<I knew that he sold out at the top in the late 1960s before the crushing bear markets of the early 1970s, but I didn't know that he cleared his portfolio almost entirely right before the 1987 crash.>
I do not think that is quite right. The following snips from the book "of Permanent Value, The story of Warren Buffet" by Andrew Kilpatrick, 1994 gives a slightly different view.
Snip-- One investment manager, representing an organization (with an old established name you would recognize) handling mutual funds aggregating well over $1 billion, said upon launching a new advisory service in 1968:
The complexities of national and international economics make money management a full-time job. A good money manager cannot maintain a study of securities on a week-by-week or even a day-by-day basis. Securities must be studied in a minute-by-minute program.
"Wow!" said Buffett. "This sort of stuff makes me feel guilty when I go out for a Pepsi."
By May 29, 1969 he wrote, "About 18 months ago I wrote to you regarding changed environmental and personal factors causing me to modify our future performance objectives."
He said the investing environment was becoming more negative and frustrating and, further, "I know I don't want to be totally occupied with out-pacing an investment rabbit all my life. The only way to slow down is to stop."
Of course today, in a slightly different business structure, Buffett remains occupied with outrunning that investment rabbit for the best investment carrots.
From 1957 to the end of 1969, the partnership had rung up a 29.5% annual compound return while the Dow had a 7.4% annual return!
Buffett liquidated the partnership and distributed to the investors their profits and their pro rata interest in Berkshire. He gave them a range of options, maintaining proportional interests in Diversified Retailing Co. or in Berkshire. Or the partners could take cash. Also he offered to help investors make bond investments.
He even recommended another money manager, his old friend from Columbia Business School, Bill Ruane, who established the Sequoia Fund on July 15, 1970, to serve limited partners when Buffett Partnership closed.
The successful Sequoia Fund has long invested in some of the same stocks that Berkshire has, such as Capital Cities/ ABC, Salomon and Federal Home Loan Mortgage Corp. About a quarter of Sequoia 's money is in Berkshire.
The Buffett Partnership was terminated at the end of 1969 and the market was well into a long tailspin culminating in the collapse of 1973-74. Perhaps Buffett was familiar with Shakespeare's stage direction in The Winter s Tale: "Exit, pursued by a bear."
Buffett's caution about conditions and his withdrawal were perfectly timed.
When the partnership closed, Berkshire had 983,582 shares outstanding. Buffett Partnership owned 691,441 of them.
It had grown to about $105 million and Buffett's own stake was worth about $25 million, much of which he quietly invested in Berkshire Hathaway. His interest, managerial and financial, had increased in Berkshire, which in 1969 had bought the Illinois National Bank and Trust of Rockford, Illinois.
Berkshire started business on the 14th floor of Kiewit Plaza on August 1, 1970.
Berkshire now had three main businesses: the textile operation, the insurance operation conducted by National Indemnity and National Fire & Marine, and the Illinois National Bank and Trust. It also owned Sun Newspapers, Inc., Blacker Printing Company and 70% of Gateway Underwriters, but these operations were not financially significant. Berkshire also bought the Omaha Sun, along with a string of weeklies in 1969, and sold them in 1981, two years before the Sun folded.
In a final letter to partners on February 18, 1970, Buffett thanked his partners-numbering about ninety by then-for giving him a free hand. "My activity has not been burdened by second-guessing, discussing non sequiturs, or hand holding. You have let me play the game without telling me what club to use, how to grip it, or how much better the other players were doing.
"I've appreciated this, and the results you have achieved have significantly reflected your attitudes and behavior. If you don't feel this is the case, you underestimate the importance of personal encouragement and empathy in maximizing human effort and achievement." "Herein lies the motivational and management aspects of Buffett's genius," says Michael Assael.
"But Warren Buffett's business and investment genius goes deeper. It now revolves around three elements, and the interplay among them:
1. Finance. Buffett understands the "return on investment" concept is paramount. He knows how to get the most bang for Berkshire 's buck.
2. Economics. Buffett is sensitive to the economic landscape and uses the changing economic environment to Berkshire's advantage. He knows where the world has been. He senses where it is headed.
3. Management and the ability to motivate people.
Buffett is touched by the importance ofhuman sensitivity, encouragement and empathy in maximizing human achievement.
"Combining these elements makes Buffett unique. He views the business world in a multi-dimensional way, much as Einstein viewed the solar system, and Freud the human brain and nervous system. The results of Buffett's genius speak for themselves."
As the partnership closed out, a young man with a bizarrely offbeat manner was planning bigger things.
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Buffett made his $700 million preferred stock investment in Salomon Inc on September 28, 1987, after a lifetime of denouncing Wall Street's demented, short-term mentality.
"It's a huge commitment. We'll know in ten years whether it was a great idea," he said then. He was fortunate to allow himself such an Un Wall-Street-like time frame.
"Without borrowing, it pretty much empties the piggy bank for now," he told the Wall Street Journal, September 30, 1987.
Buffett long has been a critic of Wall Street's short-term trading fixation as well as its excesses ranging from corporate jets to swanky dining rooms. So why Salomon? Why did Buffett invest in the heart of Wall Street? And why particularly in a firm widely known for aggressiveness and shrewd, hair-trigger trading?
"Why are we vocal critics of the investment banking business when we have a $700 million investment in Salomon? I guess atonement is probably the answer," he said at the Berkshire annual meeting in 1991.
The real answer may be that he got a sweet deal in a worldwide franchise. Salomon, founded in 1910, is one of the largest and most profitable brokerage firms in the United States.
Before looking at Buffett's transaction with Salomon, let's examine the timing which, in hindsight, simply could not have been worse.
The stock market crash of 1987 was only three weeks away-the day the market would drop 508 points-or almost 23 percent--its worst single-day loss in modem times.
The crash sent almost all stocks nose diving. Brokerage stocks particularly were hit because of their cyclical nature and partly because over expansion in the securities industry had knocked down margins. The crash triggered a lasting tailspin for brokerage stocks suctioning Salomon 's stock price right down with it.
Salomon 's common stock was trading at about $32 a share when Buffett bought the preferred stock. After the crash, the common stock eventually sank to a low of $16 a share.
Some studies suggest Salomon 's own huge selling that day was one ingredient in the mounting panic. Michael Lewis wrote in The Money Culture, p. 97, "Salomon Brothers found itself censured by the Securities and Exchange Commission for making illegal short sales during the crash of October, 1987.
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In late 1986 I wrote Buffett boldly suggesting he look at the stock of Torchmark, the insurance and financial services company in Birmingham, Alabama.
Several days later I received a note dated December I, 1986:
'"Thanks for the nice comments-and I'll look at Torchmark. "I'm glad you are a shareholder, but you are right-I'm not keen on margin buying. However, we'll try to keep you out of trouble. Sincerely, Warren E. Buffett"
His reply about margin buying came in response to my noting that I liked Berkshire so much I had margined things for more of its shares. He was right about being cautious about margin, and although he tried to keep me out of trouble, even he could not swim against the tide. During the crash of 1987, Berkshire stock fell from about $4,000 to under $3,000 a share over a several-day period, about in line with the rest of the market.
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