Warren Buffett Letters

Last time, I reviewed lessons from Warren Buffett’s 1962 letter to partners of Buffett Partnership, with a focus on his view on the power of compounding.

Today, I review his 1963 letter, focusing this time on his investment in Dempster Mill Manufacturing Company (DMMC), and the one big lesson that comes out of it.

Buffett’s investment in DMMC
In the sixth part of this series, we discussed on the categories that Buffett created to segregate his investments based on their varying characteristics. The four broad categories were generals, control situations, relatively undervalued generals, and workouts (special situations).

DMMC, like Sanborn Map that we discussed in the fourth part, was a control situation for Buffett.

Here is what he wrote about DMMC in his 1962 letter…

We are presently involved in the control of Dempster Mill Manufacturing Company of Beatrice, Nebraska. Our first stock was purchased as a generally undervalued security five years ago. A block later became available, and I went on the Board about four years ago. In August 1961, we obtained majority control.

Presently we own 70% of the stock of Dempster with another 10% held by a few associates. With only 150 or so other stockholders, a market on the stock is virtually non-existent, and in any case, would have no meaning for a controlling block.

Our own actions in such a market could drastically affect the quoted price. Therefore, it is necessary for me to estimate the value at yearend of our controlling interest.

This is of particular importance since, in effect, new partners are buying in based upon this price, and old partners are selling a portion of their interest based upon the same price.

The estimated value should not be what we hope it would be worth, or what it might be worth to an eager buyer, etc., but what I would estimate our interest would bring if sold under current conditions in a reasonably short period of time.

Our efforts will be devoted toward increasing this value, and we feel there are decent prospects of doing this.

DMMC was a manufacturer of farm implements and water systems with sales in 1961 of about US$ 9 million. The company was thinly profitable and the return on invested capital (ROIC) was poor.

Buffett considered the reasons for the poor financials as a poor management situation, along with a fairly tough industry situation.

Now you may wonder, “How could Buffett buy a poor quality business when he always stresses on buying high quality ones?”

Note that this was early 1960s, and Buffett was still 100% Graham. He was sold on Graham’s big idea of net-nets (stocks, even of bad businesses, that could be bought at a price below their net current asset value or NCAV).

Look at DMMC. In 1962, the company’s book value was US$ 75 per share, NCAV was US$ 50 per share, and Buffett had bought his controlling stake at an average price of US$ 28 per share (he valued the business at US$ 35 per share at the end of 1962), or around 45% discount to NCAV.

He wrote…

While I claim no oracular vision in a matter such as this, I feel this is a fair valuation to both new and old partners. Certainly, if even moderate earning power can be restored, a higher valuation will be justified, and even if it cannot, Dempster should work out at a higher figure.

Buffett was in fact so convinced about his ability to turn around DMMC’s fortunes that his holding in the stock represented 21% of his partnership’s total net assets (based on DMMC’s stock price of US$ 35).

But then, as he had always written, since DMMC was a control situation, his investments would generate returns only by improving the business, and not merely because other stocks in the US markets were rising.

As he wrote…

In a raging bull market, operations in control situations will seem like a very difficult way to make money, compared to just buying the general market. However, I am more conscious of the dangers presented at current market levels than the opportunities. Control situations, along with work-outs,
provide a means of insulating a portion of our portfolio from these dangers.

Anyways, by 1963, Buffett’s investment in DMMC rose to 73%. Buffett had also realized that his efforts to use the existing management to change the company’s fortunes were going fruitless.

So, on the recommendation of a “good friend”, whom we now know as Charlie Munger, Buffett brought in Harry Bottle to lead DMMC’s operations in 1963.

Here is what Bottle did…

• Reduced inventory by 75%, thus reducing carrying costs of inventory and risk of obsolescence
• This freed up capital for investments in marketable securities
• Cut selling and general expenses by 50%, and manufacturing expenses by 25%
• Closed 5 unprofitable branches leaving DMMC with 3 profitable onces
• Closed production units that were tying up capital but were operating at losses

This is what Buffett had to say about Harry’s accomplishments…

Harry is unquestionably the man of the year. Every goal we have set for Harry has been met, and all the surprises have been on the pleasant side. He has accomplished one thing after another that has been labeled as impossible, and has always taken the tough things first.

Our breakeven point has been cut virtually in half, slowmoving or dead merchandise has been sold or written off, marketing procedures have been revamped, and unprofitable facilities have been sold.

