mE. Borrert.Garmat Pa Rurretr Partwrrsnir, Ltn. OM AMA 04, HED RABKA January 18, 1963 The Ground Rules Some partners have confeseed (that's the proper word) that they sometimes find it difficult to wade through my entire annual letter. Since I seem to be getting more long-winded each year, I] have decided to emphasize certain axioms on the first pages. Everyone should be entirely clear on these points To most of you this material will seem unduly repetitious, but I would rather have nine partners out of ten mildly bored than have one out of ten with any basic misconceptions 1. In no sense is any rate of return guaranteed to partners. Partners who withdraw one-half of 1% monthly are doing just that--with- drawing. If we earn more than 6% per annum over a period of years the withdrawals will be covered by earnings and the principal will increase. If we don't earn 6%, the monthly payments are partially or wholly a return of capital. Any year in which we fail to achieve at least a plus 6% performance will be followed by @ year when partners receiving monthly pay- mente will find those payments lowered. Whenever we talk of yearly gains or losses, we are talking about market values; that {s, how we stand with assets valued at market at yearend against how we stood on the same basis at the beginning of the year, This may bear very little relationship to the realized results for tax purposes in a given year, Whether we do & good job or a poor job is not to be measured by whether we are plus or minus for the year, It is instead to be measured againel the general experience in securities as measured by the Dow-Jones Industria) Average, leading investment compante etc. Lf our record {s better than that of these yardsticks, we con- sider it @ good year whether we are plus or minus. If we do poore? we deserve the tomatoes While 1 much prefer @ five-year test, I feel three years is an abso lute minimum for fudging performance. It te a certainty that wewill have years when the partnership performance {s poorer, perhaps substantially 60, than the Dow. Mf any three-year or longer period produces poor results, we all should start looking around for other places to have our money. An exception to the latter statement would be three years covering a speculative ex- plosion in a bull market. 1 am not in the business of predicting general-stock market or business fluctuations. If you think I can do this, or think it ts essential to an investment program, you should not be in the partnership. 7. L cannot promise results to partners, What I can and do promise is that: a. Our investments will be chosen on the basis of value, not popularity; b, * ‘That we will attempt to bring risk of permanent capital lose (not short-term quotational loss) to an absolute minimum by obtaining a wide margin of safety in each commitment end a diversity of commitments; and My wife, children and I will have virtually our entire net worth invested in the partnership. Our Performance in 1962 Thave consistently told partners that we expect to shine on a relative basis uring minus years for the Dow, whereas plus years of any magnitude may find us blushing. This held true in 1062. Because of a strong rally in the last few months, the general market a6 measured by the Dow really did not have euch a frightening decline as many might think. From 731 at the beginning of the year, {t dipped to 536 in June, but closed at 652. At the end of 1960, the Dow stood at 616, so you can see that while there has been @ good deal of action the past few years, the invest- ing public as a whole {6 not too far from where it wae in 1959 or 1960. If one had owned the Dow last year (and I imagine there are a few people play~ ing the high flyere of 1961 who wish they had), they would have had @ shrink~ age in market value of 70.04 or 10.8%, Hcwever, dividends of epproximatels 23,30 would have been received to bring the over-all reeulte from the Dow for the year to minus 7.6%. Our own over-all record was plus 13.8%. Be- low we show the year-by-year performance of the Dow, the partnership be- fore allocation to the general partner, and the limited partners! results for all full yeare of Buffett Partnership, Ltd.'s and predeccasor partnerships! activities:Over-all Results Partnership Limited Partner Year {rom Dow Resulte (1) Results (2) 1957 + 8.4% +10. 4% + 8.3% 1956 438.5 440.8 +32.2 1959 #20.0 425.9 #20.9 1960 + 6.2 #22.8 +18.6 1961 #2204 445.8 435.8 1962 - 16 413.8 +118 (1) For 1957-61 consists of combined results of all predecessor limited pa nerships operating throughout entire year after all expenses but before dist butiona to partnere or allocations to the general partner. (2) For 1957-61 computed on basie of preceding column of partnership res: allowing for allocation to general partner based upon present partnership agreement, ‘The following table shows the cumulative or compounded reeulte in the sar three categories, as well as the average annual compounded rate: Over-all Results Partnership Limited Partne Year from Dow Results Results 1957 - 8.4% + 10.4% + 9.3% 1957-8 + 26.9 + 55.6 + 44.5 1957-8 + 62.3 + 95.8 +747 1957-60 + 42.9 4140.6 4107.2 1957-61 + 14,8 +251.0 #181.6 1957-62 + 61.6 +299.8 #215.1 Annual Com- pounded Rate 8.3 26.0 aa My (unscientific) opinion {e that a margin of ten percentage points per ann over the Dow {s the very maximum that can be achieved with invested func over any long period of years, so tt may be well to mentally modify some the above figures. ‘Partners have sometimes expressed concern as to the effect of size upon formance. Thia subject was reflected upon in last year's annual letter. conclusion reached was that there were some situations where larger sur helped and some where they hindered, put on balance, I did not fee} they penalize performance. 1 promised to Inform partners if my conclusions this ehould change. Al the beginning of 1957, combined limited partners! aecete totaled $303, 7126 and grew to $7,178,500 at the beginning of 1062. To date, anyway, our margin over the Dow has indicated no tendency to F row ae funda increase