Reading the Letter to Partners of Buffett Partnership 24 Jan 1962

In 1961, the DJIA overall gain 22.2% (including dividend), where Buffett Partnership had 45.9% gain.

Buffett emphasized of all partners using the same yardstick - DJIA to measure the partnership's performance:

In being sure that we all have the same ideas of what is good and what is poor; retrospectively, almost anything can be made to look good in relation to something or other. If my performance is poor, I expect partner to withdraw, and indeed, I should look for new source of investment for my own funds.

Did your investment manager established such a yardstick to measure his performance?

Buffett further elaborate the reasoning of using DJIA as the yardstick:

1. While the Dow is not perfect (nor is anything else) as a measurement of performance, it has the advantage of being widely known, has a long period of continuity and reflects with reasonable accuracy the experience of investors generally with the market.
2. Most partners, as an alternative to their investment in the partnership would probably have their funds invested in a media producing results compared to the Dow, therefore, I feel it is a fair test of performance.

The partnership's investment break down into three categories:

1. Generally undervalued securities ("generals"); The largest category, fairly large positions (5% to 10% of our total assets) in each of five or six generals, with smaller positions in another ten or fifteen.
2. "Work-outs"; Second largest category, securities whose financial results depend on corporate action such as mergers, liquidations, reorganizations, spin-offs, etc. rather than supply and demand factors created by buyers and sellers of securities. They are securities with a timetable where we can predict, within reasonable error limits, when we will get how much and what may upset the applecart. This category will produce reasonably stable earnings from year to year, to large extent irrespective of the course of the Dow.
   
3. "Control"; Control situations where we either control the company or take a very large position and attempt to influence policies of the company. Such operations should definitely be measured on the basis of several years. "Generals" bought might develop into a control situation if the price remains low for a long period.

I believe a full-time professional investor need to have skill to acquired profitable "work-outs".

Buffett further comments:

In a raging bull market, operations in control situations will seems like a very difficult way to make money, compared to just buying the general market. However, I am more conscious of the dangers presented at current market levels than the opportunities. Control situations, along with work-outs, provide a means of insulating a portion of our portfolio from these dangers.

I believe this means of insulation is the key to conservative investors being sleep well.

For conservatism of his manner of investing, Buffett comments:

I feel the most objective test as to just how conservative of our manner of investing is arises through evaluation of performance in down markets. Preferably these should have involve a substantial decline in the Dow. Our performance in the rather mild declines of 1957 and 1960 would confirm my hypothesis that we invest in an extremely conservative manner. We have never suffered a realized loss of more than 1/2 of 1% of total net assets, and our ratio of total dollars realized gains to total dollars realized losses is something like 100 to 1.

Wow! That's true conservatism! I am happy to place major portion of my investment funds to partnership similar to Buffett Partnership, if not all.

In Buffett opinion, larger funds tug in two directions:

1. From the standpoint of "passive" investments, where we do not attempt by the size of our investment to influence corporate policies, larger sums hurt results
2. However, in the case of control situations increased funds are a definite advantage. A "Sanborn Map" cannot be accomplish without the wherewithal.

Reading Buffett's Letter to Partners was a pleasant experience to me, if you following my blog posts of Buffett Partnership Letters, you will find out that I am very much summarizing the content of the letter and I may express my opinion in a point or two, this will be the way I write about Buffett Partnership Letters in the future posts, I'd love to hear your comments about this way of writing.

In closing, I will borrow a quote by Buffett from his letter:

You will not be right simply because a large number of people momentarily agree with you. You will be right, over the course of many transactions, if your hypotheses correct, your facts are correct, your reasoning is correct. True conservatism is only possible through knowledge and reason.

Reading the Letter to Partners of Buffett Partnership 22 Jul 1961

During the first half of 1961, the overall gain of the Dow-Jones Industrial Average (DJIA) was about 13%, including dividends. All partnerships still perform better than Average, although this is the type of period when the partnerships should have the most difficulty in exceeding this standard.

In Buffett's opinion:

One year is far too short a period to form any kind of an opinion as to investment performance, my own thinking is much more geared to five years performance with tests of relative results in both strong and weak markets. 

Lastly, he shared about the detail of progress of combining all partnership at year end.

Reading the Letter to Partners of Buffett Partnership 30 Jan 1961

In 1960, the Industrial Average declined from 679 to 616 or 9.3% (with dividend included, 6.3% loss), where Buffett Partnership had 22.8% gain.