Led by Bottle, a large part of DMMC’s manufacturing assets (which were generating poor returns) were sold and converted to cash, which was converted to marketable securities. Here, Buffett had a stronghold.

While Buffett was not able to turn around DMMC’s business, the fact that he bought the business so cheap (44% discount to NCAV) helped him earn good returns from this investment.

In 1963, DMMC’s security portfolio alone was worth US$ 35 per share, plus its manufacturing business was worth US$ 16 per share, thus totalling to US$ 51 per share (as compared to Buffett’s average purchase price of US$ 28 per share).

Here is what he wrote, and something that is so very important for all investors, whether buying a general or a control situation…

By buying assets at a bargain price, we don’t need to pull any rabbits out of a hat to get extremely good percentage gains. This is the cornerstone of our investment philosophy: “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results. The better sales will be the frosting on the cake.”

Welcome “margin of safety”
What Buffett wrote above was like his ode to Ben Graham and his “margin of safety” principle. If you haven’t done it already, read Chapter 20 of Graham’s The Intelligent Investor, where he writes about margin of safety as the central concept of investment.

Buffett calls margin of safety as “the three most important words in all of investing”.

Here is what he wrote in his 1992 letter…

We insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we’re not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success.

Here is something from his 1962 letter that must be the cornerstone of every value investor’s philosophy…

A lot of value can be obtained for the price paid. This substantial excess of value creates a comfortable margin of safety in each transaction. This individual margin of safety, coupled with a diversity of commitments creates a most attractive package of safety and appreciation potential.

Here are the three promises Buffett made to his partners in the 1963 letter…

I cannot promise results to partners. What I can and do promise is that:

1. Our investments will be chosen on the basis of value, not popularity;
2. That we will attempt to bring risk of permanent capital loss (not short-term quotational loss) to an absolute minimum by obtaining a wide margin of safety in each commitment and a diversity of commitments; and
3. My wife, children and I will have virtually our entire net worth invested in the partnership.

Margin of safety has always been central to how Buffett has conducted himself as an investor.

Anyways, here is an interesting point that Graham made in The Intelligent Investor…

…the risk of paying too high a price for good-quality stocks—while a real one—is not the chief hazard confronting the average buyer of securities. Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

In effect, Graham was saying that investors buying low-quality businesses were at a greater risk than those buying expensive good quality businesses (or ones with zero margin of safety).

I’m not sure if Philip Fisher, Charlie Munger, or even Buffett would fully agree to this. But there’s no doubt that buying a “moderately valued but good business” (one with low margin of safety) is a safer proposition than buying a “cheap but bad business” (of course, when we have to choose between just these two options).

With the former, you may achieve just satisfactory results. With the latter, you may be dead!

As Graham concludes in his chapter on margin of safety…

To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.

What a lesson!

What do you say?

• Archives of Wit, Wisdom, Warren

Last time, I reviewed lessons from Warren Buffett’s 1961 letter to partners of Buffett Partnership, with a special focus on how Buffett invested his money across different kind of investment categories.

Today, I review his 1962 letter, with a special focus on “compounding”.

[Read more…] about Wit, Wisdom, Warren (Issue #7): The Joys of Compounding

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Last time, I reviewed lessons from Warren Buffett’s 1961 letter to partners of Buffett Partnership, with a special focus on “conservative investing” .

Today, I review another part of the same letter – this time on Buffett’s method of operations i.e., how he categorized his investment in three (and later four) buckets and how this has helped him differentiate from most other investors.

Why we can’t be like Buffett
A lot of fund management companies abroad ape the Warren Buffett portfolio – they buy what he buys and they sell what he sells.

Not only that, there are companies across the world who are trying to sell research services to retail investors that aim to mimic Buffett’s style to earn them huge wealth.

[Read more…] about Wit, Wisdom, Warren (Issue #6): Method of Operations

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Last time, I reviewed lessons from Warren Buffett’s 1960 letter to partners of Buffett Partnership.

Today, I review the letter for 1961. Buffett wrote two letters during 1961 – once in July 1961 and then the annual letter in Jan. 1962. The first letter carried Buffett’s core rules for the partnerships. It was the annual letter where Buffett talked about his philosophy.

So I’m reviewing just the annual letter (written in Jan. 1962). From this time onwards, I’m also making a change in the way I analyse Buffett’s philosophy.

