Buffett Partnership Letter 1961 Semi
1961 July letter on partnership merger plan and structure changes
Buffett Partnership Letter 1961 Semi
Warren E. Buffett | July 22, 1961
First Half 1961 Performance
During the first half of 1961, the Dow gained about 13% (including dividends). All partnerships operating throughout the six months performed moderately better than the Average.
Key Announcements
Partnership Consolidation Plan
Buffett announced plans to merge all partnerships into a single entity at yearend with several provisions:
(A) Tax-Free Merger Based on market value at yearend, with proper allocation of future tax liability for unrealized gains. The merger itself would be tax-free with no acceleration of profit realization.
(B) New Profit Division
- First 6% per year to partners (based on beginning capital at market)
- Excess divided: 1/4 to general partner, 3/4 to all partners proportional to capital
- Deficiencies carried forward against future earnings (not backward)
Three existing profit arrangements would be replaced, with the new arrangement better for limited partners up to 18% yearly.
(C) No Carryback on Losses No carry back against amounts previously credited to general partner. Buffett family would have largest single investment (~1/6 of total assets).
New provision: Buffett prohibited from purchasing any marketable securities - "the new partnership will represent my entire investment operation in marketable securities."
(D) Monthly Payments 6% yearly rate paid monthly, based on beginning-of-year capital at market. Non-withdrawing partners could have this credited back as advance payments.
(E) Borrowing Provision Partners could borrow up to 20% of partnership interest value at 6%, liquidated at yearend.
(F) Small Tax Adjustments Adjustments under $1,000 charged directly to Buffett.
Warning on Short-Term Performance
"One year is far too short a period to form any kind of an opinion as to investment performance... My own thinking is much more geared to five year performance."
Cash Position
"We have also begun open market acquisition of a potentially major commitment... Such a commitment may be a deterrent to short range performance, but it gives strong promise of superior results over a several year period combined with substantial defensive characteristics."
Source
Warren E. Buffett, July 22, 1961.