1957 Buffett Partnership Letter – Key Takeaways and Lessons
Warren Buffett wrote the 1957 Buffett Partnership Letter on early 1958. On this letter he talked about the most important thing to do in investing. He also shared the partnership’s results in 1957. Read on to see all the key investment lessons in this letter.
Before we talk about the key lessons from this letter, I will explain first what Warren calls “generals” and “work-outs”.
During his time running the partnerships, Warren likes to classify his investments as either “generals”, “work-outs” or “control”. He would talk about each of these in detail in his 1961 Buffett Partnership Letter. For now I would just give a brief description of what a “general” and a “work-out” is:
Generals are undervalued securities which made up the majority of the portfolio of Warren’s partnerships. He would describe generals in his 1961 letter as:
“The first section consists of generally undervalued securities (hereinafter called “generals”) where we have nothing to say about corporate policies and no timetable as to when the undervaluation may correct itself. Over the years, this has been our largest category of investment, and more money has been made here than in either of the other categories. We usually have fairly large positions (5% to 10% of our total assets) in each of five or six generals, with smaller positions in another ten or fifteen.“
Work-outs, put quite simply, are arbitrage opportunities. Warren would often use this technique when the market is high. In his 1961 letter he would describe work-outs as:
“Our second category consists of “work-outs.” These are securities whose financial results depend on corporate action rather than supply and demand factors created by buyers and sellers of securities. In other words, they are securities with a timetable where we can predict, within reasonable error limits, when we will get how much and what might upset the apple cart. Corporate events such as mergers, liquidations, reorganizations, spin-offs, etc., lead to work-outs. An important source in recent years has been sell-outs by oil producers to major integrated oil companies.“
Now we can talk about the key lessons from the 1957 Buffett Partnership Letter:
1. Market Analysis is not important. All efforts should be directed to identifying substantially undervalued securities.
I believe this is the most important lesson in this letter. A lot of investors made the mistake of trying to analyze and forecast what the market will be doing next. And we all know that the market can be very hard, if not impossible, to predict. An investor’s time and effort is better used in finding cheap securities, something he or she can control. Benjamin Graham, the father of value investing, said in his investment classic book “The Intelligent Investor” that “the market is there to serve you and not to guide you.”
Warren would make two separate statements in the letter about this:
“All of the above is not intended to imply that market analysis is foremost in my mind. Primary attention is given at all times to the detection of substantially undervalued securities.“
“I make no attempt to forecast either business or the stock market.“
2. Look for “work-outs” in an overvalued market
“Generals” are hard to find in an overvalued market. There could still be some, but they are few and far in between. It may be prudent and more rewarding to focus on finding “work-outs” in an overvalued market.
3. Just because the market has declined substantially doesn’t mean it is cheap
Don’t evaluate the value of an investment by the drop in its price. Always evaluate an investment by its price compared to its underlying value. I was guilty of committing this mistake once. I lose quite a bit of money during my early days of investing because of this.
This lesson can also be inverted. We can say that: just because the market has risen substantially doesn’t mean that it is expensive. They can still be cheap as long as the underlying value is well above its price.
4. Don’t be afraid to take huge positions
If you are able to find an investment that offers “potential for a high average annual rate of return with a minimum of risk“. Needless to say, careful study must be done to make sure your assessment is as accurate as possible. And always maintain a certain level of margin of safety.
5. The importance of patience in investing
It is okay to have investments that will take a few years to generate returns. As long as they have a high average annual rate of return.
Warren also mentioned that “substantially undervalued securities can only be acquired with patience“. The price of a stock will rise quickly if you try to buy too many, too quickly. Especially those that have low liquidity. It’s better to buy slowly over a period of time. As long as the price stays the same or even better, became cheaper.
These are the key lessons I have learned from the 1957 Buffett Partnership Letter. What else have you learned? Let me know in the comments below.
(Click here to see the key takeaways and lessons of all Buffett Partnership Letters from 1957 – 1970)
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