abe"! TO MY PARTNERS: In the past, partners have cocmented chat « once- year leccer wes "a long tise between drinks," and that 4 teni-annual letter would be 4 good idea. It really shouldn be too difficult to find something to say twice « year; at Joase 4c dante thia year. Hence, this letter which will be continued in future years. During the first half of 1961, che overall gain of the Dov-Jones Industrial Average was about 13%, includin @ividends. Although this 4s the type of period when we ould have the moat difficulty in exceeding this standard, Ell partnerships that operated throughout the six sonths di goderately better chan the Aver: Partnerships formed du Tool either equeled or exceeded results of the Average from the tine of forsation, depending primarily on how long they were in operation. Lac we, hovever, emphasize tvo points. Tirat, on year 44 far Coo thort # period to form any kind of tn opint wi te investwent performance, and peasurenents based upon sf funtha become even gore unreliable. One factor that has ce None reluctance on my part to write seni-annual letters 16 fear that partners may begin to think in terme of short ter performance which can be ost misleading. My om thinking qe uuch core geared to five year performance, preferably vi teats of relative results dn both strong and veak markets The second point 1 went everyone to understand &: that if ve continue ina qarket vhich advances at the pace Sr the first half of 1961, not only do I doubt thet we wil Continue to exceed the resulta of the DJLA, but it 18 very Tikely chat our performance vill fall behind the Average. Our holdings, which I alvays believe to be on th conservative side compered to general portfolios, tend to Gore conservative as Che general market level rises, AC & Tinea, 1 attenpt to have « portion of our portfolio in sec ic iedec pertially insulated from the behavior of the ark thd this poreion should. increase ae the market rises. How {nnulecion ia 4 two-way aCreet, #0 a1 the market boils wit ipperising results Zor even che amateur cook (and perhaps Pttculerly the amateur), we find that more of our portfc Th inoe on the stoves We have alao begun open market acquisition of # potentially eajor commitment which T, of course, hope doe: Foching sackecvise Zor at least a year. Such « coomitmen: pay bea cecerrent to short range performance, but st give Titong promise of superior results over a several year Pe fonbined wich subecantial defensive characteristics. Progress has been made coverd conbining all pat ac yearend. LT have tilked with all partners Joining éurt fart year or 40 about this goal, and have also gone over Fitne vith represencative partnere of all earlier partnerSome of the provisions will be: (A) A werger of all partnerships, based on marker value at yearend,vith provisions for proper allocation asong partners of future cax lability due to unreslized gains ac yearend. The merger ituelf vill be tax and will result io no acceleration of rt profic (2) _A division of profits between the Limited pert: and general partner, with che frac 6% per year to partn, based upon beginning capital at market, and any excess divided one-fourth to the general partner and three-four to all partners proportional to their capital. Any defi. fancies in earnings belov the 6% would be carried forverdé againat fucure earnings, but vould not be carried backs Presently, there are three profit arrangements which hav been optional to inconing par Interest Exce Excess to Ltd. Partner: Q ox 13 2/3 Q) 4 1s 3/h Qa) Hone 1/6 5/6 In the event of profita, the new division will obviously have co be better for limited partners than the firat tw arrangements. Regarding the third, the new arrangesent Will be superdor up to 16% per year; but above this rate the Limited parcnera vould do better under the present agreement, About 80% of total partnership asset have selected the first two arrangenente, and 1 am hopeful, rould ve average better than 18% yearly, partners prese ader the third arrangenent will not feel short-changed under the new agreenent: (C) In the event of losses, there will be no carzy ageinat anounce previously credited to me as general. pat although there vill be « carry-forvard egainat future e) tamings, Hovever, ay vife and 1 vill have the largest, tingle Lovestment in the new partnership, probably about one-aixch of total partnership assete, and thereby @ grt dollar atake in losses than any other partner or family troup. Tas inserting « provision in the partnerahip agreewent which vill prohibit the purchase by we oF BY fectly of any markecable securities, In other words, Cl nev partnership will represent wy entire investuent ope in carketable securities, so that ay results will have be directly proportional eo yours, subject to the advan Dobcain ££ ue do better than 6h (0) A provision for monthly payments at the rate OL yearly, based on beginning of the year capital value ac carket, Partnera noc wishing to withdrav soney curr can have this credited back to them automatically as an advance payment, draving 6%, to purchase an additional equity interest in the partnership ac yearend, This vi solve one acunbling block that has heretofore existed 4 the pach of consolidation, since many partners desire regular withdravals and others wish to plow everything(E) The right to borrow during the year, up to 202 of the value of your partnership interest, at 62, such, loans to be liquidated at yearend or earlier, This will Adda degree of Liquidity to an investment which can now Gnly be disposed of at yearend. It fe not intended that Ghything but relatively persanent funds be invested in {he partnership, and ve have no desire to turn it into i bank, Rather, 1 expect this to be « relatively unused provision, which is avatlable when something unexpected Turns up and « wait uncil yearend to liquidate part or all of « partner's interest would cause hardship: (Fr) An arrangement whereby any relatively small te adjuscoene, made in later yeara on the partnership's ret Uill'be assereed directly to me. This way, we will not faced vit probles of ssking eighty people, or more, te amend their earlier return over sowe suall matter. A fet stands now, a emall change, such as a decision that # Gividend received by the parcnership was 632 4 return of Capital inetead of 68%, could cause « multitude of paper Nork. To prevent this, any change amounting to less the $1,000 of tax vill be charged directly to ma. We have aubaitted the proposed agreement to Washing for-a ruling that the merger would be tax-free, and that the partnership would be created as a partnership under the tax 1 fnile all of this fa a lot of work, it will make things enorr Gesier dn the future. You might aave this letter a4 4 refere fo read io conjunction with the agreemant which you will rece Tater in the year. The minimus investment for new partners 1a current] $25,000, but, of course, Chis does not apply te present parte Gur pethod of operation will enable the partners to add oF Nithdrav erounte of any #ize (in round $100) at yearend. Eatinated total ansete of the partnership will be in the nese hood of $4 million, which enables us to consider investnents tuck a4 the one wentioned earlier in this letter, which ve wc have had to pase several years ago. This has turned out to be wore of « production that minual latter. If you have any questions, particularly Tding anything that dante clear in ay discussion of the nev parcnerahip agreement, be sure to let me know. Tf there wre t darge number of questions, I vill write « supplenental letter covall partners giving the questions thet arive and the anevers co them. ren E, Buffett vib July 22, 1961