1968
BUFFETT PARTNERSHIP. LTD.
610 KIEWIT PLAZA
OMAHA, NEBRASKA 68131
TELEPHONE 042-4110
January 24, 1968
Our Performance in 1967
By most standards, we had a good year in 1967. Our overall performance was plus 35.9% compared to plus
19.0% for the Dow, thus surpassing our previous objective of performance ten points superior to the Dow. Our
overall gain was $19,384,250 which, even under accelerating inflation, will buy a lot of Pepsi. And, due to the
sale of some longstanding large positions in marketable securities, we had realized taxable income of
$27,376,667 which has nothing to do with 1967 performance but should give all of you a feeling of vigorous
participation in The Great Society on April 15th.
The minor thrills described above are tempered by any close observation of what really took place in the stock
market during 1967. Probably a greater percentage of participants in the securities markets did substantially
better than the Dow last year than in virtually any year in history.
In 1967, for many, it rained gold and it paid to
be out playing the bass tuba. I don't have a final tabulation at this time but my guess is that at least 95% of
investment companies following a common stock program achieved better results than the Dow - in many cases
by very substantial amounts.
It was a year when profits achieved were in inverse proportion to age - and I am in
the geriatric ward, philosophically.
The following summarizes the year-by-year performance of the Dow, the Partnership before allocation (one
quarter of the excess over 6%) to the general partner, and the results for limited partners:
Year
Overall Results
From Dow (1)
Partnership Results
(2)
Limited Partners’
Results (3)
1957
-8.4%
10.4%
9.3%
1958
38.5%
40.9%
32.2%
1959
20.0%
25.9%
20.9%
1960
-6.2%
22.8%
18.6%
1961
22.4%
45.9%
35.9%
1962
-7.6%
13.9%
11.9%
1963
20.6%
38.7%
30.5%
1964
18.7%
27.8%
22.3%
1965
14.2%
47.2%
36.9%
1966
-15.6%
20.4%
16.8%
1967
19.0%
35.9%
28.4%
(1)
Based on yearly changes in the value of the Dow plus dividends that would have been received through
ownership of the Dow during that year.
The table includes all complete years of partnership activity.
(2)
For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout
the entire year after all expenses, but before distributions to partners or allocations to the general
partner.
(3)
For 1957-61 computed on the basis of the preceding column of partnership results allowing for
allocation to the general partner based upon the present partnership agreement, but before monthly
115 withdrawals by limited partners.
On a cumulative or compounded basis, the results are:
Year
Overall Results From
Dow
Partnership Results
Limited Partners’
Results
1957
-8.4%
10.4%
9.3%
1957 – 58
26.9%
55.6%
44.5%
1957 – 59
52.3%
95.9%
74.7%
1957 – 60
42.9%
140.6%
107.2%
1957 – 61
74.9%
251.0%
181.6%
1957 – 62
61.6%
299.8%
215.1%
1957 – 63
95.1%
454.5%
311.2%
1957 – 64
131.3%
608.7%
402.9%
1957 – 65
164.1%
943.2%
588.5%
1957 – 66
122.9%
1156.0%
704.2%
1957 – 67
165.3%
1606.9%
932.6%
Annual Compounded
Rate
9.3%
29.4%
23.6%
Investment Companies
On the following page is the usual tabulation showing the results of what were the two largest mutual funds
(they have stood at the top in size since BPL was formed - this year, however, Dreyfus Fund overtook them) that
follow a policy of being, typically, 95-100% invested in common stocks, and the two largest diversified closed-
end investment companies.
Year
Mass.
Inv.
Trust (1)
Investors
Stock (1)
Lehman (2)
Tri-Cont
(2)
Dow
Limited
Partners
1957
-11.4%
-12.4%
-11.4%
-2.4%
-8.4%
9.3%
1958
42.7%
47.5%
40.8%
33.2%
38.5%
32.2%
1959
9.0%
10.3%
8.1%
8.4%
20.0%
20.9%
1960
-1.0%
-0.6%
2.5%
2.8%
-6.2%
18.6%
1961
25.6%
24.9%
23.6%
22.5%
22.4%
35.9%
1962
-9.8%
-13.4%
-14.4%
-10.0%
-7.6%
11.9%
1963
20.0%
16.5%
23.7%
18.3%
20.6%
30.5%
1964
15.9%
14.3%
13.6%
12.6%
18.7%
22.3%
1965
10.2%
9.8%
19.0%
10.7%
14.2%
36.9%
1966
-7.7%
-10.0%
-2.6%
-6.9%
-15.6%
16.8%
1967
20.0%
22.8%
28.0%
25.4%
19.0%
28.4%
Cumulative
Results
162.3%
147.6%
206.2%
181.5%
165.3%
932.6%
Annual
Compounded
Rate
9.2%
8.6%
10.7%
9.9%
9.3%
23.6%
(1)
Computed from changes in asset value plus any distributions to holders of record during year.
