Buffett Partnership Letter 1962 Annual
1962 annual - 13.9% gain vs -7.6% Dow, partnership structure explained
Buffett Partnership Letter 1962 Annual
Warren E. Buffett | January 24, 1962
1962 Performance
| Year | Dow | Partnership | Limited Partners |
|---|---|---|---|
| 1957 | -8.4% | 10.4% | 9.3% |
| 1958 | 38.5% | 40.9% | 32.2% |
| 1959 | 19.9% | 25.9% | 20.9% |
| 1960 | -6.3% | 22.8% | 18.6% |
| 1961 | 22.2% | 45.9% | 35.9% |
| 1962 | -7.6% | 13.9% | 11.9% |
Market Context
1962 was a declining market year. The Dow was down 7.6% (or 5.3% with dividends). However, 90% of investment companies outperformed the Dow.
Our Method of Operation
Three Categories of Investment
1. Generals (Undervalued Securities)
- 5-10% of total assets in each of 5-6 generals
- Smaller positions in another 10-15
- No corporate policy influence, no timetable for correction
- "More money has been made here than in either other category"
- Tend to behave sympathetically with the Dow
2. Work-outs
- Depend on corporate action (mergers, liquidations, reorganizations, spin-offs)
- Market behavior independent of Dow
- Usually 10-15 active at any time
- Borrow up to 25% of partnership net worth to enhance work-out positions
- Returns usually fall in 10-20% range
3. Control Situations
- Either control company or take very large position to influence policy
- Measured on basis of several years
- "May produce nothing" during acquisition period
- Advantage increases with capital size
Dempster Mill Manufacturing
Position: 70% owned + 10% associates
Industry: Farm implements and water systems
Situation: Poor management, tough industry
Book value: $4.5M ($75/share)
Working capital: ~$50/share
Yearend valuation: $35/share (acquired at ~$28)
"It is necessary for me to estimate the value at yearend of our controlling interest... The estimated value should not be what we hope it would be worth, but what I would estimate our interest would bring if sold under current conditions in a reasonably short period of time."
Conservatism Philosophy
"True conservatism is only possible through knowledge and reason."
On bond buyers thinking they were conservative: "This policy has produced substantial market depreciation in many cases."
On current blue-chip buying: "There is nothing at all conservative... about speculating as to just how high a multiplier a greedy and capricious public will put on earnings."
Performance Record
"We have never suffered a realized loss of more than 1/2 of 1% of total net assets, and our ratio of total dollars of realized gains to total realized losses is something like 100 to 1."
Partnership Size
Total partners: Over 90 Net assets at beginning 1962: $7,178,500 Buffett family interest: $1,025,000 (plus $782,600 other relatives) Minimum investment: $25,000
Source
Warren E. Buffett, January 24, 1962.