Thư Buffett Partnership năm 1966

July 12, 1966

July 12, 1966

First Half Performance

During the first half of 1966, the Dow-Jones Industrial Average (hereinafter called the "Dow") declined from 969.26 to 870.10. If one had owned the Dow during this period, dividends of approximately 14.70 would have been received, reducing the overall loss of the Dow to about 8.7%.

It is my objective and my hope (but not my prediction!) that we achieve over a long period of time, an average yearly advantage of ten percentage points relative to the Dow. During the first half we did considerably better than expected with an overall gain of approximately 8.2%. Such results should be regarded as decidedly abnormal. I have previously complimented partners on the good-natured tolerance they display in shrugging off such unexpected positive variances. The nature of our business is such that over the years, we will not disappoint the many of you who must also desire a test of your capacity for tolerance of negative variances.

The following summarizes the year-by-year performance of the Dow, the performance of the Partnership before allocation to the general partner, and the results for limited partners:

         Year                Overall Results From       Partnership Results (2)        Limited Partners’
                                   Dow (1)                                                Results (3)
          1957                       -8.4%                        10.4%                      9.3%
          1958                      38.5%                         40.9%                     32.2%
          1959                      20.0%                         25.9%                     20.9%
          1960                       -6.2%                        22.8%                     18.6%
          1961                      22.4%                         45.9%                     35.9%
          1962                       -7.6%                        13.9%                     11.9%
          1963                      20.6%                         38.7%                     30.5%
          1964                      18.7%                         27.8%                     22.3%
          1965                      14.2%                         47.2%                     36.9%
   First half of 1966                -8.7%                        8.2%                       7.7%

 Cumulative Results                 141.1%                      1028.7%                      641.5%
Annual Compounded                    9.7%                        29.0%                        23.5%
       Rate

1. Based on yearly changes in the value of the Dow plus dividends that would have been received through ownership of the Dow during that year. The table includes all complete years of partnership activity.

1. Dựa trên biến động hằng năm của giá trị chỉ số Dow cộng với cổ tức lẽ ra đã nhận được thông qua việc sở hữu chỉ số Dow trong năm đó. Bảng bao gồm tất cả các năm hoạt động trọn vẹn của quỹ hợp danh.

2. For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout the entire year after all expenses but before distributions to partners or allocations to the general partner.

2. Giai đoạn 1957-61 gồm kết quả gộp của tất cả các quỹ hợp danh tiền thân hoạt động trong suốt cả năm, sau mọi chi phí nhưng trước các khoản phân phối cho các thành viên hoặc phần phân bổ cho thành viên hợp danh.

3. For 1957-61 computed on the basis of the preceding column of partnership results allowing for allocation to the general partner based upon the present partnership agreement, but before monthly withdrawals by limited partners.

3. Giai đoạn 1957-61 được tính trên cơ sở cột kết quả của quỹ hợp danh ở trước, có tính đến phần phân bổ cho thành viên hợp danh dựa trên thỏa thuận hợp danh (partnership agreement) hiện hành, nhưng trước các khoản rút vốn hằng tháng của các thành viên góp vốn.

Even Samson gets clipped occasionally. If you had invested $100.000 on January 1 equally among -

a. the world's largest auto company (General Motors);

b. the world's largest oil company (Standard of New Jersey);

c. the world's largest retailing company (Sears Roebuck);

d. the world's largest chemical company (Dupont);

e. the world's largest steel company (U.S. Steel);

f. the world's largest stockholder-owned insurance company (Aetna);

g. the world’s largest public utility (American Telephone & Telegraph);

h. the world's largest bank (Bank of America);

your total portfolio (including dividends received) would have been worth $83,370 on June 30 for a loss of 16.6%. The total market value on January 1 of these eight giants was well over $100 billion. Everyone of them was selling lower on June 30.

Investment Companies

On the next page we bring up to date our regular comparison with the results of the two largest open-end investment companies (mutual funds) that follow a policy of being, typically, 95-100% invested in common stocks, and the two largest diversified closed-end investment companies.

