The first example is that of Walter Schloss where his partnership compounded a23,104.7% return versus 887.2% for the S&P. Walter never went to college, but tooka course from Ben Graham at night at the New York Institute of Finance. He has noconnections or access to useful information. Practically no one in Wall Street knows himand he is not fed any ideas. He looks up the numbers in the manuals and sends for theannual reports, and that’s about it. In introducing me to Schloss Warren had also, to mymind, described himself. “He never forgets that he is handling other people’s money andthis reinforces his normal strong aversion to loss.” He has total integrity and a realisticpicture of himself. Money is real to him and stocks are real—and from this flows anattraction to the “margin of safety” principle.
Walter has diversified enormously, owning well over 100 stocks currently. Heknows how to identify securities that sell at considerably less than their value to aprivate owner. And that’s all he does. He doesn’t worry about whether it’s January,he doesn’t worry about whether it’s Monday, he doesn’t worry about whether it’san election year. He simply says, if a business is worth a dollar and I can buy it for 40 cents,something good may happen to me. And he does it over and over and over again. He ownsmany more stocks than I do—and is far less interested in the underlying nature of the business:
I don’t seem to have very much influence on Walter. That’s one of his strengths; no one hasmuch influence on him.
The second case is Tom Knapp, who also worked at Graham-Newman with me and aLimited Partners return of 936.4% versus 238.5% for the S&P. Tom was a chemistry major atPrinceton before the war; when he came back from the war, he was a beach bum. And thenone day he read that Dave Dodd was giving a night course in investments at Columbia. Tomtook it on a noncredit basis, and he got so interested in the subject from taking that coursethat he came up and enrolled at Columbia Business School, where he got the MBA degree. Hetook Dodd’s course again, and took Ben Graham’s course. Incidentally, 35 years later I calledTom to ascertain some of the facts involved here and I found him on the beach again. The onlydifference is that now he owns the beach!
In 1968 Tom Knapp and Ed Anderson, also a Graham disciple, along with one ortwo other fellows of similar persuasion, formed Tweedy, Browne Partners. Tweedy,Browne built that record with very wide diversification. They occasionally bought controlof businesses, but the record of the passive investments is equal to the record of the controlinvestments.The Sequoia Fund which had a 775.3% compound return versus 270% for the S&P, andis managed by a man whom I met in 1951 in Ben Graham’s class, Bill Ruane. After gettingout of Harvard Business School, he went to Wall Street. Then he realized that he needed to geta real business education so he came up to take Ben’s course at Columbia, where we met inearly 1951. Bill’s record from 1951 to 1970, working with relatively small sums, was far betterthan average. When I wound up Buffett Partnership I asked Bill if he would set up a fundto handle all our partners, so he set up the Sequoia Fund. He set it up at a terrible time, justwhen I was quitting. He went right into the two-tier market and all the difficulties that madefor comparative performance for value-oriented investors. I am happy to say that my partners,to an amazing degree, not only stayed with him but added money, with the happy resultshown. There’s no hindsight involved here. Bill was the only person I recommended to mypartners, and I said at the time that if he achieved a four-point-per-annum advantage over theStandard & Poor’s, that would be solid performance. Bill has achieved well over that, workingwith progressively larger sums of money. That makes things much more difficult. Size is theanchor of performance. There is no question about it. It doesn’t mean you can’t do better thanaverage when you get larger, but the margin shrinks. And if you ever get so you’re managingtwo trillion dollars, and that happens to be the amount of the total equity evaluation in theeconomy, don’t think that you’ll do better than average!
I should add that in the records we’ve looked at so far, throughout this whole periodthere was practically no duplication in these portfolios. These are men who selectsecurities based on discrepancies between price and value, but they make their selectionsvery differently. Walter’s largest holdings have been such stalwarts as Hudson Pulp &Paper and Jeddo Highland Coal and New York Trap Rock Company and all those othernames that come instantly to mind to even a casual reader of the business pages. TweedyBrowne’s selections have sunk even well below that level in terms of name recognition. Onthe other hand, Bill has worked with big companies. The overlap among these portfolioshas been very, very low. These records do not reflect one guy calling the flip and fiftypeople yelling out the same thing after him.Charlie Munger my partner for a long time in the operation of Berkshire Hathaway,and friend of mine who is a Harvard Law graduate, who set up a major law firm. I ran intohim in about 1960 and told him that law was fine as a hobby but he could do better. He setup a partnership quite the opposite of Walter’s. His portfolio was concentrated in veryfew securities and therefore his record was much more volatile but it was based on thesame discount from-value approach. He was willing to accept greater peaks and valleys ofperformance, and he happens to be a fellow whose whole psyche goes toward concentration,who had a partnership return of 1,156.7% versus the Dow of 96.8%. When he ran hispartnership, however, his portfolio holdings were almost completely different from mine andthe other fellows mentioned earlier.
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