Warren Buffet Partnership Letter of the First Half of 1962

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Jun 21, 2007
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Since 1962 Warren Buffett started to write partnership letters every 6 months. This is Warren Buffet Partnership Letter of the first half 1962. Dow lost 21.7% in the first half of 1962. It gives Warren Buffett more chances to outperform.


Warren Buffet Partnership Letter of the First Half of 1962





The First Half of 1962:


Between yearend and June 20, 1962, the Dow declined from 731 to 561.28. If one had owned the Dow during this period, dividends of approximately $11.00 would have been received so that over-all a loss of 21.7% would have been the result of investing in the Dow. For the statistical minded, Appendix A gives the results of the Dow by years since information of the predecessor partnerships.


As stated above, a declining Dow gives us our chance to shine and pile the percentage advantages which, coupled with only an average performance during advancing markets, will give us quite satisfactory long-term goals. Our target is an approximately ½% decline for each 1% decline in the Dow, and if achieved, means we have a considerably more conservative way for investing in stocks than practically any alternative.


As outlined in Appendix B, showing combined predecessor partnership results, during the first half of 1962 we had one of the best periods in our history achieving a minus 7.5% results before payments to partners, compared to the minus 21.7% over-all result of the Dow. This 14.2 percentage points advantage can be expected to widen during the second half if the decline in the general market continues, but will probably narrow should the market turn upward. Please keep in mind my continuing admonition that six-months or even one-year’s period results are not to be taken too seriously. Short periods of measurement exaggerate chance fluctuations in performance. While circumstances contributed to an unusually good first half, there are bound to be periods when we do relatively poorly. The figures for our performance involve no change in the valuation of our controlling interest in Dempster Mill Manufacturing Company, although developments in recent months point toward a probable higher realization.


Investment Companies During the First Half:


Past letters have stressed our belief that the Dow is no pushover as a yardstick for investment performance. To the extent that funds are invested in common stocks, whether the manner of investment be through investment companies, investment counselors, bank trust departments, or do-it-yourself, our belief is that the overwhelming majority will achieve results roughly comparable to the Dow. Our opinion is that the deviation from the Dow are much more likely to be toward a poorer performance that a superior one.


To illustrate this point, we have continually measured the Dow and limited partners’ results against the two largest open-end investment companies (mutual funds) following a program of common stock investment and the two largest closed-end investment companies. The tabulation in Appendix C shows the five-years’ results, and you will not note the figures are extraordinarily close to those of the Dow. These companies have total assets of about $3.5 billion.


In the interest of getting this letter out promptly, we are mailing it before results are available for the closed-end companies. However, the two mutual funds both did poorer than the Dow, with Massachusetts Investor Trust having a minus 23% over-all performance, and investors Stock Fund in the WALL STREET HOURNAL of June 13, 1962, headed “Funds vs. Market.” Of the 17 large common stock funds studied, every one had a record poorer than the Dow from the peak of the Dow of 734, to the data of the article, although in some cases the margin of inferiority was minimal.


Particularly hard hit in the first have were the so-called “growth” funds which, almost without exception, were down considerably more than the Dow. The three large “ growth” (the quotation marks are more applicant now) funds with the best record in the preceding years, Fidelity Capital Fund, Putnam Growth Fund, and Wellington Equity Fund averaged an over-all minus 32.3% for the first half. It is only fair to point out that because of their excellent records in 1959-61, their over-all performance to date is still better than average, as it may well be in the future. Ironically, however, this earlier superior performance had caused such a rush of new investors to come to them that the poor performance this year was experienced by very many more holders than enjoyed the excellent performance of earlier years. This experience tends to confirm my hypothesis that investment performance must be judged over a period of time with such a period including both advancing and declining markets. There will continue to be both; a point perhaps better understood now than six months ago.


In outlining the results of investment companies, I do so not because we operate in a manner comparable to them or because our investments are similar to theirs. It is done because such finds represent a public batting average of professional, highly-paid investment management handling a very significant $20 billion of securities. Such management, is typical of management handling even larger sums. As an alternative to an interest in the partnership, I believe it reasonable to assume that many partners would have investments managed similarly.


Asset Values:


The above calculations of results are before allocation to the General Partner and monthly payments to partners. Of course, whenever the over-all results for the year are not plus 6% on a market value basis (with deficiencies carried forward) there is no allocation to the General Partner. Therefore, non-withdrawing partners have had a decrease in their market value equity during the first half of 10.5%. Should our results for the year be less than plus 6% (and unless there should be a material advance in the Dow, this is very probably) partners receiving monthly payments will have a decrease in their market value equity at December 31, 1962. This means that monthly payments at 6% on this new market equity next year will be on a proportionately reduced basis. For example, of our results were an over-all minus 7% for the year, a partner receiving monthly payments who had a market value interest of $100,000 on January 1 st, 1962, would have an equity at December 31, 1962 of $87,000. This reduction would arise from the minus 7% results, or with $87,000 of market equity on January 1 st, 1963, monthly payments next year would be $435.00.


None of the above, of course, has any applicability to advance payments received during 1962 which do not participate in profits or losses, but earn a straight 6%.


Year-end Amendments:


All partners have the right to withdraw or add any amount (rounded to even $100’s) at yearend. This year we hope to get this tended to earlier with the material sent out in October with the right of amendment of intentions any time up to December 31 st. This should minimize the December paper flurry.


Our attorneys have advised us to admit no more than a dozen new partners (several of whim have already expressed their desire) and accordingly, we have increased the minimum amount for new names to $100,000. This is a necessary stop to avoid a more cumbersome method of operation.


I will close with my usual request that should anything at all in this letter not be clear to you, please be sure to let me hear from you. During July and August I expect to be in the metropolitan New York area except for a trip or two back to Omaha. Therefore, you can get in touch with me either through our office in the Kiewit Plaza, or more directly, in care of Tweedy, Browne & Reilly, 52 Wall Street, New York 5, N.Y.


Cordially,





Warren E. Buffett