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1960 Letter
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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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July, 1961
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TO MY PARTNERS:
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In the past, partners have commented that a once-a-year letter was “a long time between drinks,” and
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that a semi-annual letter would be a good idea. It really shouldn’t be too difficult to find something to say twice
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a year; at least it isn’t this year. Hence, this letter which will be continued in future years.
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During the first half of 1961, the overall gain of the Dow-Jones Industrial Average was about 13%,
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including dividends. Although this is the type of period when we should have the most difficulty in exceeding
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this standard, all partnerships that operated throughout the six months did moderately better then the Average.
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Partnerships formed during 1961 either equaled or exceeded results of the Average from the time of formation,
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depending primarily on how long they were in operation.
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Let me, however, emphasize two points. First, one year is far too short a period to form any kind of an
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opinion as to investment performance, and measurements based upon six months become even more unreliable.
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One factor that has caused some reluctance on my part to write semi-annual letters is the fear that partners may
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begin to think in terms of short-term performance which can be most misleading. My own thinking is much
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more geared to five year performance, preferably with tests of relative results in both strong and weak markets.
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The second point I want everyone to understand is that if we continue in a market which advances at the
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pace of the first half of 1961, not only do I doubt that we will continue to exceed the results of the DJIA, but it is
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very likely that our performance will fall behind the Average.
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Our holdings, which I always believe to be on the conservative side compared to general portfolios, tend
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to grow more conservative as the general market level rises. At all times, I attempt to have a portion of our
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portfolio in securities as least partially insulated from the behavior of the market, and this portion should
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increase as the market rises. However appetizing results for even the amateur cook (and perhaps particularly the
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amateur), we find that more of our portfolio is not on the stove.
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We have also begun open market acquisition of a potentially major commitment which I, of course,
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hope does nothing marketwise for at least a year. Such a commitment may be a deterrent to short range
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performance, but it gives strong promise of superior results over a several year period combined with substantial
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defensive characteristics.
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Progress has been made toward combining all partners at yearend. I have talked with all partners joining
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during this past year or so about this goal, and have also gone over the plans with representative partners of all
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earlier partnerships
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Some of the provisions will be:
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(A) A merger of all partnerships, based on market value at yearend, with provisions for proper
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allocation among partners of future tax liability due to unrealized gains at yearend. The merger itself will be tax-
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free, and will result in no acceleration of realization of profits;
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14
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(B) A division of profits between the limited partners and general partner, with the first 6% per year to
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partners based upon beginning capital at market, and any excess divided one-fourth to the general partner and
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three-fourths to all partners proportional to their capital. Any deficiencies in earnings below the 6% would be
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carried forward against future earnings, but would not be carried back. Presently, there are three profit
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arrangements which have been optional to incoming partners:
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[TABLE]
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Arrangement & Interest & Provision Excess to General Partner & Excess to Limited Partners
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(1) 6% 1/3 2/3
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(2) 4% 1/4 3/4
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(3) None 1/6 5/6
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[/TABLE]
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In the event of profits, the new division will obviously have to be better for limited partners than the first two
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arrangements. Regarding the third, the new arrangement will be superior up to 18% per year; but above this rate
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the limited partners would do better under the present agreement. About 80% of total partnership assets have
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selected the first two arrangements, and I am hopeful, should we average better than 18% yearly, partners
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presently under the third arrangement will not feel short-changed under the new agreement;
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(C) In the event of losses, there will be no carry back against amounts previously credited to me as
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general partner. Although there will be a carry-forward against future excess earnings. However, my wife and I
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will have the largest single investment in the new partnership, probably about one-sixth of total partnership
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assets, and thereby a greater dollar stake in losses than any other partner of family group, I am inserting a
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provision in the partnership agreement which will prohibit the purchase by me or my family of any marketable
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securities. In other words, the new partnership will represent my entire investment operation in marketable
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securities, so that my results will have to be directly proportional to yours, subject to the advantage I obtain if
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we do better than 6%;
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(D) A provision for monthly payments at the rate of 6% yearly, based on beginning of the year capital
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valued at market. Partners not wishing to withdraw money currently can have this credited back to them
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automatically as an advance payment, drawing 6%, to purchase an additional equity interest in the partnership at
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yearend. This will solve one stumbling block that has heretofore existed in the path of consolidation, since many
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partners desire regular withdrawals and others wish to plow everything back;
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(E) The right to borrow during the year, up to 20% of the value of your partnership interest, at 6%, such
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loans to be liquidated at yearend or earlier. This will add a degree of liquidity to an investment which can now
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only be disposed of at yearend. It is not intended that anything but relatively permanent funds be invested in the
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partnership, and we have no desire to turn it into a bank. Rather, I expect this to be a relatively unused provision,
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which is available when something unexpected turns up and a wait until yearend to liquidate part of all of a
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partner’s interest would cause hardship;
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(F) An arrangement whereby any relatively small tax adjustment, made in later years on the
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partnership’s return will be assessed directly to me. This way, we will not be faced with the problem of asking
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eighty people, or more, to amend their earlier return over some small matter. As it stands now, a small change,
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such as a decision that a dividend received by the partnership has 63% a return of capital instead of 68%, could
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cause a multitude of paper work. To prevent this, any change amounting to less than $1,000 of tax will be
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charged directly to me.
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We have submitted the proposed agreement to Washington for a ruling that the merger would be tax-
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free, and that the partnership would be treated as a partnership under the tax laws. While all of this is a lot of
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work, it will make things enormously easier in the future. You might save this letter as a reference to read in
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conjunction with the agreement which you will receive later in the year.
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The minimum investment for new partners is currently $25,000, but, of course, this does not apply to
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present partners. Our method of operation will enable the partners to add or withdraw amounts of any size (in
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round $100) at yearend. Estimated total assets of the partnership will be in the neighborhood of $4 million,
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which enables us to consider investments such as the one mentioned earlier in this letter, which we would have
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had to pass several years ago.
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This has turned out to be more of a production than my annual letter. If you have any questions,
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particularly regarding anything that isn’t clear in my discussion of the new partnership agreement, be sure to let
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me know. If there are a large number of questions, I will write a supplemental letter to all partners giving the
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questions that arise and the answers to them.
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Warren E. Buffett
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Vlb
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July 22, 1961
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Paul Pham
2 years ago