(2)
From 1967 Moody's Bank & Finance Manual for 1957-1966.
Estimated for 1967.
Last year I said:
116 “A few mutual funds and some private investment operations have compiled records vastly superior to
the Dow and, in some cases, substantially superior to Buffett Partnership, Ltd. Their investment
techniques are usually very dissimilar to ours and not within my capabilities.”
In 1967 this condition intensified. Many investment organizations performed substantially better than BPL, with
gains ranging to over 100%. Because of these spectacular results, money, talent and energy are converging in a
maximum effort for the achievement of large and quick stock market profits. It looks to me like greatly
intensified speculation with concomitant risks -but many of the advocates insist otherwise.
My mentor, Ben Graham, used to say. “Speculation is neither illegal, immoral nor fattening (financially).”
During the past year, it was possible to become fiscally flabby through a steady diet of speculative bonbons.
We
continue to eat oatmeal but if indigestion should set in generally, it is unrealistic to expect that we won’t have
some discomfort.
Analysis of 1967 Results
The overall figures given earlier conceal vast differences in profitability by portfolio category during 1967.
We had our worst performance in history in the “Workout” section. In the 1965 letter, this category was defined
as,
“...securities with a timetable. They arise from corporate activity -- sell-outs, mergers, reorganizations,
spin-offs, etc. In this category, we are not talking about rumors or inside information pertaining to such
developments, but to publicly announced activities of this sort. We wait until we can read it in the paper.
The risk does not pertain primarily to general market behavior (although that is sometimes tied in. to a
degree).
but instead to something upsetting the applecart so that the expected corporate development
does not materialize.”
The streets were filled with upset applecarts - our applecarts - during 1967. Thus, on an average investment of
$17,246,879, our overall gain was $153,273. For those of you whose slide rule does not go to such insulting
depths, this represents a return of .89 of 1%. While I don't have complete figures. I doubt that we have been
below 10% in any past year. As in other categories, we tend to concentrate our investments in the workout
category in just a few situations per year. This technique gives more variation in yearly results than would be the
case if we used an across-the-board approach. I believe our approach will result in as great (or greater)
profitability on a long-term basis, but you can't prove it by 1967.
Our investment in controlled companies was a similar drag on relative performance in 1967, but this is to be
expected in strong markets.
On an average investment of $20,192,776 we had an overall gain of $2,894,571. I
am pleased with this sort of performance, even though this category will continue to underperform if the market
continues strong during 1968. Through our two controlled companies (Diversified Retailing and Berkshire
Hathaway), we acquired two new enterprises in 1967. Associated Cotton Shops and National Indemnity (along
with National Fire & Marine, an affiliated company). These acquisitions couldn't be more gratifying. Everything
was as advertised or better. The principal selling executives, Ben Rosner and Jack Ringwalt, have continued to
do a superb job (the only kind they know), and in every respect have far more than lived up to their end of the
bargain.
The satisfying nature of our activity in controlled companies is a minor reason for the moderated investment
objectives discussed in the October 9th letter.
When I am dealing with people I like, in businesses I find
stimulating (what business isn't ?), and achieving worthwhile overall returns on capital employed (say, 10
-12%), it seems foolish to rush from situation to situation to earn a few more percentage points. It also does not
seem sensible to me to trade known pleasant personal relationships with high grade people, at a decent rate of
117 return, for possible irritation, aggravation or worse at potentially higher returns.
Hence, we will continue to keep
a portion of our capital (but not over 40% because of the possible liquidity requirements arising from the nature
of our partnership agreement) invested in controlled operating businesses at an expected rate of return below
that inherent in an aggressive stock market operation.
With a combined total of $37,439,655 in workouts and controls producing an overall gain of only $3,047,844,
the more alert members of the class will have already concluded we had a whale of a year in the "Generals -
Relatively Undervalued" category. On a net average investment of $19,487,996, we had an overall gain of
$14,096,593, or 72%. Last year I referred to one investment which substantially outperformed the general
market in 1964, 1965 and 1966 and because of its size (the largest proportion we have ever had in anything - we
hit our 40% limit) had a very material impact on our overall results and, even more so, this category.
This
excellent performance continued throughout 1967 and a large portion of total gain was again accounted for by
this single security. Our holdings of this security have been very substantially reduced and we have nothing in
this group remotely approaching the size or potential which formerly existed in this investment.
The "Generals - Private Owner" section produced good results last year ($1,297,215 on $5,141,710 average
investment), and we have some mildly interesting possibilities in this area at present.
Miscellaneous
We begin the new year with net assets of $68,108,088. We had partners with capital of about $1,600,000
withdraw at yearend, primarily because of the reduced objectives announced in the October 9th letter.
