warren buffett's letters to partners (1959 1969)

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  • 1. 1959Warren Buffetsletter to partners www.equitygrowthpartners.com

2. I make no attempt to forecast the general market. Myefforts are devoted to finding undervalued securities.However, I believe that widespread public belief inthe inevitability of profits from investment in stockswill lead to eventual trouble. Should this occur,prices, but not intrinsic values in my opinion of evenundervalued securities can be expected to besubstantially affected. 3. 1960Warren Buffetsletter to partners www.equitygrowthpartners.com 4. Most of you know I have been very apprehensive aboutgeneral stock market levels for several years. To date, thiscaution has been unnecessary. By previous standards, thepresent level of "blue chip" security prices contain asubstantial speculative component with correspondingrisk of loss. Perhaps other standards of valuation areevolving which will permanently replace the oldstandards. I dont think so. I may very well be wrong;however, I would rather sustain the penalties resultingfrom over-conservatism than face consequences of error,perhaps with permanent capital loss, resulting from theadoption of "New Era" philosophy where tree really dogrow to sky. 5. 1961Warren Buffetsletter to partners www.equitygrowthpartners.com 6. My continual objective in managing partnership funds isto achieve a long-term performance record superior tothat of the Industrial Average. I believe this average, overa period of years, will more or less parallel the results ofleading investment companies. Unless we do achieve thissuperior performance there is no reason for existence ofthe partnerships. 7. Our bread and butter business is buying undervaluedsecurities and selling when the undervaluation iscorrected, along with investment in "specialsituations" where the profit is dependent on corporaterather than market action. To the extent thatpartnership funds continuously grow, it is possiblethat more opportunities will be available in "controlsituations". 8. 1962Warren Buffetsletter to partners www.equitygrowthpartners.com 9. I have consistently told partners that it is myexpectation and hope (its always hard to tell which iswhich) that we will do relatively well compared tothe general market in down or static markets, but thatwe may not look so good in advancing markets. Instrongly advancing market I expect to have realdifficulties keeping with the general market. 10. Our avenues of investment breakdown into threecategories. These categories have different behaviorcharacteristics and the way our money is divided amongthem will have an important effect on our results, relativeto the Dow in any given year. The actual percentagedivision among categories is to some degree planned, butto a great extent, accidental, based on availability of facts. Category-1:Generally undervalued securities("generals") Category-2:Securities with expectedcorporate action ("work-outs") Category-3:Control the company operations("controls") 11. The first section consists of generally undervaluedsecurities (hereinafter called "generals") where wehave nothing to say about corporate policies and notimetable as to when the undervaluation may correctitself. Over the years, this has been our largest category ofinvestment, and more money has been made herethan in either of the other categories. We usually havefairly large portions (5% to 10% of our total assets) ineach of five or six generals, with smaller in other tenor fifteen. 12. Sometimes they work out very fast; many times they takeyears. It is difficult at the time of purchase to know anyspecific reason why they should appreciate in price.However, because of this lack of glamour or anythingpending which might create immediate favourable marketaction, they are available at very cheap prices. A lot of value can be obtained for the price paid. Thissubstantial excess of value creates a comfortable marginof safety in each transaction. This individual margin ofsafety, coupled with diversity of commitments creates amost attractive package of safety and appreciationpotential. 13. Over the years our timing of purchase has been considerablybetter than our timing of sales. We do not get into thesegenerals with the idea of getting the last nickel, but are usuallyquite content selling out at some intermediate level betweenour purchase price and what we regard as fair value to privateowner. The generals tend to behave market-wise very much insympathy with the Dow. Just because something is cheap doesnot mean it is not going to go down. This segment may verywell go down percentage-wise just as much as Dow. Over theperiod of years, I believe the generals will outperform theDow, and during sharp advancing years like 1961, this is thesection of our portfolio that turns in the best results. It is ofcourse, also the most vulnerable in a declining market. 