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Warren Buffett and the Problem of Patience

Warren Buffett (Trades, Portfolio)'s early partnership years are some of the most interesting in his career from an investment perspective.

Between the mid-1950s and 1969, when he eventually wound up his partnerships, the young investor invested in hundreds of deep value opportunities and even took control of a few businesses, even though he was relatively unknown as an investor throughout the country.

He also generated outstanding returns for his investors during this period when he was managing their money.

For over a decade, Buffett achieved an annual compound return of 24.5% net of fees. In 1968, the Buffett Partnership returned 58.8% versus 7.7% for the Dow, which was his best year ever at the time.

Setting up the business

Buffett originally started his partnerships after returning home following a stint in New York working under his teacher and mentor, Benjamin Graham, at the Graham Newman Corporation.

When Buffett returned to Omaha, several friends and acquaintances asked him to help them invest their money, and in response, he set up the first partnership, asking them for total control over their investments.

The first partnership brought in $105,000. Over the next 14 years, the size of the Buffet Partnerships grew to $104 million. By the time Buffett closed the partnerships, his personal stake was worth $25 million, up from an initial investment of just $100.

Buffett decided to close his investment vehicles because he was running out of ideas. The booming stock market in the late 1960s had led to a dearth of deep value opportunities, and this, coupled with the fact that he was now spending a lot of his time running the newly acquired Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) textile company, led him to quit the business.

Wait for the best deals

Speaking about this time at the 1999 Berkshire Hathaway annual meeting of shareholders, the Oracle of Omaha said:

"In the 1969 period when I closed up, A, I had a somewhat similar situation in terms of finding things. And B, I really felt that the expectations of people had been so raised by the experience we'd had over the previous 13 years, that it made me very uncomfortable. And I felt unable to dampen those expectations. And I really just didn't find it comfortable to operate where my partners, even though they might nod their heads understandingly and say that, "You know, we really know why you aren't making any money while everybody else is." I didn't think I wanted to face the internal pressure that would come from that. I don't feel any such internal pressure in running Berkshire."

There's an important lesson to be learned here about the benefits of private capital and being able to wait on the side for the right opportunity, rather than having to chase the market higher.

Buffett went on to run Berkshire, which gave him more flexibility in terms of the stocks that he could buy and when he could buy them.

But whatever structure you are operating, the key is to remain nimble at all times and keep a lot of cash on hand to take advantage of opportunities when they present themselves. These opportunities are rare, but when they present themselves, it pays to act with conviction:

"But you know, that's part of the game. I mean, it stayed cheap a long time from the '73 period on. And you will find waves of optimism and pessimism. And they'll never be exactly like they were before. But they will come in some form or other. That does not mean we're sitting around with a bunch of cash because we expect stocks to go down, though. We keep looking for things. We're looking for things right now. We're talking to people right now about things where we could expend substantial sums of money. But it's much more difficult in this period."

Disclosure: The author owns shares of Berkshire Hathaway.

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This article first appeared on GuruFocus.