This is from Buffett Partnership Letters 1962.
Buffett wrote two interim letters during 1962. Both letters had little of general interest to the reader today and so I’m summarizing both in a single, short post.
In the first letter, sent out in July, Buffett points out that the Dow was down 21.7% for the half year. His aim, during times such as these, was to lose only half as much. In fact, the decline was only 7.5% for the Buffett partnerships. He then reiterated his belief that the Dow is a fair benchmark for the fund’s performance, and that performance, whether good or bad, must not be judged over short time periods. Three to five years is a minimum time period to judge whether an investment manager is any good.
The second letter was even more operational in nature. There was one important thing though. The Dow has recovered somewhat from its lows at the end of June 1962, being down only 16.8%. However, the partnership has turned positive at 5.5%. Thus they were ahead by 22.3%.
A big part of the outperformance came from a material appreciation in the value of their position in Dempster. Since they owned most of the company and there was little by way of a market, he had to value the company on his own.
The way he did this was by applying discounts to the various assets on the company’s balance sheet. Specifically, he discounted inventories by 40% and receivables by 15%. By the time he wrote this second letter, a big part of the inventory had been liquidated at par, leading to an increase in value of the company.
Dempster was a control situation and hence shielded the funds from the vicissitudes of the market. This, he admits, was a big reason for the outperformance.
If the Dow had been up, they could have underperformed as well. And so, he reminds his partners, the performance for this period must not be expected regularly. Buffett always knew he was playing a long game. Trust him to always play down expectations, something he’s up to even today.
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