14. Our second category consists of "work-outs". These aresecurities whose financial results depend on corporate actionrather than supply and demand situation created by buyers andsellers of securities. In other words, they are securities withtimetable where we can predict, with reasonable error limits,when we will get how much and what might upset theapplecart. Corporate events such as mergers. liquidation,reorganization, spin-offs, etc. lead to work-outs. This category will produce reasonably stable earnings fromyear to year, to large extent irrespective of the course of Dow.Obviously, if we operate throughout a year with a largeproportion of our portfolio in work-outs, we will lookextremely good if it turns out to be a declining year for theDow or quite bad if it is a strong advancing year. 15. The final category is "control" situations where we eithercontrol the company or take a very large position and attemptto influence policies of the company. Such operations shouldbe definitely be measured on the basis of several years. In agiven year, they may produce nothing as it usually to ouradvantage to the stock be stagnant market-wise for a longperiod while we are acquiring. These situation, too haverelatively little in common with the behavior of Dow. Sometimes, of course, we buy into a general with the thoughtin mind that it might develop into a control situation. If priceremains low enough for a long period, this might very wellhappen. If it moves up before we have a substantial percentageof companys stock, we sell at higher levels and complete asuccessful general operation. 16. The question of conservatism: I feel the most objective test as to just how conservative ourmanner of investing arises through evaluation of performancein down markets. preferably these should involve a substantialdecline in the Dow. You will not be right simply because a large number of peoplemomentarily agree with you. You will not be right simplybecause important people agree with you. In many quarters thesimultaneous occurrence of the two factors is enough to makea course of action meet the test of conservatism. You will be right, over the course of many transactions, if yourhypotheses is correct, your facts are correct, and yourreasoning is correct. True conservatism is only possiblethrough knowledge and reason. 17. The question of Size: In some securities in which we deal (but not all by anymeans) buying 10,000 shares is much more difficult thanbuying 100 shares and is sometimes impossible.Therefore for a portion of our portfolio, large sums aredefinitely disadvantageous. For a larger portion of ourportfolio, I would say increased sums are only slightlydisadvantageous. This category includes most of ourwork-outs and some generals. However, in the case of control situations increased fundsare definitely advantageous. 18. Prediction: Prediction is one thing from which I have shied awayand I still do in the normal sense. Over any longperiod of years, I think the Dow will probablyproduce something like 5% to 7% per yearcompounded from a combination of dividend andmarket value gains. Despites the experience of therecent years, anyone expecting substantially betterthan that from the general market probably faces adisappointment. 19. 1963Warren Buffetsletter to partners www.equitygrowthpartners.com 20. While I much prefer a five-year test, I feel three years isan absolute minimum for judging performance. It is acertainty that we will have years when the partnershipperformance is poorer, perhaps substantially so, thenDow. If any three-year or longer period produces poorresults, we all should start looking around for other placesto have our money. An exception to the letter statementwould be three years covering a speculative expansion ina bull market. I am not in the business of predicting general stockmarket or business fluctuations. If you think I can do this,or think it is essential to an investment program, youshould not be in the partnership. 21. I cannot promise results to partners. What I can anddo promise is that: Our investment will be chosen on the basis of value notpopularity That we will attempt to bring risk of permanent capitalloss (not short-term Quotational loss) to an absoluteminimum by obtaining a wide margin of safety in eachcommitment and a diversity of commitments; and My wife, children and I will have virtually our entirenetworth invested in the partnership. 22. The Joys of Compounding:Investment of Rs. 100 At end of Year 5% 10% 15% 20% 1Rs. 105 Rs. 110 Rs. 115Rs. 120 5Rs. 128 Rs. 161 Rs. 201Rs. 24910Rs. 163 Rs. 259 Rs. 405Rs. 61915Rs. 208 Rs. 418 Rs. 814Rs. 1,54125Rs. 339 Rs. 1,083 Rs. 3,292Rs. 9,540 It is always startling to see how relatively small difference in return rates add up very significant sums over period of years. 23. The cornerstone our investment philosophy: Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results. The better sales will be the frosting on the cake. 24. The past experience shows that the most highly paid andrespecte


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