Buffett Partnership Letter February 1970

Warren E. Buffett | February 25, 1970

Bond Education for Partners

Buffett provides elementary education on tax-exempt bonds for partners receiving large cash distributions.

Why Tax-Free Bonds Now?

For a 40% federal tax bracket investor:

• 6% tax-free bond = 8.5% taxable bond equivalent
• Stock market expectations: ~9% (3% dividends + 6% gain)
• After-tax: ~6.5% for average managed money

"Passive investment in tax-free bonds is likely to be fully the equivalent of expectations from professionally managed money in stocks."

Types of Bonds to Buy

1. Large revenue-producing public entities: Toll roads, electric power districts, water districts
2. Industrial Development Authority bonds: Public entity holds title, leased to private corporation (e.g., US Steel)
3. Public Housing Authority issues: Highest grade (AAA), government-backed
4. State obligations

Key Rules

DO:

• Buy bonds in $25,000+ denominations
• Prefer 10-25 year maturities
• Buy non-callable bonds or discount bonds
• Stick to well-known issuers you understand

DON'T:

• Buy bonds with unfair call provisions
• Buy very small lots (penalized on resale)
• Buy issues you don't understand

On Callable Bonds

"Such a contract essentially means that you have made a forty year deal if it is advantageous to the issuer and a five year deal if the initial contract turns out to be advantageous to you."

Call Provisions

"Bonds with very unattractive call features sell at virtually the same yield as otherwise identical bonds which are noncallable."

Source

Warren E. Buffett, February 25, 1970.