YEARLY RESULTS

    Year          Mass. Inv.      Investors     Lehman (2)        Tri-Cont          Dow          Limited
                  Trust (1)       Stock (1)                           (2)                        Partners
    1957           -11.4%          -12.4%          -11.4%           -2.4%          -8.4%          9.3%
    1958            42.7%           47.5%           40.8%           33.2%          38.5%          32.2%
    1959             9.0%           10.3%            8.1%            8.4%          20.0%          20.9%
    1960            -1.0%           -0.6%            2.5%            2.8%          -6.2%          18.6%
    1961            25.6%           24.9%           23.6%           22.5%          22.4%          35.9%
    1962            -9.8%          -13.4%          -14.4%          -10.0%          -7.6%          11.9%
    1963            20.0%           16.5%           23.7%           18.3%          20.6%          30.5%
    1964            15.9%           14.3%           13.6%           12.6%          18.7%          22.3%
    1965            10.2%            9.8%           19.0%           10.7%          14.2%          36.9%
  First half        -7.9%           -7.9%           -1.0%           -5.2%          -8.7%          7.7%
    1966

 Cumulative        118.1%          106.3%          142.8%         126.9%          141.1%          641.5%
  Results
  Annual             8.6%           7.9%            9.8%            9.0%           9.7%           23.5%
Compounded
   Rate

(1) Computed from changes in asset value plus any distributions to holders of record during year.

(2) From 1966 Moody's Bank & Finance Manual for 1957-1965. Estimated for first half of 1966.

Proponents of institutional investing frequently cite its conservative nature. If “conservative” is interpreted to mean "productive of results varying only slightly from average experience" I believe the characterization is proper. Such results are almost bound to flow from wide diversification among high grade securities. Since, over a long period, "average experience" is likely to be good experience, there is nothing wrong with the typical investor utilizing this form of investment medium.

However, I believe that conservatism is more properly interpreted to mean "subject to substantially less temporary or permanent shrinkage in value than total experience". This simply has not been achieved, as the record of the four largest funds (presently managing over $5 billion) illustrates. Specifically, the Dow declined in 1957, 1960, 1962 and the first half of 1966. Cumulating the shrinkage in the Dow during the three full year periods produces a decline of 20.6%. Following a similar technique for the four largest funds produces declines of 9.7%, 20.9%, 22.3% and 24.6%. Including the interim performance for the first half of 1966 results in a decline in the Dow of 27.5% and for the funds declines of 14.4%, 23.1%, 27.1% and 30.6%. Such funds (and I believe their results are quite typical of institutional experience in common stocks) seem to meet the first definition of conservatism but not the second one.

Most investors would climb a rung intellectually if they clearly delineated between the above two interpretations of conservatism. The first might be better labeled "conventionalism" - what it really says is that “when others are making money in the general run of securities, so will we and to about the same degree; when they are losing money, we'll do it at about the same rate." This is not to be equated with "when others are making it, we'll make as much and when they are losing it, we will lose less.” Very few investment programs accomplish the latter - we certainly don't promise it but we do intend to keep trying. (I have always felt our objectives should be somewhat loftier than those Herman Hickman articulated during the desperate years when Yale was losing eight games a season. Said Herman, "I see my job as one of keeping the alumni sullen but not mutinous.”)

During the first half we, and two 10% partners, purchased all of the stock of Hochschild, Kohn & Co., a privately owned Baltimore department store. This is the first time in the history of the Partnership that an entire business has been purchased by negotiation, although we have, from time to time, negotiated purchase of specific important blocks of marketable securities. However, no new principles are involved. The quantitative and qualitative aspects of the business are evaluated and weighed against price, both on an absolute basis and relative to other investment opportunities. HK (learn to call it that - I didn't find out how to pronounce it until the deal was concluded) stacks up fine in all respects.

We have topnotch people (both from a personal and business standpoint) handling the operation. Despite the edge that my extensive 75 cents an hour experience at the Penney's store in Omaha some years back gives us (I became an authority on the Minimum Wage Act), they will continue to run the business as in the past. Even if the price had been cheaper but the management had been run-of-the-mill, we would not have bought the business.

It is impossible to avoid some public notice when a business with several thousand employees is acquired. However, it is important that you do not infer the degree of financial importance to BPL from its news value to the public. We have something over $50 million invested, primarily in marketable securities, of which only about 10% is represented by our net investment in HK. We have an investment of over three times this much in a marketable security where our ownership will never come to public attention. This is not to say an HK is not important - a 10% holding definitely is. However, it is not as significant relative to our total operation as it would be easy to think. I still prefer the iceberg approach toward investment disclosure.

It is my intention to value HK at yearend at cost plus our share of retained earnings since purchase. This policy will be followed in future years unless there is a demonstrable change in our position relative to other department stores or in other objective standards of value. Naturally we wouldn't have purchased HK unless we felt the price was quite attractive. Therefore, a valuation policy based upon cost may somewhat undervalue our holdings. Nevertheless, it seems the most objective figure to apply. All of our investments usually appear undervalued to me - otherwise we wouldn't own them.

