⭐️ Warren Buffett’s Origin Story
Compounding at 29.5% for Over a Decade — How Young Warren Buffett Quietly Built a Fortune Buying the Market’s Most Ignored Stocks
[Jack’s note: Another fantastic free, non-sponsored Masterclass from Alejandro.]
A reminder of what was happening this week at The Stock Indider:
Hello future 🧙♂️ Hermits 👋
I'm Alejandro Yela, and if you're into under-the-radar listed companies, you're in the right place!
Welcome to 🧙♂️ The Hermit 🧙♂️ — where we go deep on the stuff others miss.
Here’s what you’ll find:
🔍 Deep-dive write-ups on overlooked public companies
💼 Transparent portfolio updates straight from our EU-regulated hedge fund
🎙️ Interviews with CEOs of hidden-gem businesses
📚 Lessons learned from over a decade in the investing trenches
You won’t find any of the hyped stuff here.
Instead you’ll get professional, skin-in-the-game research.
We’d love to have you onboard 🙌 — and highly recommend checking out our 3-minute guide to get started. It’s short, sharp, and we think you’ll love it:
🔑 1. Buffett’s Strategy: Buying Deeply Undervalued Small Public Companies
From the beginning of the Buffett Partnership Ltd. (1956–1969), Warren Buffett focused intensely on small, publicly traded companies that were ignored or mispriced by the broader market. He referred to these as “generals” — companies where:
There was no glamour or popular story to attract investors
Stocks were trading significantly below intrinsic value
The businesses had stable operations and low downside risk, creating a margin of safety
Buffett was buying these small caps when others wouldn’t touch them, often because of illiquidity, lack of dividends, or simply being boring. For example, in 1958, he described investing in Commonwealth Trust Co., a small New Jersey bank earning ~$10 per share but trading at ~$50, even though intrinsic value was estimated at $125 per share.
“Our bread-and-butter business is buying undervalued securities and selling when the undervaluation is corrected...” – Buffett, 1960 Letter
Buffett called these stocks "generals" because they were generally undervalued and required patience rather than catalysts. These ideas were often in the microcap space and could take years to pay off — but when they did, the returns were huge.
🏗️ 2. Structure of the Partnership
Buffett began his first investment partnership in 1956 with just $105,000 of assets under management. Over the next decade, he formed several additional partnerships, eventually consolidating them into Buffett Partnership Ltd.
The structure was simple but elegant:
Buffett took no fixed fees
He only earned a percentage of profits above a 6% hurdle rate
His own money was invested alongside partners, ensuring skin in the game
This created alignment of incentives — Buffett only made money if his investors did too — and gave him the flexibility to pursue unconventional, contrarian strategies.
📉 3. Low Correlation to Market & Focus on Downside Protection
Buffett emphasized protecting capital first. Many of the companies he bought were cheap because they were neglected, not because they were fundamentally broken.
He structured his portfolio into three buckets:
"Generals" – Undervalued companies (small, illiquid, obscure)
"Workouts" – Special situations like mergers, liquidations, and arbitrage
"Controls" – Companies where Buffett acquired a large enough stake to influence or control management
He believed his returns would outperform in flat or down markets and be average in bull markets. His primary objective was to beat the Dow Jones by ~10% annually over time — and he did that consistently during the partnership years.
📊 4. Performance vs. the Market
Between 1957 and 1969, the Buffett Partnership returned +2,810%, while the Dow returned +153%. That’s a compounded ~29.5% before fees vs the market’s ~7.4%.
Even adjusted for his fee structure, limited partners achieved a ~23.6% compounded return — demolishing traditional mutual funds and “blue-chip” strategies.
Buffett beat the market by:
Avoiding speculation and hype
Hunting in neglected corners of the market
Holding fewer, higher-conviction positions
He often took 10%–25% positions in tiny companies, a strategy only possible because he was managing a small pool of capital in those years.
🧠 5. The Buffett Playbook: Discipline + Patience + Deep Value
Buffett’s letters show the early formation of what later became Berkshire Hathaway’s DNA:
Focus on value: He never wavered from buying below intrinsic value
Ignore market noise: He didn’t forecast the market — he looked for businesses that were cheap, regardless of sentiment
Patience is a virtue: He was happy to sit on cash or wait years for a catalyst
Buy control when it makes sense: Occasionally, he'd buy enough of a company to influence change — as he did with Sanborn Map and Dempster Mill Manufacturing
🧭 Final Thoughts
Young Buffett succeeded because he was willing to go where others weren’t — into the realm of neglected microcaps, obscure special situations, and low-liquidity stocks that were too small for large institutions to care about. These tiny, forgotten businesses often had real earnings, assets, or hidden value that the market had mispriced.
In today’s terms, Buffett was running a concentrated, value-focused microcap hedge fund — with virtually no competition.
His success in these early years wasn’t just about picking stocks — it was about applying rational, disciplined, contrarian investing principles with laser focus and iron patience.
Want to dig into the source material?
Here’s a free copy of the full Buffett Partnership Letters (1957–1970), covering his investment approach from 1956 to 1969.
🙏 Feel free to ❤️ and comment so that more people can discover and enjoy this Substack 😇
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