A letter a day!

A letter a day!

Letter #20 1968

Key learnings:

1. This letter starts with the headline “Everyone makes mistakes”. I think this is very relevant. The irony is we often expect fund managers to continue to deliver the same performance as they did in the historical past, judging them for a few of their contrarian stock picks that fail to perform, despite knowing the volatility and uncertainty of the stock markets. ( Strange but true).

2. Equity research /money management is no doubt a full-time job. However, a minute-by-minute review of the stock you pick is unnecessary. A strong thesis followed by conviction, with periodic reviews ( monthly, quarterly) will work(These are completely personal views, they can differ from person to person). Warren Buffett’s comments on the same

“The complexities of national and international economics make money management a full-time job. A good money manager cannot maintain a study of securities on a week-by-week or even a day-by-day basis. Securities must be studied in a minute-by-minute program.”

Wow!

This sort of stuff makes me feel guilty when I go out for a Pepsi. When practiced by large and increasing numbers of highly motivated people with huge amounts of money on a limited quantity of suitable securities, the result becomes highly unpredictable. In some ways, it is fascinating to watch and in other ways it is appalling.”

3. Market price is irrelevant in the valuation of the controlling interests. (Controls means basically having ownership in the company through a large stake).

” I still sometimes get comments from partners like: “Say, Berkshire is up four points – that’s great!” or “What’s happening to us, Berkshire was down three last week?” The market price is irrelevant to us in the valuation of our controlling interests. We valued B-H at 25 at yearend 1967 when the market was about 20 and 31 at yearend 1968 when the market was about 37. We would have done the same thing if the markets had been 15 and 50 respectively. (“Price is what you pay. value is what you get”). We will prosper or suffer in controlled investments in relation to the operating performances of our businesses – we will not attempt to profit by playing various games in the securities markets.”

4. This letter also contains a brief history of how Buffett Partnership Limited was formed. ( For anyone who is interested to read)

5. Communication of the “Skin in the game ” numbers to your investors/partners will definitely help them gain confidence. This is repeatedly done by Buffett in his letters.

“The office group, along with spouses (one apiece – I still haven’t figured out how I should handle that plural) and children have over $27 million invested in BPL on January 1, 1969. Assorted sizes and shapes of aunts, uncles, parents, in-laws, brothers, sisters, and cousins make the BPL membership list read like “Our Crowd” – which, so far as I am concerned, is exactly what it is.”