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Omaha • 1970–Spring 1972

Two months after the Stage Door Deli party, as Buffett took the formal steps to unwind the partnership, the Dow broke 800 on the downside. A month later, in January 1970, his friend Carol Loomis highlighted his spectacular performance over the course of the partnership’s history—and his dour view of the prospects for stocks—in an article on hedge funds in Fortune.1 Shortly before the article appeared, as the market started to snowplow downhill, he sent the partners a letter explaining what they owned.

• Berkshire Hathaway, which he said was worth about $45 per share.2 Of this, about $16 was tied up in textiles, a business that he said was not satisfactory and had an even smaller chance of being so in the future. But even though that was one-third of the value, he would not liquidate it to free the cash. “I like the textile-operating people,” he wrote. “They have worked hard to improve the business under difficult conditions—and, despite the poor return, we expect to continue the textile operation as long as it produces near-current levels.” Berkshire Hathaway also owned the much more profitable insurer, National Indemnity.

• Diversified Retailing, which he valued at $11.50 to $12 per share. DRC consisted of only the scroungy Associated Cotton Shops and cash and notes from the sale of Hochschild-Kohn, which he planned to use “for reinvestment in other operating businesses.” He did not specify what these might be, implicitly requiring the departing partners to trust his judgment, just as they had when they joined the partnership.

• Blue Chip Stamps, revealed for the first time. Buffett told the partners he would probably cash them out of this investment because the company was planning a sale of stock around the end of the year.

• Illinois National Bank & Trust Company of Rockford, Illinois, also owned by Berkshire Hathaway.

• Sun Newspapers, which he described as “not financially significant.”3

The departing partners were floored to find that through their ownership of Berkshire Hathaway, they owned a trading-stamp company, a bank, and an insignificant newspaper.4 Now they had to decide whether to hold these cards or trade them, because they could have all cash instead.

“He would cut the pie and you would be able to get the first choice on the pieces,” says John Harding. This was a brilliant move on Buffett’s part. He, of course, wanted them to choose the cash, leaving the Berkshire Hathaway and Diversified Retailing stocks for himself. Nevertheless, he was honest with them. In a letter of October 9, 1969, he made a market forecast, which he had previously declined to do. With the market at such heights, “…[f]or the first time in my professional life,” he wrote, “I now believe there is little choice for the average investor between professionally managed money in stocks and passive investment in bonds”5—although he did allow as how the very best money managers might be able to squeeze out a few percentage points over the earnings of bonds. Nonetheless, the departing partners shouldn’t have high hopes for what they could do with the cash.

Two months later, on December 5, he gave a prediction about how these two stocks would do, along with telling the partners what he was going to do himself. “My personal opinion is that the intrinsic value of DRC and B-H will grow substantially over the years…. I would be disappointed if such growth wasn’t at a rate of approximately ten percent per annum.” That was an important statement. He was telling them that Berkshire and Diversified would not only do better than bonds, but better than he had said in October the partners could expect from even the very best money managers.

“I think both securities should be very decent long-term holdings and I am happy to have a substantial portion of my net worth invested in them…. I think there is a very high probability that I will maintain my investment in DRC and B-H for a very long period.”6

Separately, Buffett wrote the partners a dissertation on how to invest in bonds, again extending himself considerably