Given that I am reviewing the letters in a chronological order, I might write about a certain philosophy that Buffett followed in a particular year, which changed in subsequent years.

So, apart from analysing a particular year’s letter, I will try to cull out one specific theme from that letter and then see how that theme evolved for Buffett in the future.

Anyways, let’s start with the analysis of the 1961 letter.

[Read more…] about Wit, Wisdom, Warren (Issue #5): Conservative Investing

Last week, I reviewed lessons from Warren Buffett’s 1959 letter to partners of Buffett Partnership.

Today, I review the letter for 1960.

This is going to be a long-long review given the amazing number of ideas I could cull out from the letter, so make yourself comfortable before you start reading it.

Lessons in beating the street
The US stock market as represented by the Dow Jones Industrial Average (DJIA) declined in 1960, after strong gains in the previous two years. Including dividends, the DJIA fell by almost 6% during the year.

Buffett’s seven partnerships (up from six in 1959) gained around 23%, thereby again outperforming the broader market by a decent margin.

In the 1960 letter, Buffett reiterated his objective…

My continual objective in managing partnership funds is to achieve a long-term performance record superior to that of the Industrial Average. I believe this Average, over a period of years, will more or less parallel the results of leading investment companies. Unless we do achieve this superior performance there is no reason for existence of the partnerships.

However, I have pointed out that any superior record which we might accomplish should not be expected to be evidenced by a relatively constant advantage in performance compared to the Average. Rather it is likely that if such an advantage is achieved, it will be through better-than-average performance in stable or declining markets and average, or perhaps even poorer-than-average performance in rising markets.

I would consider a year in which we declined 15% and the Average 30% to be much superior to a year when both we and the Average advanced 20%. Over a period of time there are going to be good and bad years; there is nothing to be gained by getting enthused or depressed about the sequence in which they occur. The important thing is to be beating par; a four on a par three hole is not as good as a five on a par five hole and it is unrealistic to assume we are not going to have our share of both par three’s and par five’s.

A few lessons can be gained from these notes:

1. Set performance standards in advance and then follow them: As we read in the review of Buffett’s 1957 letter, he had set a standard of outperforming the market by 10% per annum over the long term.

Setting your own long-term return target will also make your task simpler as against accepting whatever return you earn and then using that as a benchmark. This way, you will see a strong year (when your portfolio advances by say 25%) as just an aberration like you will see a weak year (when you are down -20%).

The important thing to do is to start with a reasonable standard (like I want to beat the Sensex by 8-10% annually over the long run) and then try to meet it over a period of time. This will keep you focused. Of course, the standard has to be reasonable and you can’t expect to be beating the market year after year, especially during periods of mania.

2. Direct investing versus mutual fund investing: A lot of investors enter directly into stocks expecting to “do well” in the long run. Doing well isn’t enough when you are working hard to identify great businesses and then taking the risk of putting your money where your faith is.

Of course, your foremost target must not be to earn supersized returns from your overall investments. You must only target a return that can help you meet your financial objectives (like Graham’s “adequate return” as per his definition of investment).

But when it comes to stock picking, you either target outperforming the market or else give your savings to a smart fund manager who can beat the market on your behalf (and consistently over the long run).

As Buffett writes in the letter, the important thing is to be beating par (index), and especially in down markets.

There is a simple criterion I suggest people just starting out in stock picking – check your direct equity returns over five years. If you can outperform the benchmark and most good mutual funds, continue to pick stocks. Otherwise just give your money to a fund manager (of course, a majority of fund managers are a joke, but then you can always find a smart guy with some hard work).

There’s no point running on a treadmill – investments that don’t go anywhere – where you will be worse off the longer you stay.

Buffett advises something similar to his partners…

Unless we do achieve this superior performance there is no reason for existence of the partnerships.

I’m not sure how many investors and mutual fund managers are so honest with themselves and their clients respectively.

3. Good years and bad years: Stock market does not move in a straight line. There are good years, there are bad years, and they follow each other. Of course for people who started investing in 2008, there are only bad years, but even they need to understand that law of averages work very well in the stock market.

Here’s a quote from Horace that Benjamin Graham used for the foreword of the first edition of Security Analysis, and which summarises what Buffett mentioned about good and bad years above – “Many shall be restored that now are fallen and many shall fall that now are in honor.”

Thus the target for you, the value investor, must not be to earn great returns year after year. Rather, your target must be to do better than the average market in a bad year (like 2008) and do at par with the market in a good year (like 2009).