This
makes good sense for them, since most of them have the ability and motivation to surpass our objectives and I
am relieved from pushing for results that I probably can't attain under present conditions.
Some of those who withdrew (and many who didn't) asked me, "What do you really mean?" after receiving the
October 9th letter. This sort of a question is a little bruising to any author, but I assured them I meant exactly
what I had said. I was also asked whether this was an initial stage in the phasing out of the partnership. The
answer to this is, “Definitely, no”. As long as partners want to put up their capital alongside of mine and the
business is operationally pleasant (and it couldn't be better), I intend to continue to do business with those who
have backed me since tennis shoes.
Gladys Kaiser has joined us and is doing the same sort of top-notch job that we have long received from Donna,
Bill and John.
The office group, spouses and children have over $15 million invested in BPL on January 1,
1968, so we have not had a need for NoDoz during business hours.
Within a few days, you will receive:
A tax letter giving you all BPL information needed for your 1967 federal income tax return. This letter
is the only item that counts for tax purposes.
An audit from Peat, Marwick, Mitchell & Co. (they have again done an excellent job) for 1967, setting
forth the operations and financial position of BPL, as well as your own capital account.
A letter signed by me setting forth the status of your BPL interest on January 1, 1968. This is identical
with the figures developed in the audit.
Let me know if anything in this letter or that occurs during the year needs clarifying. My next letter will be
about July15th, summarizing the first half of this year.
Cordially,
118 Warren E. Buffett
119 BUFFETT PARTNERSHIP.
LTD.
610 KIEWIT PLAZA
OMAHA, NEBRASKA 68131
TELEPHONE 042-4110
July 11th, 1968
First Half Performance
During the first half of 1968, the Dow-Jones Industrial Average declined fractionally from 905 to 898.
Ownership of the Dow would also have produced dividends of about $15 during the half, resulting in an overall
gain of 0.9% for that Average. The Dow, once again, was an anemic competitor for most investment managers,
although it was not surpassed by anything like the margins of 1967.
Our own performance was unusually good during the first half, with an overall gain of 16% excluding any
change in valuation for controlled companies (which represented slightly over one-third of net assets at the
beginning of the year). However, any release of adrenalin is unwarranted. Our marketable security investments
are heavily concentrated in a few situations, making relative performance potentially more volatile than in
widely diversified investment vehicles.
Our long term performance goals are as stated in the revised "Ground
Rules" and I will be quite happy if we achieve those limited objectives over a period of years. The following
table summarizes performance to date on the usual basis:
Year
Overall Results
From Dow (1)
Partnership Results
(2)
Limited Partners’
Results (3)
1957
-8.4%
10.4%
9.3%
1958
38.5%
40.9%
32.2%
1959
20.0%
25.9%
20.9%
1960
-6.2%
22.8%
18.6%
1961
22.4%
45.9%
35.9%
1962
-7.6%
13.9%
11.9%
1963
20.6%
38.7%
30.5%
1964
18.7%
27.8%
22.3%
1965
14.2%
47.2%
36.9%
1966
-15.6%
20.4%
16.8%
1967
19.0%
35.9%
28.4%
First Half 1968
0.9%
16.0%
13.5%
Cumulative Results
167.7%
1880.0%
1072.0%
Annual Compounded
Rate
8.9%
29.6%
23.8%
(1)
Based on yearly changes in the value of the Dow plus dividends that would have been received through
ownership of the Dow during that year.
The table includes all complete years of partnership activity.
(2)
For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout
the entire year after all expenses but before distributions to partners or allocations to the general partner.
(3)
For 1957-61 computed on the basis of the preceding column of partnership results allowing for
allocation to the general partner based upon the present partnership agreement, but before monthly
withdrawals by limited partners.
120 Although we revise valuations of our controlled companies only at yearend, it presently appears that our share of
their 1968 earnings will be something over $3 million.
Those with primary responsibility for their operations,
Ken Chace at Berkshire Hathaway, Louis Kohn at Hochschild Kohn, Jack Ringwalt at National Indemnity and
Ben Rosner at Associated Cotton Shops, continue to meld effort and ability into results.
This year, Diversified Retailing Company (owner of Hochschild Kohn and Associated Cotton Shops) issued its
first published annual report. This was occasioned by the public sale of debentures to approximately 1,000
investors last December. Thus, DRC is in the rather unusual position of being a public company from a
creditors' viewpoint, but a private one (there are three stockholders -BPL owns 80%) for ownership purposes.
I
am enclosing the DRC report with this letter (except where duplicates go to one house hold) and plan to
continue to send them along with future mid-year letters.
As I have mentioned before, we cannot make the same sort of money out of permanent ownership of controlled
businesses that can be made from buying and reselling such businesses, or from skilled investment in
marketable securities. Nevertheless, they offer a pleasant long term form of activity (when conducted in
conjunction with high grade, able people) at satisfactory rates of return.