Market Forecasting

Ground Rule No.6 (from our November packet) says: “I am not in the business of predicting general stock market or business fluctuations. If you think I can do this, or think it is essential to an investment program, you should not be in the partnership.”

Of course, this rule can be attacked as fuzzy, complex, ambiguous, vague, etc. Nevertheless, I think the point is well understood by the great majority of our partners. We don't buy and sell stocks based upon what other people think the stock market is going to do (I never have an opinion) but rather upon what we think the company is going to do. The course of the stock market will determine, to a great degree, when we will be right, but the accuracy of our analysis of the company will largely determine whether we will be right. In other words, we tend to concentrate on what should happen, not when it should happen.

In our department store business I can say with considerable assurance that December will be better than July. (Notice how sophisticated I have already become about retailing.) What really counts is whether December is better than last December by a margin greater than our competitors' and what we are doing to set the stage for future Decembers. However, in our partnership business I not only can't say whether December will be better than July, but I can't even say that December won't produce a very large loss. It sometimes does. Our investments are simply not aware that it takes 365-1/4 days for the earth to make it around the sun. Even worse, they are not aware that your celestial orientation (and that of the IRS) requires that I report to you upon the conclusion of each orbit (the earth's - not ours). Therefore, we have to use a standard other than the calendar to measure our progress. This yardstick is obviously the general experience in securities as measured by the Dow. We have a strong feeling that this competitor will do quite decently over a period of years (Christmas will come even if it's in July) and if we keep beating our competitor we will have to do something better than "quite decently". It's something like a retailer measuring his sales gains and profit margins against Sears' - beat them every year and somehow you'll see daylight.

I resurrect this "market-guessing" section only because after the Dow declined from 995 at the peak in February to about 865 in May, I received a few calls from partners suggesting that they thought stocks were going a lot lower. This always raises two questions in my mind: (1) if they knew in February that the Dow was going to 865 in May, why didn't they let me in on it then; and, (2) if they didn't know what was going to happen during the ensuing three months back in February, how do they know in May? There is also a voice or two after any hundred point or so decline suggesting we sell and wait until the future is clearer. Let me again suggest two points: (1) the future has never been clear to me (give us a call when the next few months are obvious to you – or, for that matter the next few hours); and, (2) no one ever seems to call after the market has gone up one hundred points to focus my attention on how unclear everything is, even though the view back in February doesn't look so clear in retrospect.

If we start deciding, based on guesses or emotions, whether we will or won't participate in a business where we should have some long run edge, we're in trouble. We will not sell our interests in businesses (stocks) when they are attractively priced just because some astrologer thinks the quotations may go lower even though such forecasts are obviously going to be right some of the time. Similarly, we will not buy fully priced securities because "experts" think prices are going higher. Who would think of buying or selling a private business because of someone's guess on the stock market? The availability of a question for your business interest (stock) should always be an asset to be utilized if desired. If it gets silly enough in either direction, you take advantage of it. Its availability should never be turned into a liability whereby its periodic aberrations in turn formulate your judgments. A marvelous articulation of this idea is contained in chapter two (The Investor and Stock Market Fluctuations) of Benjamin Graham's "The Intelligent Investor". In my opinion, this chapter has more investment importance than anything else that has been written.

We will have a letter out about November 1 with the Commitment Letter for 1967 and an estimate of the 1966 tax situation.

Cordially,

January 25, 1967

January 25, 1967

The First Decade

The Partnership had its tenth anniversary during 1966. The celebration was appropriate -an all-time record (both past and future) was established for our performance margin relative to the Dow. Our advantage was 36 points which resulted from a plus 20.4% for the Partnership and a minus 15.6% for the Dow.

This pleasant but non-repeatable experience was partially due to a lackluster performance by the Dow. Virtually all investment managers outperformed it during the year. The Dow is weighted by the dollar price of the thirty stocks involved. Several of the highest priced components, which thereby carry disproportionate weight (Dupont, General Motors), were particularly poor performers in 1966. This, coupled with the general aversion to conventional blue chips, caused the Dow to suffer relative to general investment experience, particularly during the last quarter.

