Buffett Partnership Letter 1957 Annual

Warren E. Buffett | February 1958

1957 Performance

Year	Dow	Partnership	Limited Partners
1957	-8.4%	10.4%	9.3%

The General Stock Market Picture in 1957

"The past year witnessed a moderate decline in stock prices... the decline in stock prices has been considerably less than the decline in corporate earning power under present business conditions."

Buffett viewed the general market as priced above intrinsic value, particularly in blue-chip securities. He saw risk of substantial decline but believed work-outs would be insulated.

Our Activities in 1957

Investment Categories:

Generals: Undervalued securities with no corporate control, depending on market appreciation
Work-outs: Investments dependent on specific corporate actions (mergers, liquidations, tenders) rather than general market moves

"A work-out is an investment which is dependent on a specific corporate action for its profit rather than a general advance in the price of the stock."

By end of 1956, portfolio ratio was 70-30 (general issues to work-outs). By end of 1957, it shifted to approximately 85-15.

Results for 1957

Three partnerships formed in 1956 showed gains of about 6.2%, 7.8%, and 25% respectively. The wide variance was due to timing of fund availability and market levels when funds were invested.

"This performance emphasizes the importance of luck in the short run, particularly in regard to when funds are received."

Two partnerships started mid-1957 had results roughly equivalent to the averages (down about 12% from inception).

Key Principles

Long-term measurement: "Over the years, I will be quite satisfied with a performance that is 10% per year better than the Averages"
Portfolio value: "I can definitely say that our portfolio represents better value at the end of 1957 than it did at the end of 1956"
Patience: "Obviously during any acquisition period, our primary interest is to have the stock do nothing or decline rather than advance"

Source

Warren E. Buffett, February 1958.