Buffett Letter: 1966 semi-annual 1

1966

Semi-annual 1

• Mr Buffett reiterates that his goal is to have a 10% point advantage over the index (Dow)
• Forecasting is prone to a lot fallibility
• He says that those who expect very superior results (like those in in the previous year) are perhaps day dreaming by attending weekly meetings of Halley's Comet Observation Club
• 'Dow is no pushover as an index of investment achievement' - Buffett
• Anyone engaged in money management should have a clear standard of measurement be it on returns, time periods and so on. This should also be clear to all stakeholders
• By setting up yardsticks of performance upfront a money manager cannot blame external or other circumstances. There will certainly be loss years but that is not to be criticized, losing to the index in the appropriate time frame is to be criticized
• I think this is the first letter in which he says that increasing the size of the fund will be disadvantageous
• Buffett disclosed that he has bought a company called Berkshire Hathaway, an ailing textile company in 1962. He purchased enough stock to take a controlling stake in the company
• He says 'Berkshire is a delight to own.' Also adds 'While a Berkshire is hardly going to be as profitable as a Xerox, Fairchild Camera or National Video in a hypertensed market, it is a very comfort able sort of thing to own'
• Buffett on diversification - We diversify substantially less than most investment operations. We might invest up to 40% of our net worth in a single security under conditions coupling an extremely high probability that our facts and reasoning are correct with a very low probability that anything could drastically change the underlying value of the investment
• I like to call this as maximizing the probability of returns with least chance of going bust
• He talks about payoffs in an investment and the probability of achieving that payoff. It is akin to having an edge, win ratio and trade payoffs. He is essentially position sizing intuitively basis this. Excellent as expected from Buffett
• Noah school of investing - Brilliant example on the case against diversification. He outlines, as we know, that having a lot of stocks will lead to lesser variance over the years and not so with a concentrated portfolio
• Thus we must concentrate our investments, have margin of safety in investing and be ready for a lot of variance
• He says - Interestingly enough, the literature of investment management is virtually devoid of relative to deductive calculation of optimal diversification. All texts counsel "adequate" diversification, but the ones who quantify "adequate" virtually never explain how they arrive at their conclusion. Hence, for our summation on overdiversification, we turn to that eminent academician Billy Rose, who says, "You've got a harem of seventy girls; you don't get to know any of them very well.”
• Buffett again shares that almost all of his and his close family's networth is invested with this partnership
• This letter in my opinion is an excellent take on concentration vs diversification