It turns out that the Dow Jones Industrial Average went up again in 1959. A total return of 19.9% in fact. But then, as now, the index was misleading. Despite the index being up that much, Buffett tells us that 710 stocks were down that year, compared to only 628 that were up. Institutional fund managers largely under-performed, and blamed it on sentiment-driven buyers in the markets. So far, sounds pretty familiar!
By now, Buffett himself is very skeptical of the prices of blue chip securities. And this year found him saying what he probably said again in 1998/99. He says:
Perhaps other standards of valuation are evolving which will permanently replace the old standard. I don’t think so. I may very well be wrong; however, I would rather sustain the penalties resulting from over-conservatism than face the consequences of error, perhaps with permanent capital loss, resulting from the adoption of a “New Era” philosophy where trees really do grow to the sky.
Some things never change, do they?*
Just for the record, I’ll mention that the partnerships (six in that year) averaged a return of 25.9% before fees. We’ll see the fee structure itself in a later year. (Didn’t I mention in the last post that I’d read ahead).
The other thing that stands out in the letter is his disclosure of a position in the portfolios. An investment of 35% of the partnerships’ assets in a single company. However, he tells us that this company, in turn, owns securities of 30 to 40 companies. And that it is available at a substantial discount to the value of those securities plus a conservative assessment of the operating business. So this would be one of the early net-nets. But he has an advantage that most us do not in this day and age. He had become the largest shareholder of the company and the next two largest holders also agreed with his ideas. So he’s bought the assets at a discount, and he is in a position to be the catalyst for unlocking the value.
Even so. 35% in a single position. The man never did seem to have believed in diversification. As will turn out, the fund was not very large to begin with. So the 35% did not represent a lot of money, but was enough to make him the largest shareholder. So 35% of assets invested in a small cap company. Do not try this at home!
Read the original here.
P.S. I’m reading Peter Bernstein’s Capital Ideas right now and I just happened upon this gem. Coincidentally, absolutely relevant to this post and to Buffett’s quote above.
Time magazine’s issue of December 31, 1958, exulted: “In the new economy, many of the old classical rules of economics no longer apply; over the years the U.S. has made and learned new rules all its own.”