Warren Buffett's Ground Rules

Miller worked through the letters Buffett wrote to his limited partners from 1956 to 1970, when he ran Buffett Partnership Limited rather than Berkshire Hathaway, and organised the material by subject with his own explanation attached. The partnership letters are less widely read than the Berkshire ones and describe a different operation.

The substantive content concerns method and structure. Buffett divided the portfolio into three categories. Generals were undervalued securities bought passively and held until the market recognised them. Workouts were positions in announced corporate events such as mergers, liquidations, tenders and spin-offs, where the return depended on the transaction completing rather than on market direction. Controls were positions large enough for Buffett to influence or determine what the company did, with Sanborn Map and Dempster Mill Manufacturing as the documented cases. He argued that workouts provided returns uncorrelated with the market and therefore made the partnership more resilient in falling markets, and he sized the categories according to opportunity.

The ground rules of the title are the terms he set with partners: he would not predict market direction, he would be judged against the Dow over at least three years and preferably five, he would take no fee on the first six per cent of return and a quarter of anything above it, and he would tell partners what he was doing but not what he owned. He also stated repeatedly that he expected to do better relative to the market in falling years than in rising ones.

Miller's commentary is competent but adds little to the letters, which are the real content. The material is also specific to a period when a small pool of capital could exploit inefficiencies in small and illiquid securities, and Buffett has said directly that the approach does not scale.