50 Years Of Buffett Wins

One thing that you might not know is that Warren Buffett does not go out of his way to make predictions about the stock market, but he made a rare exception in his July letter to shareholders, where he provided then with some insights that should help them get through this very treacherous time for stocks.

“I think you can be quite sure that 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,” wrote Buffett. “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.”

The thing I will tell you is that this letter has not been paid attention to all that much lately. What is the reason? Because the date on the letters July 6, 1962.

The thing I really want to impress upon you is that Warren Buffett told his shareholders half a century ago that they have to ignore the gyrations in the market. This advice still holds true in the year 2012, which is a total of 50 years later. A lot of investors these days can’t seem to look 10 days ahead, let alone projecting 10 years into the future. But that’s not to say that investors don’t have plenty of fears that they can easily justify in regards to their money, and in particular the people that are watching over it. It’s extremely important that you make a safe return on your capital, and it’s also paralyzing to think about potentially losing all your money when trying to earn a return that has meaning.

Is there anything particularly new going on here? People have always been averse to risk, and it’s just another part of our overall human nature. The stock market is greedy and it intends to feed on people’s fears. There’d be no reason for Warren Buffett to remind his investors that they need to keep a long timeline if this fear didn’t exist.

There were definitely some very important reasons for investors to be scared during the year 1962 as well. There was the Cuban Missile Crisis where individuals were worried that nuclear war would break out, and then there’s also the Cold War that was going on between the former Soviet Union and the United States of America. The Dow Jones Industrial Average also took a big hit in the beginning of 1962, where it dropped a total of 23%. This was unfortunate because it had made a 22% gain in the year prior, and that was completely erased. There was a instance on May 29 called flash crash which literally knocked off 6% of the Dow’s gains in one single day.

How Did Warren Buffett Handle All of This?

As I’m sure you have probably guessed already, Warren Buffett was very easily capable of staying cool under pressure. Stock buyers definitely need to take the long view, according to Buffett. You can’t even stress out six months or one year’s worth of results, the way that many people do in this current day and age. They freak out over one quarters worth the results. This is all according to information that Buffett presented in that same July newsletter in 1962 that was meant for his Buffett Partnership Limited shareholders. He also added that “investment performance must be judged over a period of time, with such a period including both advancing and declining markets.”

If you are interested, you are capable of finding the shareholder letter that I’ve been talking about online. There are also other shareholder letters and communications from the late 1950s and into the 1960s. There is also the letter from May 29, 1969 which informed his investors that he dissolved the limited partnership and he offered them a stake in what is now known as a Berkshire Hathaway Inc., Warren Buffett’s current and only investment company.

Now that we have 50 years of hindsight available to us, it’s quite obvious that the letter we’ve been mentioning from 1962, as well as another letter from January of 1963, that both of these letters are very relevant for investors today. They unfortunately face a global economy that is on the brink of total disaster, and hopefully there will be some very important changes on the horizon.

“There are lessons [in the partnership letters] on temperament, value and being a voracious learning machine,” stated Jeff Auxier, who has held Berkshire Hathaway shares in his Auxier Focus Fund for many years.

“All of the great investors do it the way Buffett does,” he added. “You’ve got to do massive amounts of homework and have the patience to wait for the right price. Anyone dealing with their own money should study that before they invest.”

The correspondence that we are capable of reading in the 1960s pretty much shows us that the soon-to-be 82-year-old Warren Buffett has not lost a single step or way of thinking from how he acted during his younger years. He always stressed that it was important to preserve your capital during the down markets, and that you should not chase the market at all when there are runaway years taking place, and you need to focus on long-term results and challenges.

The main thing that so many investors just don’t seem to get about Buffett’s long-term strategy is that it’s not a simple way of passively buying and holding stocks. You have to be able to buy stocks very cheaply, hold them and also pay close attention to what is going on with the stocks in the companies. This holds true for the undervalued common stock, any opportunities for a workout situation, and wholly owned or majority-owned control businesses which are the hallmarks of Warren Buffett’s investment choices.

“Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results,” stated Buffett in a shareholder letter that he put out in January of 1963.

