Saturday, November 5, 2016

"Notes on the Warren Buffett Letters 1959-1984"

First some background. From 2010's "Warren Buffett, Mr. Market and the Buffett Partnership Letters, 1959-1969 (BRK.A; BRK.B)":

We first posted the partnership letters in September 2007 when it was one of our most popular offerings.
This is a repost from Sept. 2008 with the special bonus feature of a few of the early Berkshire Letters to Shareholders.
But Wait, there's more! The link to Warren's Mr. Market quote.
There are a couple Finance/MBAs in these:

I had an "Oh shoot" moment on Saturday.
As I was looking for a section of Mr. Buffett's 1987 Letter* to the Shareholders of BRK, I remembered that I had an outstanding promise that I hadn't fulfilled. On August 9 I linked to a post from 1440 Wall Street:
1440 Wall Street writes:
I am no great Buffett-ologist. And I don't consider myself to be a value investor by any means.

And while I don't have a tipline, I do have scores of relationships that date back nearly 20-years. From time to time I pass along things of interest, and Warren Buffett's very first partnership letter, written when Eisenhower was President, and the twenty that follow are apparently hard to come by:...
...In any case, if you want the link to the letters, which cover nearly twenty years ending in 1969, send me an email describing in ten words or less why 1440 is the best financial blog extant, or if you don’t believe that, why I am a douchebag. Be forewarned, the letters will take hours to read in their entirety. Respectfully yours,
I wrote:
Well I am a Buffetologist and I also know where they are. We'll give StockJockey time to conduct his poll/contest, say for another 12 days, 23 hours and 30 minutes. If he hasn't publicly provided the link, meet me here after the close on Monday, August 18.
And then promptly forgot about the promise. Sorry.

The letters were hidden in plain sight, I posted the links on September 25 last year. Here they are again, with the bonus of a couple early BRK letters:

2/11/1959 The General Stock Market in 1958
2/20/1960 The General Stock Market in 1959
1/30/1961 The General Stock Market in 1960
7/22/1961 To My Partners
1/24/1962 Our Performance in 1961
7/06/1962 A reminder
12/24/1962 To all Partners
1/18/1963 The Ground rules
7/10/1963 First Half Performance
11/06/1963 To all Partners
12/26/1963 To all Partners
1/18/1964 Our Performance in 1963
7/08/1964 First Half Performance
1/18/1965 Our Performance in 1964
7/9/1965 First half Performance
11/01/1965 To My Partners of 1966
1/20/1966 Our Performance in 1966
7/12/1966 First half Performance
11/01/1966 To My Partners of 1967
1/25/1967 The First Decade
7/12/1967 First half Performance
10/9/1967 To My Partners
11/01/1967 To My Partners
1/24/1968 Our Performance in 1967
7/11/1968 First half Performance
11/1/1968 To My Partners
1/22/1969 Our Performance in 1968
5/22/1969 To My Partners
4/3/1970 Berkshire Letter written by Ken Chase
3/13/1972 To the Stockholders of Berkshire Hathaway Inc.:
3/16/1973 To the Stockholders of Berkshire Hathaway Inc.:

Sincere thanks to Redfield, Blonsky & Co., LLC.

*From Theoretical Declines of a Bursting Oil Bubble. And: Warren Buffett Swings By:
Mr. Market
...Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his....CONTINUED
Here are the headline notes from Medium:
(Part 1: 1959–’84)
Formatting legend: my own notes/observations are bullet-pointed; everything else is a ~ direct quote; italicized text with vertical quote-line = notable

Buffett Partnership Letters

I make no attempt to forecast the general market — my efforts are devoted to finding undervalued securities. However, I do believe that wide-spread public belief in the inevitability of profits from investment in stocks will lead to eventual trouble. Should this occur, prices, but not intrinsic values in my opinion, of even undervalued securities can be expected to be substantially affected.
  • Notes his own likely outperformance in bear vs. bull markets; happy to match the market in big up years
  • Largest position yr prior was “10–20%” of partnership assets
  • Reminds he’s been apprehensive about stock market levels for several years and that to date it’s been unnecessary
  • Comments on a 35% (!) position; rest of portfolio in “work-out operations” in attempt to avoid impact from behavior/general market issues
Over a period of time there are going to be good and bad years; there is nothing to be gained by getting enthused or depressed about the sequence in which they occur.
  • LT goal: beat the Industrials Average
My own thinking is much more geared to five year performance, preferably with tests of relative results in both strong and weak markets.
At all times, I attempt to have a portion of our portfolio in securities at least partially insulated from the behavior of the market and this portion should increase as the market rises.

You may feel I have established an unduly short yardstick in that it perhaps appears quite simple to do better than an unmanaged index of 30 leading common stocks. Actually, this index has generally proven to be a reasonably tough competitor.
Over the years our timing of purchases has been considerably better than our timing of sales.
On the dangers of buying blue-chips at elevated valuation levels (and hoping for multiple expansion): “You will not be right simply because a large number of people momentarily agree with you. You will not be right because important people agree with you…You will be right, over the course of many transactions, if your hypotheses are correct, your facts are correct, and your reasoning is correct. True conservatism is only possible through knowledge and reason.”
Three types of investments:
  • Generals — generally under-valued securities — biggest category. Most in-sync with ST market movements. No governance issues — just undervalued. 5–6 positions at 5–10% sizes, with smaller positions in another 10–15
  • Work-outs — next biggest category. Results depend on corp. actions (M&A, liquidations , reorg, spin-offs, etc)
  • Control — either actual control or very large position in attempt to influence policies of company. Likely stagnant returns for some time — until change implemented
  • Excited commentary on market swoon in 1H of year (-21% vs. partnership — 7%)
I am not in the business of predicting general stock market or business fluctuations. If you think I can do this, or think it is essential to an investment program, you should not be in the partnership.
Many times generals represent a form of “coattail riding” where we feel the dominating stockholder group has plans for the conversion of unprofitable or under-utilized assets to a better use…everything else equal, we would rather let others do the work. Obviously, not only do the values have to be ample in a case like this, but we also have to be careful whose coat we are riding.
  • Lays “The Ground Rules” for expectations of investing in the partnership: focus on relative, LT (3-yr min. test) performance
  • Notes how he, his family and multiple relatives are invested in the partnership (not the first time he’s mentioned this)...

HT: Alpha Ideas Nov. 4 Linkfest