To reiterate what Buffett wrote in the 1960 letter…

I would consider a year in which we declined 15% and the Average 30% to be much superior to a year when both we and the Average advanced 20%. Over a period of time there are going to be good and bad years; there is nothing to be gained by getting enthused or depressed about the sequence in which they occur.

For the long term, however, you must set a standard return target (which should be better than what the market could earn), and then work towards meeting it.

Like Buffett was working towards beating the US market, especially in the bad years (like 1957 and 1960)…

Data Source: Buffett’s 1960 Letter
This is where the real importance of value investing lies for you – buying sustainable businesses at margin of safety so that you reduce your chances of permanent loss of capital, even in bad markets.

4. Conventional investing vs. conservative investing: Buffett wrote…

Although four years is entirely too short a period from which to make deductions, what evidence there is points toward confirming the proposition that our results should be relatively better in moderately declining or static markets.

To the extent that this is true, it indicates that our portfolio may be more conservatively, although decidedly less conventionally, invested than if we owned “blue-chip” securities. During a strongly rising market for the latter, we might have real difficulty in matching their performance.

Buffett described “conventional investing” as buying blue-chip stocks – ones that are generally traded at rich valuations as compared to non-blue-chip, and despite this fact, are considered as safe havens.

Data Source: Ace Equity
For Buffett, safety of an investment always negatively correlates with the valuation an investor pays for stocks. So a higher valuation as compared to intrinsic value means lower safety (what if things go wrong?) and a lower valuation equates with greater safety.

Thus, Buffett was happy investing in a “conservative” manner, i.e., focusing his sights on non-blue-chip stocks that traded at reasonable to cheap valuations – ones that had large margin of safety attached to them (we’ll study a case below).

This was classic Benjamin Graham, as Buffett was then 100% Graham (only later did he call himself 85% Graham and 15% Philip Fisher).

The art of “value unlocking”: Sanborn Map
In the 1960 letter, Buffett talked extensively about his investment in Sanborn Map, a map-publishing company. Sanborn Map formed a huge 35% of Buffett’s assets, and he presented it as a case study in value unlocking.

Sanborn was a Graham-style investment for Buffett. On the nature of this business, this is what he recognized…

For seventy-five years the business operated in a more or less monopolistic manner, with profits realized in every year accompanied by almost complete immunity to recession and lack of need for any sales effort.

Buffett also gave an historical perspective on Sanborn, wherein he mentioned that the company’s once-lucrative core business of map publishing declined starting 1950s (driven by a new and competitive method that made inroads into the company’s territory).

The impact on Sanborn was so much that it, as Buffett wrote, “…amounted to an almost complete elimination of what had been sizable, stable earning power”. Its net profit of US$ 500,000 in the late 1930s declined to less than US$ 100,000 by late 1950s.

Source
Then, Buffett added…

However, during the early 1930’s Sanborn had begun to accumulate an investment portfolio. There were no capital requirements to the business so that any retained earnings could be devoted to this project. Over a period of time, about $2.5 million was invested, roughly half in bonds and half in stocks. Thus, in the last decade particularly, the investment portfolio blossomed while the operating map business wilted.

In other words, while Sanborn’s core business was declining, the company was gradually adding to its investment portfolio, which at the end of 1959 was about a size of US$ 2.5 million (at cost).

On a market value basis, the investment portfolio was valued at US$ 65 per share (up from US$ 20 per share in 1938) as compared to Sanborn’s stock price of US$ 45 per share (down from US$ 110 per share in 1938).

Effectively, in 1938, Sanborn’s core mapping business was selling at US$ 90 per share (US$ 110 of stock price minus US$ 20 per share of investment portfolio). Against this, by 1958, the core business was valued at US$ -20 (US$ 45 of stock price minus US$ 65 per share of investment portfolio)!

Source: Buffett’s 1960 Letter
This raised Buffett’s interest in the company, as he saw a great margin of safety in it.

His basic assumption was that, despite the decline in business profits (Sanborn was still profitable then, and the business still exists in 2012 to provide mapping services to the US insurance industry)…

…Sanborn in 1958 still possessed a wealth of information of substantial value to the insurance industry. To reproduce the detailed information they had gathered over the years would have cost tens of millions of dollars.”

In effect, for a business that was selling at around US$ 4.7 million of market cap (US$ 45 x 105,000 shares), Buffett’s replacement value was around “tens of millions of dollars”!

