Academia Vs. The Real World – Part 2

<< Read Part 1: Academia vs. The Real World

We are revisiting our discussion of what the real world is like versus what academics claim in papers and debates. A good way of putting this is “Academia has a tendency, when unchecked (from lack of skin in the game), to evolve into a ritualistic self-referential publishing game.” In 1984, this is exactly what Michael Jensen did in his talk at Columbia University in a debate with Warren Buffett. We know that reciting more and more of your colleagues’ papers is the best way to win in academia. We seek to finish this discussion on what works in the real world.

During the run-up to Christmas of 1969, Warren Buffett decided to close his partnership and spent that time winding down the portfolio. Despite having the most successful year ever in 1968, he didn’t want to manage the partnership any longer. He had particular concerns for this which we believe must be talked about in light of today’s circumstances. We also want to look at what he advised his former partnership investors to do. We will examine what kind of a ride, understanding the ups and downs, was produced by the Sequoia Fund (SEQUX) in the aftermath of his advice. We believe all of this will help us think rationally as long-duration investors and help us set our expectations.

The Sequoia Fund was founded in a vacuum. The Fund was managed by Bill Ruane, a friend of Buffett’s who he met in 1950 at a Ben Graham seminar at Columbia University. In 1969, Buffett wanted out and dispersed the capital of his partnership to his partners. He sent them 40% of their money in Berkshire Hathaway and 60% in cash. For the former partners that wanted common stock ownership, he advised them to take this cash to Ruane’s fund that was launching in 1970. The greatest investor of all time made this fund recommendation. The ride wasn’t fun in the beginning.

Below is a table of the Sequoia Fund’s returns from July 14, 1970, to November 2018 month-end. We’ve noted the years of underperformance in red.

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