The following summarizes the year-by-year performance of the Dow, the performance of the Partnership before allocation (one quarter of the excess over 6%) to the general partner, and the results for limited partners:

         Year               Overall Results From      Partnership Results (2)       Limited Partners’
                                  Dow (1)                                              Results (3)
         1957                       -8.4%                      10.4%                      9.3%
         1958                       38.5%                      40.9%                     32.2%
         1959                       20.0%                      25.9%                     20.9%
         1960                       -6.2%                      22.8%                     18.6%
         1961                       22.4%                      45.9%                     35.9%
         1962                       -7.6%                      13.9%                     11.9%
         1963                       20.6%                      38.7%                     30.5%
         1964                       18.7%                      27.8%                     22.3%
         1965                       14.2%                      47.2%                     36.9%
         1966                      -15.6%                      20.4%                     16.8%

 Cumulative Results                141.1%                     1028.7%                    641.5%
Annual Compounded                   9.7%                       29.0%                      23.5%
       Rate

(1) Based on yearly changes in the value of the Dow plus dividends that would have been received through ownership of the Dow during that year. The table includes all complete years of partnership activity.

(2) For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout the entire year after all expenses, but before distributions to partners or allocations to the general partner.

(3) For 1957-61 computed on the basis of the preceding column of partnership results allowing for allocation to the general partner based upon the present partnership agreement. but before monthly withdrawals by limited partners.

On a cumulative or compounded basis, the results are:

         Year              Overall Results From         Partnership Results       Limited Partners’
                                    Dow                                                Results
       1957                        -8.4%                      10.4%                     9.3%
    1957 – 58                     26.9%                       55.6%                    44.5%
    1957 – 59                     52.3%                       95.9%                    74.7%
    1957 – 60                     42.9%                      140.6%                    107.2%
    1957 – 61                     74.9%                      251.0%                    181.6%
    1957 – 62                     61.6%                      299.8%                    215.1%
    1957 – 63                     95.1%                      454.5%                    311.2%
    1957 – 64                    131.3%                      608.7%                    402.9%
    1957 – 65                    164.1%                      943.2%                    588.5%
    1957 – 66                    122.9%                      1156.0%                   704.2%
Annual Compounded                 11.4%                       29.8%                    23.9%
       Rate

Investment Companies

On the following page is the usual tabulation showing the results of the two largest open-end investment companies (mutual funds) that follow a policy of being, typically, 95-100% invested in common stocks, and the two largest diversified closed-end investment companies.

    Year         Mass. Inv.       Investors     Lehman (2)       Tri-Cont          Dow          Limited
                 Trust (1)        Stock (1)                          (2)                        Partners
    1957          -11.4%           -12.4%          -11.4%          -2.4%           -8.4%         9.3%
    1958           42.7%            47.5%           40.8%          33.2%           38.5%         32.2%
    1959            9.0%            10.3%            8.1%           8.4%           20.0%         20.9%
    1960           -1.0%            -0.6%            2.5%           2.8%           -6.2%         18.6%
    1961           25.6%            24.9%           23.6%          22.5%           22.4%         35.9%
    1962           -9.8%           -13.4%          -14.4%         -10.0%           -7.6%         11.9%
    1963           20.0%            16.5%           23.7%          18.3%           20.6%         30.5%
    1964           15.9%            14.3%           13.6%          12.6%           18.7%         22.3%
    1965           10.2%             9.8%           19.0%          10.7%           14.2%         36.9%
    1966           -7.7%           -10.0%           -2.6%          -6.9%          -15.6%         16.8%

 Cumulative        118.1%          106.3%         142.8%          126.9%         141.1%          641.5%
  Results
  Annual            8.6%            7.9%           9.8%            9.0%            9.7%           23.5%
Compounded
   Rate

(1) Computed from changes in asset value plus any distributions to holders of record during year.

(2) From 1966 Moody's Bank & Finance Manual for 1957-1965. Estimated for 1966.

These investment company performance figures have been regularly reported here to show that the now is no patsy as an investment standard. It should again be emphasized that the companies were not selected on the basis of comparability to Buffett Partnership, Ltd. There are important differences including: (1) investment companies operate under both internally and externally imposed restrictions on their investment actions that are not applicable to us; (2) investment companies diversify far more than we do and, in all probability, thereby have less chance for a really bad performance relative to the now in a single year; and (3) their managers have considerably less incentive for abnormal performance and greater incentive for conventionality.

However, the records above do reveal what well-regarded, highly paid, full-time professional investment managers have been able to accomplish while working with common stocks. These managers have been favorites of American investors (more than 600,000) making free choices among many alternatives in the investment management field. It is probable that their results are typical of the overwhelming majority of professional investment managers.