Investment Companies
On the following page is the form sheet on the usual investment companies:
Year
Mass.
Inv.
Trust (1)
Investors
Stock (1)
Lehman (2)
Tri-Cont
(2)
Dow
Limited
Partners
1957
-11.4%
-12.4%
-11.4%
-2.4%
-8.4%
9.3%
1958
42.7%
47.5%
40.8%
33.2%
38.5%
32.2%
1959
9.0%
10.3%
8.1%
8.4%
20.0%
20.9%
1960
-1.0%
-0.6%
2.5%
2.8%
-6.2%
18.6%
1961
25.6%
24.9%
23.6%
22.5%
22.4%
35.9%
1962
-9.8%
-13.4%
-14.4%
-10.0%
-7.6%
11.9%
1963
20.0%
16.5%
23.7%
18.3%
20.6%
30.5%
1964
15.9%
14.3%
13.6%
12.6%
18.7%
22.3%
1965
10.2%
9.8%
19.0%
10.7%
14.2%
36.9%
1966
-7.7%
-10.0%
-2.6%
-6.9%
-15.6%
16.8%
1967
20.0%
22.8%
28.0%
25.4%
19.0%
28.4%
First Half
1968
5.1%
2.8%
4.4%
2.0%
0.9%
13.5%
Cumulative
Results
175.7%
154.5%
218.6%
186.7%
167.7%
1072.0%
Annual
Compounded
Rate
9.2%
8.5%
10.6%
9.6%
8.9%
23.8%
(1)
Computed from changes in asset value plus any distributions to holders of record during year.
(2)
From 1968 Moody's Bank &
Finance Manual for 1957 -1967. Estimated for first half of 1968.
Due to a sluggish performance by the Dow in the last few years, the four big funds now have, on average, about
a one-half point per annum advantage over the Dow for the full period.
The Present Environment
121 I make no effort to predict the course of general business or the stock market. Period. However, currently there
are practices snowballing in the security markets and business world which, while devoid of short term
predictive value, bother me as to possible long term consequences.
I know that some of you are not particularly interested (and shouldn't be) in what is taking place on the financial
stage. For those who are, I am enclosing a reprint of an unusually clear and simple article which lays bare just
what is occurring on a mushrooming scale. Spectacular amounts of money are being made by those participating
(whether as originators, top employees.
professional advisors, investment bankers, stock speculators, etc… ) in
the chain-letter type stock-promotion vogue. The game is being played by the gullible, the self-hypnotized, and
the cynical. To create the proper illusions, it frequently requires accounting distortions (one particularly
progressive entrepreneur told me he believed in "bold, imaginative accounting"), tricks of capitalization and
camouflage of the true nature of the operating businesses involved. The end product is popular, respectable and
immensely profitable (I'll let the philosophers figure in which order those adjectives should be placed).
Quite candidly, our own performance has been substantially improved on an indirect basis because of the fall-
out from such activities.
To create an ever widening circle of chain letters requires increasing amounts of
corporate raw material and this has caused many intrinsically cheap (and not so cheap) stocks to come to life.
When we have been the owners of such stocks, we have reaped market rewards much more promptly than might
otherwise have been the case. The appetite for such companies, however, tends to substantially diminish the
number of fundamentally attractive investments which remain.
I believe the odds are good that, when the stock market and business history of this period is being written, the
phenomenon described in Mr. May's article will be regarded as of major importance, and perhaps characterized
as a mania. You should realize, however, that his "The Emperor Has No Clothes" approach is at odds (or
dismissed with a “SO What?” or an "Enjoy, Enjoy”) with the views of most investment banking houses and
currently successful investment managers.
We live in an investment world, populated not by those who must be
logically persuaded to believe, but by the hopeful, credulous and greedy, grasping for an excuse to believe.
Finally, for a magnificent account of the current financial scene, you should hurry out and get a copy of “The
Money Game” by Adam Smith. It is loaded with insights and supreme wit. (Note: Despite my current “Support
Your Local Postmaster” drive, I am not enclosing the book with this letter - it retails for $6.95.)
Taxes
Several unusual factors make the tax figure even more difficult than usual to estimate this year. We will
undoubtedly have an above average amount of ordinary income. The picture on short term and long term capital
gain is subject to unusually substantial variance.
At the beginning of the year, I suggested that you use an 8%
ordinary income factor (it won't come in this manner but this figure embodies an adjustment for long term
capital gain) applied to your BPL capital account on an interim basis to compute quarterly tax estimates. If a
figure different from 8% seems more appropriate for your September 15th quarterly estimate. I will let you
know by September 5th. If no change is necessary, you will next hear from me on November 1st with the
Commitment Letter for 1969.
Cordially,
Warren E. Buffett
WEB/glk