Before Warren Buffett took control of Berkshire, he ran Buffett Partnership from 1956 to 1969. His early partnership letters have been floating around the internet for some time.
Recently, I printed all the letters to read through chronologically. I’m only through the first five years (and will have more once I’m finished) but I thought I’d share a few takeaways from the first few years.
The first couple years, the letters are only a page or two at most, but by 1961 Buffett seems to be in full stride. Throughout each you get a glimpse into his process and how it evolved over time. More surprising – maybe not – is how repetitive he is.
In every letter, Buffett goes about tempering expectations:
Our performance, relatively, is likely to be better in a bear market than in a bull market so that deductions made from the above results should be tempered by the fact that it was the type of year when we should have done relatively well. In a year when the general market had a substantial advance I would be well satisified to match the advance of the Averages. – 1957 Annual Letter
Market behavior is foremost in his mind:
A friend who runs a medium-sized investmetn trust recently wrote: “the mercurial temperament, characteristic of the American people, produced a major transformation in 1958 and ‘exuberant’ would be the proper word for the stock market, at least.”
I think this summarizes the change in psychology dominating the stock market in 1958 at both the amateur and professional levels. 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 the 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 beleive it is valid to say that the longer their visit, ther greater the reaction from it. – 1958 Annual Letter
Capital preservation is his top priority:
By previous standards, the present level of “blue chip” security prices contains a substantial speculative component with a corresponding risk of loss. 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 resutling 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. – 1959 Annual Letter
I would consider a year in which we declined 15% and the Average 30% to be much superior to a year when both we and the Average advanced 20%. Over a period of time there are going to good and bad years; there is nothing to be gained by getting enthused or depressed about the sequence in which they occur. The important thing is be beating par; a four on a par three hole is not as good as a five on a par five hole and it is unrealistic to assume we are not going to have our share of both par three’s and par five’s. – 1960 Annual Letter
Our holdings, which I always believe to be on the conservative side compared to general portfolios, tend to grow more conservative as the general market level rises. At all times, I attempt to have a portion of our portfolio in securities at least partially insulated from the behavior of the market, and this portion should increase as the market rises. However appetizing results for even the amateur cook (and perhaps particularly the amateur), we find that more of our portfolio is not on the stove. – July 1961 Letter
Finally, he offers up an annual “prediction”:
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 htink you can be quite sure taht 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 is 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. – 1961 Annual Letter