We had the pleasure of speaking with Marc Rubinstein, author of Net Interest, a financial sector newsletter, about his essay, Other People’s Money.
In the 1950s and 1960s, Warren Buffett ran a hugely successful investment partnership. Aged just 25, he clawed together $105,000 from six investors and began managing it out of a small study in his rented home, accessible only via the bedroom. His agreement with these early investors was novel: they were guaranteed a return of 4% on their funds; anything above that he would split 50/50 with them, but he would also cover a quarter of any losses out of his own pocket. “My obligation to pay back losses was not limited to my capital. It was unlimited.” 1
Fortunately for Buffett, that loss clause was never triggered – he never had a single down year. In his first few months of operation, he beat the market by 4% and over the next 12 years he would go on to compound at a rate of 31.6% per year before fees. By the end of 1968, he was managing $105 million on behalf of over 300 investors. His reputation had grown and he had become rich.
And then he wound it all up.
Buffett wrote to his investors in May 1969 to explain. He offered four reasons: opportunities for his style of investing were drying up; his fund had grown too large for small cap investments to have a real impact; the market had become more speculative as a result of a swelling demand for returns; and finally, “the only way to slow down is to stop”. More than anything else, Warren Buffett wanted to slow down.
Over the next few months, Buffett liquidated his funds, returning to investors a mix of cash and stock in two illiquid holdings over which he had control – Diversified Retail Company Inc and Berkshire Hathaway Inc. He recommended clients reinvest their proceeds in his friend Bill Ruane’s fund or in tax-free bonds. And that was that.
Read on or listen to our conversation (recorded on May 10, 2021):
This conversation is available as an episode of Gain Industry Insights, a member podcast of MOI Global. (Learn how to access member podcasts.)
About This Audio Series:
MOI Global is delighted to engage in illuminating conversations on the financial sector with Marc Rubinstein, whose Net Interest newsletter we have found to be truly exceptional. Our goal is to bring you Marc’s insights into financial services businesses and trends on a regular basis, with Marc’s weekly essays serving as inspiration for our discussions.
About Marc Rubinstein:
Marc is a fellow MOI Global member, managing partner of Fordington Advisors, and author of Net Interest. He is a former analyst and hedge fund manager, most recently at Lansdowne Partners, with more than 25 years of experience in the financial sector. Marc is based in London.
About Net Interest:
Net Interest, authored by Marc Rubinstein, is a newsletter of insight and analysis from the world of finance. Enjoyed by the most senior executives and smartest investors in the industry, it casts light on this important sector in an easy-to-read style. Each post explores a theme trending in the sector. Between fintech, economics and investment cycles—there’s always something to talk about!
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