Seeing this anomaly, he bought Sanborn’s stock throughout 1958 and 1959. As Roger Lowerstein mentions in his biography of Buffett – Buffett: The Making of an American Capitalist – the master investor was trusting in Graham’s testimony – sooner or later a stock would rise to value.

But it didn’t!

As Buffett wrote…

The very fact that the investment portfolio had done so well served to minimize in the eyes of most directors the need for rejuvenation of the map business.

This was a clear case of idiots running a good (cash generating) business.

Buffett was appalled at seeing that the company’s 14 directors combined held just 46 shares of stock out of 105,000 shares outstanding. In effect, these top men had no interest in seeing the value of Sanborn’s stock rise and thus were not interested in improving the company’s core earning power.

What is more, while the company was cutting back on its dividends due to declining profits, the salaries and other payments made to the directors were not cut.

Anyways, in a true Graham style, Buffett accumulated Sanborn’s shares by buying the stake of a deceased director, who was holding 15,000 shares in the company. Then, aided by his open market purchases, Buffett came to own a large stake in the company, became a director, and then lobbied the management to unlock the value in the investment portfolio.

His idea was to…

…separate the two businesses, realize the fair value of the investment portfolio and work to re-establish the earning power of the map business. There appeared to be a real opportunity to multiply map profits through utilization of Sanborn’s wealth of raw material in conjunction with electronic means of converting this data to the most usable form for the customer.

A control position added massively to Buffett’s margin of safety, which was already there in terms of the company’s stock valuation being low as compared to its investment portfolio.

After the initial opposition to Buffett’s plan of unlocking value of the investment portfolio, Sanborn’s management capitulated in 1960.

Buffett unlocked Sanborn’s value by separating the investment portfolio into a separate unit, sold the investments at fair value, and then distributed the investments among the company’s shareholders (including himself).

Effectively, he bought a wallet with US$ 100 in it for US$ 70, and not only got to keep the money, but also sell the wallet!

Buffett did all this quickly after coming on board because a large portion of Sanborn’s money was tied up in blue-chip stocks, which Buffett didn’t care for at then prices (as we discussed above).

In all, as per Lowenstein’s book, Buffett made a quick 50% profit on his investment in Sanborn.

This sharp profit in a short time and on a large proportion of his portfolio was the reason Buffett earned a market-beating return for his partnerships in 1960.

But he was quick to point out that Sanborn’s case showed…

…the futility of measuring our results over a short span of time such as a year. Such control situations may occur very infrequently. Our bread-and-butter business is buying undervalued securities and selling when the undervaluation is corrected along with investment in special situations where the profit is dependent on corporate rather than market action.

To the extent that partnership funds continue to grow, it is possible that more opportunities will be available in “control situations.”

In other words, while Buffett was always willing to take advantage of special situations (like Sanborn’s value unlocking) when they arose, he was at heart an investor who preferred to buy undervalued securities and sell when the undervaluation was corrected.

By the way, an interesting insight that initially missed my eye was Buffett’s understanding of “technology”, which he has otherwise claimed that he does not understand. 🙂

This is what Buffett wrote of the future prospects of Sanborn’s mapping business…

There appeared to be a real opportunity to multiply map profits through utilization of Sanborn’s wealth of raw material in conjunction with electronic means of converting this data to the most usable form for the customer.

If that’s not a sharp understanding of the future of technology, than what is it?

Investing heavily in your best ideas
While this may be a scary choice to make – concentrating your investments in a few stocks – that is what the young Buffett was doing in 1960s.

Sanborn, for instance, formed about 35% of Buffett’s portfolio in 1960. Plus it was a small company with an illiquid stock (just 105,000 shares outstanding).

Despite these attributes that can scare any investor, Buffett saw a great opportunity and invested heavily in Sanborn. He later did the same thing with See’s Candy in the 1970s.

Let’s me be clear here. I am not suggesting that you put 30-40% of your money in any one stock or investment. However, if you really believe in an idea, you may be willing to take it to around 10-15% of your portfolio.

Too many people over-diversify – allocating the same amount of money to their best ideas as to their worst ones. But then, as they say, “Concentrate to grow your wealth and diversify to preserve it.”

In fact, one of Buffett’s most ardent followers, Mohnish Pabrai discusses the importance of making big bets infrequently in his book The Dhandho Investor.

