1962

~21m

BUFFETT PARTNERSHIP, LTD.

810 KIEWIT PLAZA

OMAHA 31, NEBRASKA

July 6, 1962

A Reminder:

In my letter of January 24, 1962 reporting on 1961, I inserted a section entitled. "And a Prediction." While I

have no desire to inflict cruel and unusual punishment upon my readers, nevertheless, a reprinting of that

section, in its entirety, may be worthwhile:

And a Prediction

Regular readers (I may be flattering myself) will feel I have left the tracks when I start talking about

predictions. This is one thing from which I have always shied away and I still do in the normal sense.

I am certainly not going to predict what general business or the stock market are going to do in the next

year or two since I don't have the faintest idea.

I think you can be quite sure that over the next ten years there are going to be a few years when the

general market is plus 20% or 25%, a few when it is minus on the same order, and a majority when it is

in between.

I haven't any notion as to the sequence in which these will occur, nor do I think it is of any

great importance for the long-term investor.

Over any long period of years, I think it likely that the Dow will probably produce something like 5% to

7% per year compounded from a combination of dividends and market value gain. Despite the

experience of recent years, anyone expecting substantially better than that from the general market

probably faces disappointment.

Our job is to pile up yearly advantages over the performance of the Dow without worrying too much

about whether the absolute results in a given year are a plus or a minus. I would consider a year in

which we were down 15% and the Dow declined 25% to be much superior to a year when both the

partnership and the Dow advanced 20%.

I have stressed this point in talking with partners and have

watched them nod their heads with varying degrees of enthusiasm.

It is most important to me that you fully understand my reasoning in this regard and agree with me not

only in your cerebral regions, but also down in the pit of your stomach.

For the reasons outlined in my method of operation, our best years relative to the Dow are likely to be in

declining or static markets. Therefore, the advantage we seek will probably come in sharply varying

amounts.

There are bound to be years when we are surpassed by the Dow, but if over a long period we

can average ten percentage points per year better than it, I will feel the results have been satisfactory.

Specifically, if the market should be down 35% or 40% in a year (and I feel this has a high probability

of occurring one year in the next ten--no one knows which one), we should be down only 15% or 20%.

If it is more or less unchanged during the year, we would hope to be up about ten percentage points. If it

is up 20% or more, we would struggle to be up as much. The consequence of performance such as this

over a period of years would mean that if the Dow produces a 5% to 7% per year over-all gain

compounded, I would hope our results might be 15% to 17% per year.

26 The above expectations may sound somewhat rash, and there is no question but that they may appear

very much so when viewed from the vantage point of 1965 or 1970. It may turn out that I am

completely wrong.

However, I feel the partners are certainly entitled to know what I am thinking in this

regard even though the nature of the business is such as to introduce a high probability of error in such

expectations. In anyone year, the variations may be quite substantial. This happened in 1961, but

fortunately the variation was on the pleasant side. They won't all be!

The First Half of 1962:

Between yearend 1961 and June 30, 1962 the Dow declined from 731.14 to 561.28. If one had owned the Dow

during this period, dividends of approximately $11.00 would have been received so that overall 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 formation of the predecessor partnerships.

As stated above, a declining Dow gives us our chance to shine and pile up the percentage advantages which,

coupled with only an average performance during advancing markets, will give us quite satisfactory long-term

results.

Our target is an approximately 1/2% decline for each 1% decline in the Dow and if achieved, means we

have a considerably more conservative vehicle for investment 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% result before payments to partners, compared

to the minus 21.7% overall result on 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 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 deviations from the Dow

are much more likely to be toward a poorer performance than 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 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 Investors Trust

having a minus 23% overall performance, and Investors Stock Fund realizing a minus 25.4%.

This is not

unusual as witness the lead article in the WALL STREET JOURNAL of June 13, 1962 headed "Funds vs.

Market.” Of the 17 large common stock funds studied, everyone had a record poorer than the Dow from the

peak on the Dow of 734, to the date of the article, although in some cases the margin of inferiority was minor.