At the ripe young age of 25, Warren Buffett started his first limited partnership during May of 1956, where he took $105,000 worth of money from family and friends and used the money to invest in the same style of his mentor Benjamin Graham. By the time the year 1963 rolled around, the total investing partnerships he owned were worth a grand total of $9.4 billion, and if you factor that in for today’s inflation-adjusted dollars, that’s roughly worth about $70 million right now. This is all according to the Bureau of Labor Statistics. So you know, $1.4 million of that money was Warren Buffett’s own.

It really wasn’t hard to fathom the success of Buffett’s investment firm: the Dow Jones industrial average returned a total of 8.3% annually over that same five-year period, and Buffett’s partnership, after fees, gained a total of 21% each year. So that is quite the dramatic difference.

Back then, Buffett was not very forthcoming with the investment mistakes that he made at that time,  but he is a lot more open about these errors in recent years. He did specifically stress a great deal of caution to his partners because he knew that his strategies of deep value would not do so well during bull markets, but they would thrive tremendously during down markets or flat markets. (The privately held investments would drag down returns in other years.)

In his January letter in 1963, Buffett commented that beating the Dow by 13 percentage points annually over a five-year period was much better than he expected since he only really wanted to beat the benchmark by 10 points annually on average over that many years. He also told his partners that they should modify their thinking mentally, because he did not expect to continue to achieve that same level of success, and he wanted his shareholders to recognize that they might have too high of expectations.

Buffett once again mentioned his mantra about performance, which is:

“Our job is to pile up yearly advantages over the performance of the Dow without worrying too much about whether the absolute results in a given year are a plus or a minus. ” (By late 1967, Buffett was not capable of finding as many bargains, so he had to trim his expectations to outperform the Dow by only 5%.)

Warren Buffett’s Ground Rules

In the letter that he wrote during the year in 1963, he actually laid out several requirements for all his partners. He called these requirements “The Ground Rules.” Two are only related to housekeeping, but five are very important and I am going to repeat them now:

1 – “In rate of return guaranteed to partners. Partners who withdraw one-half of 1% monthly are doing just that withdrawing no sense is any.”

2 – “Whether we do a good job or a poor job is not to be measured by whether we are plus or minus for the year,” Buffett wrote. Although Buffett’s portfolio differed greatly from the Dow and his investing style hardly matched that of mutual funds, the Dow and several big U.S. funds nonetheless were Buffett’s ultimate measures. He noted: “If our record is better than that of these yardsticks, we consider it a good year whether we are plus or minus. If we do poorer, we deserve the tomatoes.”

3 – “While I much prefer a five-year test, I feel three years is an absolute minimum for judging performance. It is a certainty that we will have years when the partnership performance is poorer, perhaps substantially so, than the Dow. If any three-year or longer period produces poor results, we all should start looking around for other places to put our money.”

4 – “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.”

5 – “I cannot promise results to partners,” Buffett stated. “What I can and do promise is that our investments will be chosen on the basis of value, not popularity; that we will attempt to bring risk of permanent capital loss…to an absolute minimum by obtaining a wide margin of safety in each commitment and a diversity of commitments, and my wife, children and I will have virtually our entire net worth invested in the partnership.”

Many years from now, what people will mostly notice in Buffett’s letters that he sent out during the 1960s is that they are quite open. Not in the sense of what was going on with the holdings of the portfolio, because Warren Buffett does not divulge that information, but they honestly revealed his entire investment philosophy. It’s very rare for you to get a full understanding of a manager’s decision-making process in this day and age, so it’s important that you recognize the level of Warren Buffett’s bluntness. He was not afraid to treat his partners the way they are supposed to be treated, as adults.

The main reason why Berkshire Hathaway’s letters to the shareholders are required reading for informed investors, is also why there are other people who like to push fear and greed in the marketplace. They like to believe that Warren Buffett is completely out of touch.

But I wouldn’t believe that if I were you. There will be many people taking the advice of Warren Buffett way beyond the doom and gloom days of the beginning of the 21st-century.

Here’s what Warren Buffett mentioned to his partners in a letter that he sent out in January 1962 “You will not be right simply because a large number of people momentarily agree with you. You will not be right simply because important people agree with you.

“You will be right,” wrote Buffett, “over the course of many transactions, if your hypotheses are correct, your facts are correct, and your reasoning is correct.”

Buffett truly recognized the secrets of successful investing early on in his career. His philosophy is: Any kid can make a buck; grown-ups know how to keep it.

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