A letter a day!
There were in total three letters written in the year 1967. The last letter was focused on the revision of the performance criteria and the reasons why it is done.
This letter focuses on the annual fund performance for the year 1967.
Letter 18 # 1967
- At times, because of speculation some might outperform the market.
"In 1967 this condition intensified. Many investment organizations performed substantially better than BPL, with gains ranging from over 100%. Because of these spectacular results, money, talent, and energy are converging in maximum effort for the achievement of large and quick stock market profits. It looks to me like greatly intensified speculation with concomitant risks -but many of the advocates insist otherwise.
My mentor, Ben Graham, used to say. “Speculation is neither illegal, immoral nor fattening (financially).”
During the past year, it was possible to become fiscally flabby through a steady diet of speculative bonbons. We continue to eat oatmeal but if indigestion should set in general, it is unrealistic to expect that we won’t have some discomfort."
- When you hold a controlling stake in the company, you might be questioned for not shifting to better opportunities for better performance. It will seem foolish to do so if it is the nature of business on basis of which you have taken a controlling stake.
“The satisfying nature of our activity in controlled companies is a minor reason for the moderated investment objectives discussed in the October 9th letter. When I am dealing with people I like, in businesses I find stimulating (what business isn’t ?), and achieving worthwhile overall returns on capital employed (say, 10-12%), it seems foolish to rush from situation to situation to earn a few more percentage points. It also does not seem sensible to me to trade known pleasant personal relationships with high-grade people, at a decent rate of return, for possible irritation, aggravation, or worse at potentially higher returns. Hence, we will continue to keep a portion of our capital (but not over 40% because of the possible liquidity requirements arising from the nature of our partnership agreement) invested in controlled operating businesses at an expected rate of return below that inherent in an aggressive stock market operation.”
- In the last letter, there were some changes in the return expectations. Buffett had earlier stated an outperformance of at least 10% P. A , which was later on revised to 5%, keeping in mind the market scenario. Post that communication many of the partners/investors did withdraw their capital from BPL ( Buffett Partnership Ltd) to which Buffett has replied in this letter
“Some of those who withdrew (and many who didn’t) asked me, “What do you really mean?” after receiving the October 9th letter. This sort of question is a little bruising to any author, but I assured them I meant exactly what I had said. I was also asked whether this was an initial stage in the phasing out of the partnership. The answer to this is, “Definitely, no”. As long as partners want to put up their capital alongside mine and the business is operationally pleasant (and it couldn’t be better), I intend to continue to do business with those who have backed me since tennis shoes.”
At times, many of our clients/partners will not be satisfied with our fund’s performance. At that point in time, clear communication of what we feel regarding the market and the fund’s performance is the best option. We might end up losing some of the investors, but at least the ones who are aligned with our investment philosophy will still continue.