A letter a day!

Today I am covering two letters. The first one is the year-end letter, written after the half-yearly letter in the year 1965, and the second one is an annual letter of 1965.

The year-end letter and its key learnings:

This letter is important for a reason because it is in this letter that Buffett mentions Berkshire Hathway for the very first time. He started acquiring controlling interest in Berkshire from 1962(at the price of $7.6) onwards which he clearly mentions in this letter. A controlling stake was acquired in the year 1965. Berkshire was a textile company and in little trouble when Buffett started acquiring it. Very less people know that initially, it was Buffett Partnership Ltd that eventually became Berkshire Hathway. ( We will discover it in the letters ahead).

Letter 13#1965

Key learnings:

1. The success of past methods and ideas does not transfer forward to future ones. This is said in that context that the same research done in the past might not apply to partners/clients onboarding with us today.

2. On performance comparison, Buffett has already highlighted the importance of having a yardstick to measure your performance. Again quoting him here

“So if you are evaluating others (or yourself!) in the investment field, think out some standards – apply them – interpret them. If you do not feel our standard (a minimum of a three-year test versus the Dow) is an applicable one, you should not be in the Partnership. If you do feel it is applicable, you should be able to take the minus years with equanimity in the visceral regions as well as the cerebral regions -as long as we are surpassing the results of the Dow.”

3. With the increasing amount of capital, each fund manager is worried about it hampering their performance and so was Buffett. He said:

“Several times in the past I have raised the question of whether increasing amounts of capital would harm our investment performance. Each time I have answered negatively and promised you that if my opinion changed, I would promptly report it.
I do not feel that increased capital has hurt our operation to date. As a matter of fact, I believe that we have done somewhat better during the past few years with the capital we have had in the Partnership than we would have done if we had been working with a substantially smaller amount. This was due to the partly fortuitous development of several investments that were just the right size for us -big enough to be significant and small enough to handle. I now feel that we are much closer to the point where increased size may prove disadvantageous. I don’t want to ascribe too much precision to that statement since there are many variables involved. What may be the optimum size under some market and business circumstances can be substantially more or less than the optimum under other circumstances. There have been a few times in the past when on a very short-term basis I have felt it would have been advantageous to be smaller but substantially more times when the converse was true.”

4. In this letter, Buffett has also described the state of Berkshire in a detailed manner. (Too many points so advising you to read from the letter itself if you find it interesting).

5. Always have good quality ideas( even if one) rather than focusing on the number of ideas.

6. The investment business is that of ascertaining facts and then applying experience and reason to such facts to reach expectations.

7. The good performance of the portfolio does not depend upon the number of stocks.

“If the good performance of the fund is even a minor objective, any
portfolio encompassing one hundred stocks (whether the manager is handling one thousand dollars or one billion dollars) is not being operated logically. The addition of the one-hundredth stock simply can’t reduce the potential variance in portfolio performance sufficiently to compensate for the negative effect its inclusion has on the overall portfolio expectation.”

Adding one more thing here “All texts counsel “adequate” diversification, but the ones who quantify “adequate” virtually never explain how they arrive at their conclusion.