27 Particularly hard hit in the first half 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 applicable now)

funds with the best record in the preceding few years, Fidelity Capital Fund, Putnam Growth Fund, and

Wellington Equity Fund averaged an overall minus 32.3% for the first half. It is only fair to point out that

because of their excellent records in 1959-61, their overall 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 funds represent a public batting

average of professional, highly-paid investment management handling a very significant $20 billion of

securities. Such management, I believe, 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 overall 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 six months of 7.5% and partners who have withdrawn at

the rate of 6% per annum 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 probable) 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, if our results were an overall minus 7% for the year, a partner

receiving monthly payments who had a market value interest of $100,000 on January 1, 1962 would have an

equity at December 31, 1962 of $87,000. This reduction would arise from the minus 7% result, or $7, 000 plus

monthly payments of $500 for an additional $6,000.

Thus, with $87,000 of market equity on January 1, 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%.

APPENDIX A

DOW-JONES INDUSTRIAL AVERAGE

Year

Closing Dow

Change for

Year

Dow Dividend

Overall

Result from

Dow

Percentage

Result

1956

499.47

1957

435.69

-63.78

21.61

-42.17

-8.4%

1958

583.65

147.96

20.00

167.96

38.5%

1959

679.36

95.71

20.74

116.45

20.0%

1960

615.89

63.47

21.36

42.11

-6.2%

1961

731.14

115.25

22.61

137.86

22.4%

6/30/62

561.28

169.86

11.00 Est.

-158.86

-21.7%

28 APPENDIX B

PARTNERSHIP PERFORMANCE

Year

Partnership Result (1)

Limited Partners’ Results (2)

1957

10.4%

9.3%

1958

40.9%

32.2%

1959

25.9%

20.9%

1960

22.8%

18.6%

1961

45.9%

35.9%

6/30/62

-7.5%

(1) For 1957-61 consists of combined

results of all predecessor limited partnerships operating throughout entire

year after all expenses but before distributions to partners or allocations to the general partners.

(2) For 1957-61 computed on basis of preceding column of partnership results allowing for allocation to general

partner based upon present partnership agreement.

APPENDIX C

YEARLY RESULTS

Year

Mass. Inv. Trust

(1)

Investors Stock

(1)

Lehman (2)

Tri-Cont.

(2)

1957

-11.4%

-12.4%

-11.4%

-2.4%

1958

42.7%

47.5%

40.8%

33.2%

1959

9.0%

10.3%

8.1%

8.4%

1960

-1.0%

-0.6%

2.5%

2.8%

1961

25.6%

24.9%

23.6%

22.5%

6/30/92

23.0%

-25.4%

N.A.

(1) Computed from changes in asset value plus any distributions to holders of record during year.

(2) From Moody's Bank & Finance Manual - 1962.

CUMULATIVE RESULTS

Years

Mass.

Inv.

Trust

Investors

Stock

Lehman

Tri-Cont.

Dow

Limited

Partners

1957

-11.4%

-12.4%

-11.4%

-2.4%

-8.4%

9.3%

1957-58

26.4%

29.2%

24.7%

30.0%

26.9%

44.5%

1957-59

37.8%

42.5%

34.8%

40.9%

52.3%

74.7%

1957-60

36.4%

41.6%

38.2%

44.8%

42.9%

107.2

1957-61

71.4%

76.9%

70.8%

77.4%

74.9%

181.6

1957-6/30/62

31.9%

32.0%

N.A.

37.0%

160.5%

29 BUFFETT PARTNERSHIP, LTD.

810 KIEWIT PLAZA

OMAHA 31, NEBRASKA

November 1, 1962

TO MY PARTNERS FOR 1963:

Here we go on the annual paper flurry.

Two copies of an amended partnership agreement for 1963 are enclosed.

The one with the General Provisions attached is to be kept by you and the other single-page agreement should

be returned. There are no substantive changes of any sort from last year's agreement. This amendment is merely

to allow for a few new partners and in several places to reword in clearer (we hope) language provisions of the

present agreement. Practically all of the rewording is in General Provision 5 (paragraph 7 in last year's

agreement). Rather than have a separate amending document, we have incorporated the changes into one

complete document embodying the entire agreement.

We are also enclosing two commitment letters (one for you--one to be returned) on which you are to indicate

your wishes regarding additions or withdrawals at January 1st. We would like to have the agreement and the

commitment letter back by December 1st.

However, the commitment letter can be amended right up until the

end of the year (not after) so if you should have a change of plans and you have already mailed us your

commitment letter, all you have to do is get in touch with me, and I will make whatever changes you desire.

