Financial History 144 Winter 2023 - Page 26

the idea . He had also built an excellent track record managing money and was ready for a new challenge . They formed Ruane , Cunniff & Stires , Inc . and purchased a seat on the New York Stock Exchange for the highest price to date , just as the stock market was peaking and Buffett was exiting .
Cunniff was an ideal partner for Ruane . On the one hand , they shared a similar background . Cunniff also served as a US Navy officer during WWII and attended Harvard Business School funded by the GI Bill . He enrolled at Colgate University in 1941 , just as the United States entered WWII . The Navy dramatically increased its presence at Colgate and other universities to train new officers to join the war effort . He was commissioned as an ensign and stationed in the Pacific theater . He fought in some of the most intense naval battles of the war , including Leyte Gulf in 1944 , as well as Lingayen Gulf and Okinawa in 1945 . His New York Times obituary states that “ in later years Rick would occasionally remark that no stock market disturbance could compare to being 21 years old on the deck as commander of a small boat ( Landing Craft 451 ) surrounded by enemy ships and kamikaze planes , taking fire .”
Cunniff was also an ideal partner for Ruane because he was very different . He was reserved , analytical , politically conservative and a lifelong student of history and business . Ruane , on the other hand , was very gregarious and liberal in his political views . The best partnerships are often based on different , but complementary perspectives .
Another member of the Cunniff family became a very influential partner in later years . Rick ’ s eldest daughter , Carley , joined the firm in 1983 , after having graduated from Harvard Business School and working in several investment banks . According to Paul Lountzis , her friend and colleague at the firm , “ Carley was a brilliant financial analyst who was the heart and soul of the firm , yet never sought the limelight … She combined her financial prowess with deeply understanding all aspects of a business and she did it with humor and her special wit that made it so fun to learn from her and be with her .” Carley served as executive vice president and director of both the firm and the Sequoia Fund . She passed away prematurely in 2005 , the same year as did Bill Ruane .
Sidney Stires , another Harvard graduate who worked at Kidder , Peabody with Ruane as a research analyst , was also a partner . He was a gifted musician whose grandparents were composer Sidney Homer and his wife , contralto Louise Homer . In 2004 , Robert Goldfarb , a longtime senior analyst and portfolio manager at the firm , became president and the name of the company was changed to Ruane , Cunniff & Goldfarb .
Sequoia Fund
In 1970 , Ruane and Cunniff set up the Sequoia Fund to manage the money received from Buffett ’ s partners . The fund struggled to survive in its early years , underperforming for the first three years as investors embraced a “ Nifty Fifty ” group of growth stocks such as Polaroid , Eastman Kodak and Avon . The fund then lost 24 % in 1973 and another 16 % in 1974 during a vicious bear market .
This was a very challenging time for Ruane . He had invested all his capital in the firm . “ We were flat broke with maybe a thousand dollars ,” recalls his daughter , Lili . He was forced to sell off some of the hundred acres of farmland he owned in Connecticut to provide for his family and to keep the company going . Ruane wrote to his shareholders , “ It is entirely possible that you have the dubious distinction of being a stockholder in a fund which has the lowest average price-earnings ratio in the country .”
By the end of 1974 , the “ Nifty Fifty ” bubble collapsed and the stock market started to recover . The Sequoia Fund ’ s portfolio of extremely cheap value stocks soared 60 % in 1975 and another 72 % in 1976 . It never looked back after that , outperforming the market over the next 25 years . From 1970 through 2001 , the fund was the best-performing mutual fund , appreciating 17 % on an annual basis .
This extraordinary performance can be explained by several factors . First , both Ruane and Cunniff adhered to Graham ’ s principles of investment :
• A stockholder is a partial owner of a business
• Each business has an intrinsic value which can be estimated by disciplined financial analysis
• Invest only with a margin of safety relative to the intrinsic value
Second , Ruane ’ s method of investing was another factor in the firm ’ s success . Tom Russo , founder of Gardner , Russo & Quinn and an analyst at Ruane , Cunniff from 1984 – 88 , recalls that Ruane always invested in a highly concentrated portfolio of approximately 10 stocks and held for the long term . One example was Buffett ’ s Berkshire Hathaway , which appreciated over time to represent 30 % of the fund ’ s portfolio . Ruane also focused on the unit economics of a business : for example , the profit per Duracell battery .
Third , Ruane ’ s leadership style spelled success . Terence Pare , an analyst at Ruane , Cunniff for 20 years until his recent retirement , remembers Ruane ’ s charismatic personality : “ Whenever he walked into the room , everyone perked up .” He also liked to interact with friends and colleagues in a playful way , including pranks . Russo recalls that in 1986 , Bob Malott , a shareholder of the Sequoia Fund and chairman of FMC Corporation , delivered a bogus subpoena to Ruane , Cunniff & Co , Inc . and its management , citing , “ Defendants are guilty of wasting corporate assets , through acts which include but are not limited to yacht outings by Board Members and assorted female companions , and lavish parties at corporate headquarters involving alcoholic beverages , gourmet fare and high priced professional singing talent ( paid full union scale ).”
He treated all his employees with respect and rewarded them generously for good performance . In summary , he created a wonderful culture of teamwork , akin to that of a large family . The fund ’ s performance speaks for itself .
Other Remembrances
Buffett recalls that “ Bill was a remarkable investor and a remarkable human being . He introduced me to Tom Murphy , the founder of Capital Cities / ABC . I knew them both extremely well and never saw either do an unkind thing to anyone .” He remembers a playful episode during a Buffett Group trip on the Queen Elizabeth II . “ The deck was crowded with people when this disheveled man with a mustache pushed his way through our group . He bumped into me and then suddenly pulled off his fake mustache — it was Bill Ruane .” Buffett also recalls that when he was chairman of the board of Data Documents , a small company based in Omaha ,
24 FINANCIAL HISTORY | Winter 2023 | www . MoAF . org