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BUFFETT PARTNERSHIP, LTD.
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810 KIEWIT PLAZA
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OMAHA 31, NEBRASKA
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November 1, 1962
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TO MY PARTNERS FOR 1963:
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Here we go on the annual paper flurry. Two copies of an amended partnership agreement for 1963 are enclosed.
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The one with the General Provisions attached is to be kept by you and the other single-page agreement should
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be returned. There are no substantive changes of any sort from last year's agreement. This amendment is merely
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to allow for a few new partners and in several places to reword in clearer (we hope) language provisions of the
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present agreement. Practically all of the rewording is in General Provision 5 (paragraph 7 in last year's
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agreement). Rather than have a separate amending document, we have incorporated the changes into one
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complete document embodying the entire agreement.
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We are also enclosing two commitment letters (one for you--one to be returned) on which you are to indicate
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your wishes regarding additions or withdrawals at January 1st. We would like to have the agreement and the
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commitment letter back by December 1st. However, the commitment letter can be amended right up until the
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end of the year (not after) so if you should have a change of plans and you have already mailed us your
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commitment letter, all you have to do is get in touch with me, and I will make whatever changes you desire.
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Any withdrawals will be paid immediately after January 1st. Any additions must reach us by January 10th, and
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should they be paid in during November, they will take on the status of advance payments and draw interest at
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the rate of 6% until yearend.
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Please be sure the signature on your partnership agreement is notarized. Partners in Omaha may obtain the
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notarization at our office if they wish. Also, be sure to let us know by an appropriate circle on the commitment
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letter whether you wish to receive monthly payments in 1963. In order to be sure everyone understands this, let
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me again state that these monthly payments are in no sense guaranteed earnings or anything of the sort. They
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represent a convenient form of regular withdrawal, which to the extent we earn better than 6% are payments
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from earnings, and to the extent we don't, are payments from capital.
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Complete tax information for your 1962 return will be in your hands by January 20th. If you should need an
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estimate of your tax position before that time, let me know and I will give you a rough idea. We will also send
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out a short letter on taxes in late December.
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Having read this far, you are entitled to a report on how we have done to date in 1962. For the period ending
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October 31st, the Dow-Jones Industrials showed an overall loss, including dividends received, of approximately
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16.8%. We intend to use the same method or valuing our controlling interest in Dempster Mill Manufacturing at
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this yearend that we did at the end of last year. This involved applying various discounts to the balance sheet
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items to reflect my opinion as to what could be realized on a very prompt sale. Last year this involved a 40%
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discount on inventories, a 15% discount on receivables, estimated auction value of fixed assets, etc., which led
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to an approximate value or $35.00 per share.
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The successful conversion of substantial portions of the assets of Dempster to cash, at virtually 100 cents on the
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dollar, has been the high point of 1962. For example, inventory of $4.2 million at last yearend will probably be
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about $1.9 million this yearend, reducing the discount on this item by about $920,000 (40% of $2.3 million
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reduction). I will give this story my full journalistic treatment in my annual letter. Suffice to say at this point that
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applying the same discounts described above will probably result in a yearend value of at least $50.00 per share.
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The extent of the asset conversion job can perhaps best be illustrated in a sentence by pointing out that whereas
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we had $166,000 of cash and $2,315,000 of liabilities at November 30, 1961 (Dempster fiscal yearend), we
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expect this year to have about $1 million in cash and investments (of the type the Partnership buys) against total
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liabilities of $250,000. Prospects for further improvement in this situation in 1963 appear good, and we expect a
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substantially expanded investment portfolio in Dempster next year.
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Valuing Dempster at $50 per share, our overall gain (before any payments to partners) to October 31st for the
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Partnership has been 5.5%. This 22.3 percentage-points advantage over the Dow, if maintained until the end of
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the year, will be among the largest we have ever had. About 60% of this advantage was accomplished by the
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portfolio other than Dempster, and 40% was the result of increased value at Dempster.
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I want all partners and prospective partners to realize the results described above are distinctly abnormal and
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will recur infrequently, if at all. This performance is mainly the result of having a large portion of our money in
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controlled assets and workout situations rather than general market situations at a time when the Dow declined
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substantially. If the Dow had advanced materially in 1962, we could have looked very bad on a relative basis,
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and our success to date in 1962 certainly does not reflect any ability on my part to guess the market (I never try),
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but merely reflects the fact that the high prices of generals partially forced me into other categories or
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investment. If the Dow had continued to soar, we would have been low man on the totem pole. We fully expect
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to have years when our method of operation will not even match the results of the Dow, although obviously I
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don't expect this on any long-term basis or I would throw in the towel and buy the Dow.
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I’ll cut this sermon short with the conclusion that I certainly do not want anyone to think that the pattern of the
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last few years is likely to be repeated; I expect future performance to reflect much smaller advantages on
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average over the Dow.
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Each letter ends with the request that you let me know about anything that isn't clear. Please be sure that you do
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this. We are all geared up with secretarial help, a new typewriter, etc., and we want to be sure that this letter and
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agreement are understood by all.
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Cordially,
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Warren E. Buffett
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WEB:bf
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P/S: There are no prizes for being the last ones to get in the agreement and commitment letter, so please get to it
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as soon as possible. Remember the commitment letter can be amended by a postcard or a phone call--we are just
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trying to get the bulk of the work out of the way well before December 31st so we can concentrate on getting the
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audit, tax information, etc., out pronto at yearend.
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