Any withdrawals will be paid immediately after January 1st. Any additions must reach us by January 10 th , and

should they be paid in during November, they will take on the status of advance payments and draw interest at

the rate of 6% until yearend.

Please be sure the signature on your partnership agreement is notarized. Partners in Omaha may obtain the

notarization at our office if they wish. Also, be sure to let us know by an appropriate circle on the commitment

letter whether you wish to receive monthly payments in 1963. In order to be sure everyone understands this, let

me again state that these monthly payments are in no sense guaranteed earnings or anything of the sort.

They

represent a convenient form of regular withdrawal, which to the extent we earn better than 6% are payments

from earnings, and to the extent we don't, are payments from capital.

Complete tax information for your 1962 return will be in your hands by January 20th. If you should need an

estimate of your tax position before that time, let me know and I will give you a rough idea. We will also send

out a short letter on taxes in late December.

Having read this far, you are entitled to a report on how we have done to date in 1962. For the period ending

October 31st, the Dow-Jones Industrials showed an overall loss, including dividends received, of approximately

16.8%. We intend to use the same method or valuing our controlling interest in Dempster Mill Manufacturing at

this yearend that we did at the end of last year. This involved applying various discounts to the balance sheet

items to reflect my opinion as to what could be realized on a very prompt sale.

Last year this involved a 40%

discount on inventories, a 15% discount on receivables, estimated auction value of fixed assets, etc., which led

to an approximate value or $35.00 per share.

The successful conversion of substantial portions of the assets of Dempster to cash, at virtually 100 cents on the

dollar, has been the high point of 1962. For example, inventory of $4.2 million at last yearend will probably be

about $1.9 million this yearend, reducing the discount on this item by about $920,000 (40% of $2.3 million

reduction). I will give this story my full journalistic treatment in my annual letter.

Suffice to say at this point that

applying the same discounts described above will probably result in a yearend value of at least $50.00 per share.

The extent of the asset conversion job can perhaps best be illustrated in a sentence by pointing out that whereas

30 we had $166,000 of cash and $2,315,000 of liabilities at November 30, 1961 (Dempster fiscal yearend), we

expect this year to have about $1 million in cash and investments (of the type the Partnership buys) against total

liabilities of $250,000. Prospects for further improvement in this situation in 1963 appear good, and we expect a

substantially expanded investment portfolio in Dempster next year.

Valuing Dempster at $50 per share, our overall gain (before any payments to partners) to October 31st for the

Partnership has been 5.5%. This 22.3 percentage-points advantage over the Dow, if maintained until the end of

the year, will be among the largest we have ever had.

About 60% of this advantage was accomplished by the

portfolio other than Dempster, and 40% was the result of increased value at Dempster.

I want all partners and prospective partners to realize the results described above are distinctly abnormal and

will recur infrequently, if at all. This performance is mainly the result of having a large portion of our money in

controlled assets and workout situations rather than general market situations at a time when the Dow declined

substantially. If the Dow had advanced materially in 1962, we could have looked very bad on a relative basis,

and our success to date in 1962 certainly does not reflect any ability on my part to guess the market (I never try),

but merely reflects the fact that the high prices of generals partially

forced me into other categories or

investment. If the Dow had continued to soar, we would have been low man on the totem pole.

We fully expect

to have years when our method of operation will not even match the results of the Dow, although obviously I

don't expect this on any long-term basis or I would throw in the towel and buy the Dow.

I’ll cut this sermon short with the conclusion that I certainly do not want anyone to think that the pattern of the

last few years is likely to be repeated; I expect future performance to reflect much smaller advantages on

average over the Dow.

Each letter ends with the request that you let me know about anything that isn't clear. Please be sure that you do

this. We are all geared up with secretarial help, a new typewriter, etc., and we want to be sure that this letter and

agreement are understood by all.

Cordially,

Warren E. Buffett

WEB:bf

P/S: There are no prizes for being the last ones to get in the agreement and commitment letter, so please get to it

as soon as possible.

Remember the commitment letter can be amended by a postcard or a phone call--we are just

trying to get the bulk of the work out of the way well before December 31st so we can concentrate on getting the

audit, tax information, etc., out pronto at yearend.