1959 Annual Letter to Partners
Buffett's fourth annual letter revealing a 35% position in an investment trust trading at substantial discount, with an emphasis on being insulated from general market behavior.
1959 Annual Letter to Partners
Warren E. Buffett | February 20, 1960 | Omaha, Nebraska
The General Stock Market in 1959
The Dow-Jones Industrial Average recorded an advance from 583 to 679, or 16.4% for the year. Adding dividends, the overall gain was 19.9%.
Despite this indication of a robust market, more stocks declined than advanced on the New York Stock Exchange by a margin of 710 to 628. Both the Dow-Jones Railroad Average and Utility Average registered declines.
Most investment trusts had a difficult time compared to the Industrial Average:
- Tri-Continental Corp. (largest closed-end investment company, $400 million in assets): +5.7% for the year
- Massachusetts Investors Trust (largest mutual fund, $1.5 billion in assets): +9% for the year
Buffett's Market View
"Most of you know I have been very apprehensive about general stock market levels for several years. To date, this caution has been unnecessary. By previous standards, the present level of 'blue chip' security prices contains a substantial speculative component with a corresponding risk of loss."
Buffett maintained his view that current market levels contain substantial speculative risk, while acknowledging he might be wrong:
"I would rather sustain the penalties resulting from over-conservatism than face the consequences of error, perhaps with permanent capital loss, resulting from the adoption of a 'New Era' philosophy where trees really do grow to the sky."
Results in 1959
The six partnerships operating throughout the year achieved:
| Partnership | Overall Net Gain |
|---|---|
| Range | 22.3% to 30.0% |
| Average | 25.9% |
Portfolios were approximately 80% comparable, with differences due to securities and cash becoming available at varying times and payments made to partners.
Performance measurement basis: Overall net gain is determined on market values at the beginning and end of the year, adjusted for payments to or contributions from partners. It measures change in liquidating value — before interest allowed to partners and before any division of profit to the general partner, but after operating expenses.
The principal operating expense was the Nebraska Intangibles Tax of 0.4% of market value — the first year it was effectively enforced.
The Present Portfolio
A Major Position: Investment Trust at Discount
Last year, a new commitment represented approximately 25% of assets. Presently, this investment represents approximately 35% of assets — an unusually large percentage made for strong reasons.
"In effect, this company is partially an investment trust owning some thirty or forty other securities of high quality. Our investment was made and is carried at a substantial discount from asset value based on market value of their securities and a conservative appraisal of the operating business."
Key advantages:
- Partnership is the company's largest stockholder by a considerable margin
- Two other large holders agree with their ideas
- Probability is extremely high that performance will be superior to the general market until disposition
The remaining 65% of the portfolio is in securities considered undervalued and work-out operations.
Investment Philosophy
"To the extent possible, I continue to attempt to invest in situations at least partially insulated from the behavior of the general market."
This policy should lead to:
- Superior results in bear markets
- Average performance in bull markets
At time of writing, the Dow-Jones Industrials had retraced over half of their 1959 advance — potentially testing the bear market prediction.
Partnership Performance Standard
As emphasized in previous letters, the standard of performance involves:
- Relatively good results (compared to general market indices and leading investment trusts) in periods of declining or level prices
- Relatively unimpressive results in rapidly rising markets
1959 demonstrated this dynamic: despite strong partnership returns, they lagged behind the Dow's 19.9% advance because the portfolio was insulated from general market behavior.
Related
- partnership-letter-1958 — Previous year featuring the Commonwealth Trust case study
- partnership-letter-1962 — The classic letter systematizing the three categories
- warren-buffett — The author
- asymmetric-risk — Seeking situations where upside exceeds downside