2000: What was the fee structure in the 1950s Buffett partnership?

AUDIENCE MEMBER: Good morning Mr. Buffett, and good morning Mr. Munger. My name is Mohnish Pabrai and I’m from Long Grove, Illinois.

I have been a student and disciple of yourself, Mr. Buffett, for some time, and especially Mr. Munger. And I have adopted, quite intensely, your theories of capital allocation, in the manner in which I run my business, as well as my portfolio, and quite pleased with the results so far.

My question has to do with the original 1950s Buffett partnerships. There is some conflicting data in the various books about you pertaining to the rules of the partnership and the fees of the partnership.

What I wanted to understand is, I think some of the books allude to the principle being guaranteed — I think six percent a year being guaranteed — and then you took a fourth, and the partners got three-fourths.

In some cases they talk about four percent, and some cases they say there was no guarantee. I would just appreciate a clarification on that.

WARREN BUFFETT: OK, we’ll make it short because I’m not sure how much general interest there is to that. But there was never any guarantee.

There was a guarantee that I wouldn’t get a penny myself — there was none of this one percent fee and all that sort of thing that hedge funds now normally have. After a short period of time I told people I’d have all my capital in it, basically.

So there was a guarantee I would follow — have a common destiny. There was never any guarantee of principle of any sort.

Originally, the thing started by accident, so that there 11 different partnerships before they all got put together on January 1st, 1962, into Buffett Partnerships.

So with the 11 different partnerships, they had different — some different arrangements — based on the preferences of the limited partners. I offered them an option of three or four different choices, and different families made different choices.

When we put them together we settled on the 6 percent preferential with a quarter of the profits over that, with a carry forward of all deficiencies. Nobody was guaranteed anything on them.

Charlie had a much better partnership. His was a third, as I remember, wasn’t it Charlie? (Laughter) ?

CHARLIE MUNGER: Yes, but we were smaller and operating specialist posts on the stock exchange. (Buffett laughs)

The facts were different.

WARREN BUFFETT: Yeah.