new. Buffett may have kept some sort of loss provision (either actual or mental) for his basket of “work-out” securities similar to bad debt expense or loan provisions in accrual accounting.