It is not true, however, that these are the best records achieved in the investment field. A few mutual funds and some private investment operations have compiled records vastly superior to the Dow and, in some cases, substantially superior to Buffett Partnership, Ltd. Their investment techniques are usually very dissimilar to ours and not within my capabilities. However, they are generally managed by very bright, motivated people and it is only fair that I mention the existence of such superior results in this general discussion of the record of professional investment management.

Trends in Our Business

A keen mind working diligently at interpreting the figures on page one could come to a lot of wrong conclusions.

The results of the first ten years have absolutely no chance of being duplicated or even remotely approximated during the next decade. They may well be achieved by some hungry twenty-five year old working with $105,100 initial partnership capital and operating during a ten year business and market environment which is frequently conducive to successful implementation of his investment philosophy.

They will not be achieved by a better fed thirty-six year old working with our $54,065,345 current partnership capital who presently finds perhaps one-fifth to one-tenth as many really good ideas as previously to implement his investment philosophy.

Buffett Associates. Ltd. (predecessor to Buffett Partnership. Ltd.) was founded on the west banks of the Missouri. May 5. 1956 by a hardy little band consisting of four family members, three close friends and $105,100. (I tried to find some brilliant flash of insight regarding our future or present conditions from my first page and a half annual letter of January, 1957 to insert as a quote here. However, someone evidently doctored my file copy so as to remove the perceptive remarks I must have made.)

At that time, and for some years subsequently, there were substantial numbers of securities selling at well below the "value to a private owner" criterion we utilized for selection of general market investments. We also experienced a flow of “workout” opportunities where the percentages were very much to our liking. The problem was always which, not what. Accordingly, we were able to own fifteen to twenty-five issues and be enthusiastic about the probabilities inherent in all holdings.

In the last few years this situation has changed dramatically. We now find very few securities that are understandable to me, available in decent size, and which offer the expectation of investment performance meeting our yardstick of ten percentage points per annum superior to the Dow. In the last three years we have come up with only two or three new ideas a year that have had such an expectancy of superior performance. Fortunately, in some cases, we have made the most of them. However, in earlier years, a lesser effort produced literally dozens of comparable opportunities. It is difficult to be objective about the causes for such diminution of one's own productivity. Three factors that seem apparent are: (1) a somewhat changed market environment;

(2) our increased size; and (3) substantially more competition.

It is obvious that a business based upon only a trickle of fine ideas has poorer prospects than one based upon a steady flow of such ideas. To date the trickle has provided as much financial nourishment as the flow. This is true because there is only so much one can digest (million dollar ideas are of no great benefit to thousand dollar bank accounts - this was impressed on me in my early days) and because a limited number of ideas causes one to utilize those available more intensively. The latter factor has definitely been operative with us in recent years. However, a trickle has considerably more chance of drying up completely than a flow.

These conditions will not cause me to attempt investment decisions outside my sphere of understanding (I don't go for the "If you can't lick 'em, join 'em” philosophy - my own leaning is toward "If you can't join ‘em, lick 'em”). We will not go into businesses where technology which is away over my head is crucial to the investment decision. I know about as much about semi-conductors or integrated circuits as I do of the mating habits of the chrzaszcz. (That's a Polish May bug, students - if you have trouble pronouncing it, rhyme it with thrzaszcz.)

Furthermore, we will not follow the frequently prevalent approach of investing in securities where an attempt to anticipate market action overrides business valuations. Such so-called "fashion" investing has frequently produced very substantial and quick profits in recent years (and currently as I write this in January). It represents an investment technique whose soundness I can neither affirm nor deny. It does not completely satisfy my intellect (or perhaps my prejudices), and most definitely does not fit my temperament. I will not invest my own money based upon such an approach hence, I will most certainly not do so with your money.

Finally, we will not seek out activity in investment operations, even if offering splendid profit expectations, where major human problems appear to have a substantial chance of developing.

What I do promise you, as partners, is that I will work hard to maintain the trickle of ideas and try to get the most out of it that is possible – but if it should dry up completely, you will be informed honestly and promptly so that we may all take alternative action.

