In this article, we’ll take a look at the first part of the 1958 partnership letter written by Warren Buffett.
This article (Part 1) deals with “The General Stock Market in 1958” and “Results in 1958.” The next article (Part 2) will cover a typical investment situation and address the “current” investment environment (i.e., at the time the 1958 letter was written).
Please note that I don’t plan to summarize the entire first part of the 1958 letter, or repeat insights that were already covered in my previous articles. Rather, I plan to focus on a few quotes that highlight new and/or important investment ideas and wisdom. With that disclaimer out of the way, let’s jump in.
THE GENERAL STOCK MARKET IN 1958
Here are a couple of quotes that I found interesting in this section on “The General Stock Market in 1958.”
“During the past year, almost any reason has been seized upon to justify ‘investing’ in the market. There are undoubtedly more mercurially-tempered people in the stock market now than for a good many years and the duration of their stay will be limited to how long they think profits can be made quickly and effortlessly. While it is impossible to determine how long they will continue to add numbers to their ranks and thereby stimulate rising prices I believe it is valid to say that the longer their visit, the greater the reaction from it.”This passage makes it sound like speculation had entered the markets in 1958. Buffett didn’t know how long the speculators would stick around, or if their numbers would grow and push prices up, but he did believe that it was “valid to say that the longer their visit, the greater the reaction from it.”
“…I do believe that wide-spread public belief in the inevitability of profits from investment in stocks will lead to eventual trouble.”
Buffett states that “almost any reason has been seized upon to justify ‘investing’ in the market.” This statement makes it sound like many market participants (perhaps blinded by greed) were desperately trying to convince themselves that it was reasonable or prudent to invest in the stock market. However, a cold, hard look at the facts would have probably dissuaded these individuals from investing in this speculative market.
This passage is cautionary in its tone. It implies that investors should scrutinize the facts and reasoning for making an investment and come to their own conclusions/decisions (and not just take investment cues from the price action of the market).
This passage also seems to hint at the fact that investors need to be extra cautious in their analysis and decision-making when they are dealing with popular or widely-held investments.
RESULTS IN 1958
According to the 1958 partnership letter, the Dow-Jones industrial average had an overall gain of 38.5% in 1958. The letter goes on to say:
[i]“The five partnerships that operated throughout the entire year obtained results averaging slightly better than this 38.5%. Based on market values at the end of both years, their gains ranged from 36.7% to 46.2%. Considering the fact that a substantial portion of assets has been and still is invested in securities, which benefit very little from a fast-rising market, I believe these results are reasonably good. I will continue to forecast that our results will be above average in a declining or level market, but it will be all we can to do keep pace with a rising market.”[/i]Below are a couple of observations:
1) At least one of the partnerships underperformed the Dow in 1958 (i.e., had an overall gain of 36.7% versus 38.5%). This is only noteworthy because you don’t often see Buffett, in his partnership days, underperform the averages. However, the average result of the partnerships was actually slightly better than that of the Dow.
2) Even though a “substantial portion of assets has been and still is invested in securities, which benefit very little from a fast-rising market,” the “five partnerships that operated throughout the entire year obtained results averaging slightly better than this 38.5%.” This is an impressive result. It almost sounds like the partnership’s portfolio of generally undervalued securities did well enough in 1958 to offset the underperformance of its other securities that didn’t benefit as much from the fast rising market. But that’s just my interpretation. It’s always possible that there’s another explanation for the partnership’s 1958 performance.
Anyway, thanks for taking the time to read my thoughts on Part 1 of the 1958 Buffett partnership letter. I hope you’ll join me for Part 2 of the letter.
Links to other articles in the Buffett Partnership Series:
Next article: Buffett Partnership Letter Series – 1958 (Part 2)
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Introduction: Buffett Partnership Letter Series