Everyone should be entirely clear on these ground rules, which is the philosophy of Peter Partnership Fund. If you are in tune with me, then lets go. If you aren’t, I understand.

1) I believe in getting paid for Performance, not Time. If I earn peanuts for you, I deserve tomatoes. If i earn wonderful return for you, I expect to get paid handsomely. However, in no sense is any rate of return guaranteed to partners. The 6% annualised return is simply a hurdle rate for me to be paid, and NOT a promise of a minimum return.

2) Whether we do a good job or a poor job is not to be measured by whether we are plus or minus for the year.  It is instead to be measured against S&P 500 ETF. Mind you, this benchmark is not an easy benchmark, as it outperform roughly 80% of all active equity funds over 5 years as well as 10 years period.

3) While I much prefer a five-year test, I feel three years is an absolute minimum for judging performance. It is a certainty that we will have years when the partnership performance is poorer, perhaps substantially so, than the benchmark. If any three-year or longer period produces poor results, we all (including my family’s funds and my own funds) should start looking around for other places to have our money. An exception to the latter statement would be three years covering a speculative explosion in a bull market.

4) I am NOT in the business of predicting the general stock market or business fluctuations. If you think I can do this, or think it is essential to an investment program, you should not be in the partnership.

5) If a 20% or 30% drop in the market value of your equity holdings (such as Peter Partnership Fund) is going to produce emotional or financial distress, you should simply avoid common stock type investments. In the words of the poet – Harry Truman – “If you can’t stand the heat, stay out of the kitchen. “ It is preferable, of course, to consider the problem before you enter the “kitchen”.

6) The maximum I will ever invest in a company is 60% of the fund’s net worth. If after my purchase, and the particular stock rises at a rate faster than the overall portfolio, I reserve the right not to sell it simply to trim the overall portfolio to less than 60%. However, I will not be adding more into the stock once it reaches 60%. This 60% limit does not apply to Berkshire Hathaway stock (Berkshire), which I can invest up to 300% of the fund’s net worth. This 300% limit happens only when Berkshire is selling at its buyback level, which is extremely rare.

7) I will not comment on my purchase/selling of any of the stocks during the year. I do not want to be “followed” around every time I make a “shot” every turn. However, I will report to you the way I want to be reported at the end of every year. Any questions will be answered honestly, without hiding anything (just the way I want to be answered if our roles were reversed).

8) I cannot promise results to partners. What I can and do promise is that:
a. Our investments will be chosen on the basis of value, not popularity;
b. That we will attempt to bring risk of permanent capital loss (not short-term quotational loss) to an absolute minimum by obtaining a wide margin of safety in each commitment and a diversity of commitments (except for Berkshire Hathaway money is managed).
c.  My wife and I will have virtually our entire net worth invested the same way your money is managed.

1 Source: http://www.investopedia.com/advisor-network/questions/how-many-mutual-funds-beat-sp-500-percentage-basis-after-operational-fees/

***If you wish to download the The Ground Rules in pdf format, CLICK HERE.