Analysis of 1966 Results

All four main categories of our investment operation worked out well in 1966. Specifically, we had a total overall gain of $8,906,701 derived as follows:

           Category                          Average Investment                        Overall Gain

Controls                                              $17,259,342                         $1,566,302
Generals – Private Owner                               $1,359,340                         $1,004,362
Generals – Relatively                                 $21,847,045                         $5,124254
Undervalued
Workouts                                               $7,666314                          $1,714,181
Miscellaneous, including US                            $1,332,609                          $(18,422)
Treasury Bills
Total Income                                                                              $9,390,677
Less: General Expense                                                                      $483,976
Overall Gain                                                                              $8,906,701

A few caveats are necessary before we get on with the main discussion:

1. An explanation of the various categories listed above was made in the January 18, 1965 letter. If your memory needs refreshing and your favorite newsstand does not have the pocketbook edition. we'll be glad to give you a copy.

1. Phần giải thích về các nhóm khác nhau liệt kê ở trên đã được trình bày trong lá thư ngày 18 tháng 1 năm 1965. Nếu trí nhớ của các bạn cần được làm mới và sạp báo ưa thích của các bạn không có ấn bản bỏ túi, chúng tôi sẽ vui lòng gửi các bạn một bản.

2. The classifications are not iron-clad. Nothing is changed retroactively but the initial decision as to category is sometimes arbitrary.

2. Việc phân loại không phải là bất di bất dịch. Không có gì bị thay đổi hồi tố, nhưng quyết định ban đầu về việc xếp nhóm đôi khi mang tính tùy ý.

3. Percentage returns calculated on the average investment base by category would be understated relative to partnership percentage returns which are calculated on a beginning investment base. In the above figures, a security purchased by us at 100 on January 1 which appreciated at an even rate to 150 on December 31 would have an average investment of 125 producing a 40% result contrasted to a 50% result by the customary approach. In other words, the above figures use a monthly average of market values in calculating the average investment.

3. Tỷ suất sinh lời phần trăm tính trên cơ sở khoản đầu tư bình quân theo từng nhóm sẽ thấp hơn thực tế khi so với tỷ suất sinh lời phần trăm của quỹ hợp danh, vốn được tính trên cơ sở khoản đầu tư đầu kỳ. Trong các số liệu trên, một chứng khoán được chúng ta mua ở giá 100 vào ngày 1 tháng 1 và tăng giá đều đặn lên 150 vào ngày 31 tháng 12 sẽ có khoản đầu tư bình quân là 125, tạo ra kết quả 40%, so với kết quả 50% theo cách tính thông thường. Nói cách khác, các số liệu trên sử dụng bình quân hằng tháng của giá trị thị trường để tính khoản đầu tư bình quân.

4. All results are based on a 100% ownership, non-leverage, basis. Interest and other general expenses are deducted from total performance and not segregated by category. Expenses directly related to specific investment operations, such as dividends paid on short stock, are deducted by category. When securities are borrowed directly and sold short, the net investment (longs minus shorts) is shown for the applicable average investment category.

4. Mọi kết quả đều được tính trên cơ sở sở hữu 100%, không dùng đòn bẩy (leverage). Tiền lãi vay và các chi phí chung khác được trừ khỏi tổng thành tích và không phân tách theo nhóm. Các chi phí liên quan trực tiếp đến những nghiệp vụ đầu tư cụ thể, chẳng hạn cổ tức phải trả cho cổ phiếu bán khống, được trừ theo nhóm. Khi chứng khoán được vay trực tiếp và bán khống (sold short), khoản đầu tư ròng (vị thế mua trừ vị thế bán khống) được thể hiện cho nhóm khoản đầu tư bình quân tương ứng.

5. The above table has only limited use. The results applicable to each category are dominated by one or two investments. They do not represent a collection of great quantities of stable data (mortality rates of all American males or something of the sort) from which conclusions can be drawn and projections made. Instead, they represent infrequent, non-homogeneous phenomena leading to very tentative suggestions regarding various courses of action and are so used by us.

5. Bảng trên chỉ có công dụng hạn chế. Kết quả ứng với mỗi nhóm do một hoặc hai khoản đầu tư chi phối. Các kết quả này không đại diện cho một tập hợp lượng lớn dữ liệu ổn định (tỷ lệ tử vong của toàn bộ nam giới Mỹ hoặc thứ gì đó tương tự) mà từ đó có thể rút ra kết luận và đưa ra các dự phóng. Thay vào đó, chúng đại diện cho những hiện tượng không thường xuyên, không đồng nhất, chỉ dẫn tới những gợi ý rất dè dặt về các hướng hành động khác nhau, và chúng tôi sử dụng chúng đúng như vậy.

