BUFFETT PARTNERSHIP, LTD.
810 KIEWIT PLAZA
OMAHA 31, NEBRASKA
November 1, 1962
TO MY PARTNERS FOR 1963:
Here we go on the annual paper flurry. Two copies of an amended partnership agreement for 1963 are enclosed. The one with the General Provisions attached is to be kept by you and the other single-page agreement should be returned. There are no substantive changes of any sort from last year’s agreement. This amendment is merely to allow for a few new partners and in several places to reword in clearer (we hope) language provisions of the present agreement. Practically all of the rewording is in General Provision 5 (paragraph 7 in last year’s agreement). Rather than have a separate amending document, we have incorporated the changes into one complete document embodying the entire agreement.
We are also enclosing two commitment letters (one for you–one to be returned) on which you are to indicate your wishes regarding additions or withdrawals at January 1st. We would like to have the agreement and the commitment letter back by December 1st. However, the commitment letter can be amended right up until the end of the year (not after) so if you should have a change of plans and you have already mailed us your commitment letter, all you have to do is get in touch with me, and I will make whatever changes you desire.
Any withdrawals will be paid immediately after January 1st. Any additions must reach us by January 10th, and should they be paid in during November, they will take on the status of advance payments and draw interest at the rate of 6% until year-end.
Please be sure the signature on your partnership agreement is notarized. Partners in Omaha may obtain the notarization at our office if they wish. Also, be sure to let us know by an appropriate circle on the commitment letter whether you wish to receive monthly payments in 1963. In order to be sure everyone understands this, let me again state that these monthly payments are in no sense guaranteed earnings or anything of the sort. They represent a convenient form of regular withdrawal, which to the extent we earn better than 6% are payments from earnings, and to the extent we don’t, are payments from capital.
Complete tax information for your 1962 return will be in your hands by January 20th. If you should need an estimate of your tax position before that time, let me know and I will give you a rough idea. We will also send out a short letter on taxes in late December.
Having read this far, you are entitled to a report on how we have done to date in 1962. For the period ending October 31st, the Dow-Jones Industrials showed an overall loss, including dividends received, of approximately 16.8%. We intend to use the same method or valuing our controlling interest in Dempster Mill Manufacturing at this year-end that we did at the end of last year. This involved applying various discounts to the balance sheet items to reflect my opinion as to what could be realized on a very prompt sale. Last year this involved a 40% discount on inventories, a 15% discount on receivables, estimated auction value of fixed assets, etc., which led to an approximate value or $35.00 per share.
The successful conversion of substantial portions of the assets of Dempster to cash, at virtually 100 cents on the dollar, has been the high point of 1962. For example, inventory of $4.2 million at last year-end will probably be about $1.9 million this year-end, reducing the discount on this item by about $920,000 (40% of $2.3 million reduction). I will give this story my full journalistic treatment in my annual letter. Suffice to say at this point that applying the same discounts described above will probably result in a year-end value of at least $50.00 per share. The extent of the asset conversion job can perhaps best be illustrated in a sentence by pointing out that whereas we had $166,000 of cash and $2,315,000 of liabilities at November 30, 1961 (Dempster fiscal year-end), we expect this year to have about $1 million in cash and investments (of the type the Partnership buys) against total liabilities of $250,000. Prospects for further improvement in this situation in 1963 appear good, and we expect a substantially expanded investment portfolio in Dempster next year.
Valuing Dempster at $50 per share, our overall gain (before any payments to partners) to October 31st for the Partnership has been 5.5%. This 22.3 percentage-points advantage over the Dow, if maintained until the end of the year, will be among the largest we have ever had. About 60% of this advantage was accomplished by the portfolio other than Dempster, and 40% was the result of increased value at Dempster.
I want all partners and prospective partners to realize the results described above are distinctly abnormal and will recur infrequently, if at all. This performance is mainly the result of having a large portion of our money in controlled assets and workout situations rather than general market situations at a time when the Dow declined substantially. If the Dow had advanced materially in 1962, we could have looked very bad on a relative basis, and our success to date in 1962 certainly does not reflect any ability on my part to guess the market (I never try), but merely reflects the fact that the high prices of generals partially forced me into other categories or investment. If the Dow had continued to soar, we would have been low man on the totem pole. We fully expect to have years when our method of operation will not even match the results of the Dow, although obviously I don’t expect this on any long-term basis or I would throw in the towel and buy the Dow.
I’ll cut this sermon short with the conclusion that I certainly do not want anyone to think that the pattern of the last few years is likely to be repeated; I expect future performance to reflect much smaller advantages on average over the Dow.
Each letter ends with the request that you let me know about anything that isn’t clear. Please be sure that you do this. We are all geared up with secretarial help, a new typewriter, etc., and we want to be sure that this letter and agreement are understood by all.
Warren E. Buffett
P/S: There are no prizes for being the last ones to get in the agreement and commitment letter, so please get to it as soon as possible. Remember the commitment letter can be amended by a postcard or a phone call–we are just trying to get the bulk of the work out of the way well before December 31st so we can concentrate on getting the audit, tax information, etc., out pronto at year-end.
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