Buffett emphasized the partnerships' objective in his writing:

My continual objective in managing partnership funds is to achieve a long-term performance record superior to that of Industrial Average. Unless we do achieve this superior performance there is no reason for existence of the partnerships.

I guess not many investment manager will voice out loud the partnership's objective as per Buffett, especially the later statement above.

Buffett disclosed the largest holding of the partnership (represents 35% of assets), Sanborn Map Co. engaged in the publication and continuous revision of extremely detailed maps of all cities of the United States. The maps mainly sold to thirty insurance companies for fire insurance underwriting purpose, also sold to public utilities, mortgage companies and tax authorities. Sanborn's operating business heading south with the change of underwriting method known as "carding" in the early 1950, annual after tax profits fell from over $500,000 in the late 1930 to under $100,000 in 1958 and 1959. However, Sanborn had accumulated $2.5 million investment portfolio (50% bonds, 50% stocks) since early 1930 which blossomed in the last decades while the operating map business wilted.

I will attempt to analyze the reasoning behind the purchases of Sanborn here:

1. Even Sanborn operating business turn south, but the fair value of accumulated investment portfolio not fully realized.
2. There is a way to re-establish the Sanborn map operating business to multiply it's profits and most importantly management and top officers have the similar idea and supporting this plan.

I'd love to hear your comments about my analysis above.

Reading the Letter to Partners of Buffett Partnership 20 Feb 1960

Like last year letter, Buffett write about general stock market outlook in the beginning of letter. He commented overall gain 19.9% (included dividend received) of Dow-Jones Industrial Average stock index doesn't not represents performance of stocks listed in New York Stock Exchange as it was declined from 710 to 628.

He further emphasize on his conservatism of investment philosophy:

I would rather sustain the penalties resulting from over-conservatism than face the consequences of error, perhaps with permanent capital loss.

Most investment trusts had difficult time in comparison with Industrial Average, but Buffett Partnerships still achieved overall gain averaging about 25.9%.

In this year letter, Buffett didn't disclosed the company name of largest holding of the partnership besides it increase to represents 35% of assets. But he did mentioned about the company operation and the reasoning for unusually large percentage of holding:

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 substantial discount from asset value based on market value of their securities and a conservative appraisal of the operating business.

Reading the Letter to Partners of Buffett Partnership 11 Feb 1959

Thanks to my friend reminded me reading the great writings from Warren Buffett - Letter to Partners of the Buffett Partnership 1959 to 1969. This is the first reading notes which capture my thought when I gone through the letter.

As per his comment to general stock market in 1958, the bull/hot market will affect the finding of undervalued securities due to fast rising of price. I like the statement "I do believe that widespread public belief in the inevitability of profits from investment in stocks will lead to eventual trouble". In my opinion, this statement applicable to my belief to the current hot property market in Asia.

First, Buffett share his reasoning to purchase the largest holding of the partnership, Commonwealth Trust Co.:

1. The stock has intrinsic value $125 per share and earning $10 per share, with average purchase price $51 per share.
2. Unlocking value of stock in one to ten years, $250 per share.
3. Being a second largest shareholder have voting power on merger proposal.

What surprised me on Buffett writing to his partners was, he disclosed the intrinsic value and future unlocking value of the stock in his writing, that indicate that he was very clear, confident and certain about the intrinsic value and future unlocking value of the stock. Even with this great stock, he sold it for $80 per share due to finding a even better deal. Wow! That's indicate that Buffett always in the "finding great deal" mode, a great deal like Commonwealth Trust Co. would not make him sit and wait.

Buffett emphasized on importance of not having "Leakage regarding the partnership portfolio holdings". I know a investment manager who running investment partnership being very secretive and caution on sharing his partnership holdings, even to his partners. Buffett may well explain and support the behavior of the investment manager given the current stock market is easily accessible by retail investor. Was U.S stock market open to retail investor in 1958? (If you know the answer, kindly post your response to comment section)

Buffett further assured that replacement of Commonwealth Trust Co. which represents 25% of the partnership assets will perform better than Dow-Jones for the holding period. Again, he made the investment decision so certain and so convincing to his partners.

Lastly, he set a clear basis how he want to be judged:

An above average performance in a bear market or neutral market, and a normal performance in a bull market.

Would you use this basis to judge your investment manager if you have one?