6. Finally, these calculations are not made with the same loving care we apply to counting the money and are subject to possible clerical or mathematical error since they are not entirely self-checking.

6. Cuối cùng, những phép tính này không được thực hiện với sự chăm chút yêu thương như chúng tôi dành cho việc đếm tiền, và có thể mắc lỗi văn thư hoặc lỗi tính toán vì chúng không hoàn toàn tự kiểm tra được.

Controls

There were three main sources of gain during 1966 in respect to controlled companies. These arose through: (1) retained business earnings applicable to our holdings in 1966; (2) open market purchases of additional stock below our controlling interest valuation and; (3) unrealized appreciation in marketable securities held by the controlled companies. The total of all positive items came to $2,600,838 in 1966.

However, due to factors mentioned in my November 1, 1966 letter, specific industry conditions, and other relevant valuation items, this gain was reduced by $1,034,780 in arriving at our fair valuation applicable to controlling interests as of December 31, 1966. Thus the overall gain in the control category was reduced to $1,566,058 for the year.

We were undoubtedly fortunate that we had a relatively high percentage of net assets invested in businesses and not stocks during 1966. The same money in general market holdings would probably have produced a loss, perhaps substantial, during the year. This was not planned and if the stock market had advanced substantially during the year, this category would have been an important drag on overall performance. The same situation will prevail during 1967.

Generals -Private Owner

Our performance here falls in the "twenty-one dollars a day, once a month" category. In the middle of 1965 we started purchasing a very attractive widely held security which was selling far below its value to a private owner. Our hope was that over a two or three year period we could get $10 million or more invested at the favorable prices prevailing. The various businesses that the company operated were understandable and we could check out competitive strengths and weaknesses thoroughly with competitors, distributors, customers, suppliers, ex-employees, etc. Market conditions peculiar to the stock gave us hope that, with patience, we could buy substantial quantities of the stock without disturbing the price.

At yearend 1965 we had invested $1,956,980 and the market value of our holding was $2,358,412 so that $401,432 was contributed to performance luring 1965. We would have preferred, of course, to have seen the market below cost since our interest was in additional buying, not in selling. This would have dampened Buffett Partnerships Ltd.’s 1965 performance and perhaps reduced the euphoria experienced by limited partners (psychically, the net result to all partners would have been a standoff since the general partner would have been floating) but would have enhanced long term performance. The fact that the stock had risen somewhat above our cost had already slowed down our buying program and thereby reduced ultimate profit.

An even more dramatic example of the conflict between short term performance and the maximization of long term results occurred in 1966. Another party, previously completely unknown to me, issued a tender offer which foreclosed opportunities for future advantageous buying. I made the decision that the wisest course (it may not have been) for us to follow was to dispose of our holdings and we thus realized a total profit of $1,269,181 in February, of which $867,749 was applicable to 1966.

While any gains looked particularly good in the market environment that intimately developed in 1966, you can be sure I don't delight in going round making molehills out of mountains. The molehill, of course, was reflected in 1966 results. However, we would have been much better off from a long range standpoint if 1966 results had been five percentage points worse and we were continuing to buy substantial quantities of the stock at the depressed prices that might have been expected to prevail in this year's market environment.

Good ideas were a dime a dozen, such a premature ending would not be unpleasant. There is something to be said, of course, for a business operation where some of the failures produce moderate profits. However, you can see how hard it is to develop replacement ideas by examining our average investment in the Private Owner category - we came up with nothing during the remainder of the year despite lower stock prices, which should have been conducive to finding such opportunities.

Generals - Relatively Undervalued

Our relative performance in this category was the best we have ever had - due to one holding which was our largest investment at yearend 1965 and also yearend 1966. This investment has substantially out-performed the general market for us during each year (1964, 1965, 1966) that we have held it. While any single year's performance can be quite erratic, we think the probabilities are highly favorable for superior future performance over a three or four year period. The attractiveness and relative certainty of this particular security are what caused me to introduce Ground Rule 7 in November, 1965 to allow individual holdings of up to 40% of our net assets. We spend considerable effort continuously evaluating every facet of the company and constantly testing our hypothesis that this security is superior to alternative investment choices. Such constant evaluation and comparison at shifting prices is absolutely essential to our investment operation.