So while you may buy a number of stocks for your portfolio, it pays in the long run to put most of your money in your best ideas.

“But I am no Buffett!”
You might wonder – “Buffett was able to unlock value in Sanborn simply because he earned a seat on the board and then spun off the investment portfolio. I can’t buy enough shares to get on the board of a company that I think holds a value unlocking potential! So how could I profit like Buffett did?”

Well, what if I say that you are more empowered than Buffett of 1960?

Yes it’s true! The Information Age empowers you, dear investor.

If you can find a value unlocking potential like Sanborn (though it’s difficult to find such a bargain in a period when information spreads so fast…but just in case), all you need to do is own the stock and then spread the word around.

Sure, nobody may notice your analysis or even care about it at first, but then have faith in what Graham said, “Sooner or later a stock would rise to value.”

As long as your intention is not to find a greater fool to unload your junk upon (which means you are not trying to create a fake market in a junk stock), go out and tell the world about your analysis (like you may share it on the Safal Niveshak Forum :-)).

Your (genuine) story will spread, sooner than later. That will lead to value unlocking.

There have been several cases of value unlocking in India that have earned investors a good amount of money – Bajaj Auto, Cadila Healthcare, Eicher Motors, Zee Telefilms, and Piramal Healthcare are some prominent names that come to mind.

So there’s a potential to earn good returns in this space of value unlocking through special situations. I am no expert in this space, but am really looking forward to learn more (to add to my limited circle of competence).

Next Friday, I will review Buffett’s 1961 letter to partners, which you can read here.

• Archives of Wit, Wisdom, Warren

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Last week, I reviewed lessons from Warren Buffett’s 1958 letter to partners of Buffett Partnerships.

Lest you forget, here is a summary of the key lessons we discussed in that review:

1. In rising markets, there’s a rise in the ratio of mercurially tempered people – those with rapid and unpredictable changeableness of mood. The overall mood is of exuberance. People invest in stocks for any and every reason. These combine together to further stimulate rising stock prices. Whenever you find such a deadly combination next time, simply run for cover…because such exuberance will always leads to eventual trouble – stock market crashes.
2. Be very careful while buying illiquid stocks – The impact cost of a large sell order can be huge in case the stock surges and a large investor wants to cash out.
3. Illiquidity of a great stock can work to your advantage as a small investor. You can buy it over a period of time without impacting the price materially. Then, when big investors come to know the story and take a bite of it, you would’ve already made your money.
4. Avoid extrapolating short term performance into long term performance. A 30-40% return from your stocks in one year doesn’t mean you will retire a rich investor in 10 years. It never happens!
5. Use intrinsic value as a reference point to sell stocks – Sell when a stock reaches close to intrinsic value, and also when intrinsic value reaches close to stock price.
6. Sell a stock (but only when you don’t have any investible cash left) if you can find a better opportunity – one with a greater margin of safety.
7. Beware of permanent loss of capital…and then when you identify businesses that won’t impair your capital permanently, buy them and be willing to wait for even 10-15 years to create tremendous wealth from them.

Today, I review the letter for 1959.

[Read more…] about Wit, Wisdom, Warren (Issue #3): The Valuation Junkyard

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Last week, we studied lessons from Warren Buffett’s 1957 letter to partners of Buffett Partnerships.

Lest you forget, here is a summary of the key lessons we discussed in the previous review:

1. Give due importance to intrinsic value while making your investment decisions.
2. Over time, stock prices generally revert to intrinsic value.
3. Ignore the Sensex (what it is doing, where it is going) except to check the pulse of the “general investing environment”.
4. Ignore short term movements in stock prices, even if they are sharp. You must only be concerned with comparing stock prices with intrinsic values, and that’s it.
5. Give luck its due credit (but luck, like love, is a verb…so practice hard to get lucky, like Buffett did).
6. Humility is one of the most important attributes of a value investor.
7. Over the long term, if you can do your work properly, expect to outperform the broader market at just a reasonable rate. Never expect a big outperformance, for such an expectation might lead you to commit grave errors of commission.
8. Being a value investor, expect to perform better in a bear market than in a bull market.
9. Patience is a virtue, and especially if you are a stock market investor.
10. It’s important to set a proper asset allocation strategy before you start to invest…and then it’s equally important to follow that strategy in stock market ups and downs.

Today, I review the letter for 1958.

[Read more…] about Wit, Wisdom, Warren (Issue #2): Avoiding Permanent Loss of Capital