It would be much more pleasant (and indicate a more favorable future) to report that our results in the Generals -Relatively Undervalued category represented fifteen securities in ten industries, practically all of which outperformed the market. We simply don't have that many good ideas. As mentioned above, new ideas are continually measured against present ideas and we will not make shifts if the effect is to downgrade expectable performance. This policy has resulted in limited activity in recent years when we have felt so strongly about the relative merits of our largest holding. Such a condition has meant that realized gains have been a much smaller portion of total performance than in earlier years when the flow of good ideas was more substantial.

The sort of concentration we have in this category is bound to produce wide swings in short term performance – some, most certainly, unpleasant. There have already been some of these applicable to shorter time spans than I use in reporting to partners. This is one reason I think frequent reporting to be foolish and potentially misleading in a long term oriented business such as ours.

Personally, within the limits expressed in last year's letter on diversification, I am willing to trade the pains (forget about the pleasures) of substantial short term variance in exchange for maximization of long term performance. However, I am not willing to incur risk of substantial permanent capital loss in seeking to better long term performance. To be perfectly clear - under our policy of concentration of holdings, partners should be completely prepared for periods of substantial underperformance (far more likely in sharply rising markets) to offset the occasional over performance such as we have experienced in 1965 and 1966, and as a price we pay for hoped-for good long term performance.

All this talk about the long pull has caused one partner to observe that “even five minutes is a long time if one's head is being held under water." This is the reason, of course, that we use borrowed money very sparingly in our operation. Average bank borrowings during 1966 were well under 10% of average net worth.

One final word about the Generals - Relatively Undervalued category. In this section we also had an experience which helped results in 1966 but hurt our long term prospects. We had just one really important new idea in this category in 1966. Our purchasing started in late spring but had only come to about $1.6 million (it could be bought steadily but at only a moderate pace) when outside conditions drove the stock price up to a point where it was not relatively attractive. Though our overall gain was $728,141 on an average holding period of six and a half months in 1966, it would have been much more desirable had the stock done nothing for a long period of time while we accumulated a really substantial position.

Workouts

In last year's letter I forecast reduced importance for workouts. While they were not of the importance of some past years. I was pleasantly surprised by our experience in 1966 during which we kept an average of $7,666,314 employed in this category. Furthermore, we tend to ascribe borrowings to the workout section so that our net equity capital employed was really something under this figure and our return was somewhat better than the 22.4% indicated on page six. Here, too, we ran into substantial variation. At June 30, our overall profit on this category was $16,112 on an average investment of $7,870,151 so that we really had a case of an extraordinarily good second half offsetting a poor first half.

In past years, sometimes as much as 30-40% of our net worth has been invested in workouts, but it is highly unlikely that this condition will prevail in the future. Nevertheless, they may continue to produce some decent returns on the moderate amount of capital employed.

Miscellaneous

Operationally, we continue to function well above rated capacity with Bill, John, Elizabeth and Donna all contributing excellent performances. At Buffett Partnership. Ltd. we have never had to divert investment effort to offset organizational shortcomings and this has been an important ingredient in the performance over the years.

Peat, Marwick, Mitchell & Co., aided for the second year by their computer, turned in the usual speedy, efficient and comprehensive job.

We all continue to maintain more than an academic interest in the Partnership. The employees and I, our spouses and children, have a total of over $10 million invested at January 1, 1967. In the case of my family, our Buffett Partnership, Ltd. investment represents well over 90% of our net worth.

Within the coming two weeks you will receive:

1. A tax letter giving you all BPL information needed for your 1966 federal income tax return. This letter is the only item that counts for tax purposes.

1. Một thư về thuế cung cấp cho các bạn mọi thông tin về BPL cần thiết cho tờ khai thuế thu nhập liên bang năm 1966 của các bạn. Thư này là tài liệu duy nhất có giá trị cho mục đích thuế.

2. An audit from Peat, Marwick, Mitchell & Co. for 1966, setting forth the operations and financial position of BPL, as well as your own capital account.

2. Báo cáo kiểm toán năm 1966 của Peat, Marwick, Mitchell & Co., trình bày hoạt động và tình hình tài chính của BPL cũng như tài khoản vốn (capital account) của riêng các bạn.

3. A letter signed by me setting forth the status of your BPL interest on January 1, 1967. This is identical with the figures developed in the audit.

3. Một lá thư do tôi ký, nêu tình trạng phần vốn góp của các bạn tại BPL vào ngày 1 tháng 1 năm 1967. Thư này trùng khớp với các số liệu được xác định trong báo cáo kiểm toán.

Let me know if anything in this letter or that occurs during the year needs clarifying. My next letter will be about July 15 summarizing the first half of this year.

Cordially,