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 1957 Letter
 WARREN E. BUFFETT
 5202 Underwood Ave. Omaha, Nebraska
 SECOND ANNUAL LETTER TO LIMITED PARTNERS
 The General Stock Market Picture in 1957.
 In last year's letter to partners, I said the following:
 My view of the general market level is that it is priced above intrinsic value. This view relates to blue-chip
 securities. This view, if accurate, carries with it the possibility of a substantial decline in all stock prices, both
 undervalued and otherwise. In any event I think the probability is very slight that current market levels will be
 thought of as cheap five years from now. Even a full-scale bear market, however, should not hurt the market
 value of our work-outs substantially.
 If the general market were to return to an undervalued status our capital might be employed exclusively in
 general issues and perhaps some borrowed money would be used in this operation at that time. Conversely, if
 the market should go considerably higher our policy will be to reduce our general issues as profits present
 themselves and increase the work-out portfolio.
 All of the above is not intended to imply that market analysis is foremost in my mind. Primary attention is given
 at all times to the detection of substantially undervalued securities.
 The past year witnessed a moderate decline in stock prices. I stress the word "moderate" since casual reading of
 the press or conversing with those who have had only recent experience with stocks would tend to create an
 impression of a much greater decline. Actually, it appears to me that the decline in stock prices has been
 considerably less than the decline in corporate earning power under present business conditions. This means that
 the public is still very bullish on blue chip stocks and the general economic picture. I make no attempt to
 forecast either business or the stock market; the above is simply intended to dispel any notions that stocks have
 suffered any drastic decline or that the general market, is at a low level. I still consider the general market to be
 priced on the high side based on long term investment value.
 Our Activities in 1957
 The market decline has created greater opportunity among undervalued situations so that, generally, our
 portfolio is heavier in undervalued situations relative to work-outs than it was last year. Perhaps an explanation
 of the term "work-out" is in order. A work-out is an investment which is dependent on a specific corporate
 action for its profit rather than a general advance in the price of the stock as in the case of undervalued
 situations. Work-outs come about through: sales, mergers, liquidations, tenders, etc. In each case, the risk is that
 something will upset the applecart and cause the abandonment of the planned action, not that the economic
 picture will deteriorate and stocks decline generally. At the end of 1956, we had a ratio of about 70-30 between
 general issues and work-outs. Now it is about 85-15.
 During the past year we have taken positions in two situations which have reached a size where we may expect
 to take some part in corporate decisions. One of these positions accounts for between 10% and 20% of the
 portfolio of the various partnerships and the other accounts for about 5%. Both of these will probably take in the
 neighborhood of three to five years of work but they presently appear to have potential for a high average annual
 rate of return with a minimum of risk. While not in the classification of work-outs, they have very little
 Buffett Partnership Letters 1957 to 1970
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 dependence on the general action of the stock market. Should the general market have a substantial rise, of
 course, I would expect this section of our portfolio to lag behind the action of the market.
 Results for 1957
 In 1957 the three partnerships which we formed in 1956 did substantially better than the general market. At the
 beginning of the year, the Dow-Jones Industrials stood at 499 and at the end of the year it was at 435 for a loss
 of 64 points. If one had owned the Averages, he would have received 22 points in dividends reducing the overall
 loss to 42 points or 8.470% for the year. This loss is roughly equivalent to what would have been achieved by
 investing in most investment funds and, to my knowledge, no investment fund invested in stocks showed a gain
 for the year.
 All three of the 1956 partnerships showed a gain during the year amounting to about 6.2%, 7.8% and 25% on
 yearend 1956 net worth. Naturally a question is created as to the vastly superior performance of the last
 partnership, particularly in the mind of the partners of the first two. This performance emphasizes the
 importance of luck in the short run, particularly in regard to when funds are received. The third partnership was
 started the latest in 1956 when the market was at a lower level and when several securities were particularly
 attractive. Because of the availability of funds, large positions were taken in these issues. Whereas the two
 partnerships formed earlier were already substantially invested so that they could only take relatively small
 positions in these issues.
 Basically, all partnerships are invested in the same securities and in approximately the same percentages.
 However, particularly during the initial stages, money becomes available at varying times and varying levels of
 the market so there is more variation in results than is likely to be the case in later years. Over the years, I will
 be quite satisfied with a performance that is 10% per year better than the Averages, so in respect to these three
 partnerships, 1957 was a successful and probably better than average, year.
 Two partnerships were started during the middle of 1957 and their results for the balance of the year were
 roughly the same as the performance of the Averages which were down about 12% for the period since
 inception of the 1957 partnerships. Their portfolios are now starting to approximate those of the 1956
 partnerships and performance of the entire group should be much more comparable in the future.
 Interpretation of results
 To some extent our better than average performance in 1957 was due to the fact that it was a generally poor year
 for most stocks. Our performance, relatively, is likely to be better in a bear market than in a bull market so that
 deductions made from the above results should be tempered by the fact that it was the type of year when we
 should have done relatively well. In a year when the general market had a substantial advance I would be well
 satisfied to match the advance of the Averages.
 I can definitely say that our portfolio represents better value at the end of 1957 than it did at the end of 1956.
 This is due to both generally lower prices and the fact that we have had more time to acquire the more
 substantially undervalued securities which can only be acquired with patience. Earlier I mentioned our largest
 position which comprised 10% to 20% of the assets of the various partnerships. In time I plan to have this
 represent 20% of the assets of all partnerships but this cannot be hurried. Obviously during any acquisition
 period, our primary interest is to have the stock do nothing or decline rather than advance. Therefore, at any
 given time, a fair proportion of our portfolio may be in the sterile stage. This policy, while requiring patience,
 should maximize long term profits.
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 I have tried to cover points which I felt might be of interest and disclose as much of our philosophy as may be
 imparted without talking of individual issues. If there are any questions concerning any phase of the operation, I
 would welcome hearing from you.
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 Buffett Partnership Letters 1957 to 1970
 1958 Letter
 Warren E Buffett
 5202 Underwood Ave. Omaha, Nebraska
 THE GENERAL STOCK MARKET IN 1958
 A friend who runs a medium-sized investment trust recently wrote: "The mercurial temperament, characteristic
 of the American people, produced a major transformation in 1958 and ‘exuberant’ would be the proper word for
 the stock market, at least".
 I think this summarizes the change in psychology dominating the stock market in 1958 at both the amateur and
 professional levels. During the past year almost any reason has been seized upon to justify “Investing” in the
 market. There are undoubtedly more mercurially-tempered people in the stock market now than for a good many
 years and the duration of their stay will be limited to how long they think profits can be made quickly and
 effortlessly. While it is impossible to determine how long they will continue to add numbers to their ranks and
 thereby stimulate rising prices, I believe it is valid to say that the longer their visit, the greater the reaction from
 it.
 I make no attempt to forecast the general market - my efforts are devoted to finding undervalued securities.
 However, I do believe that widespread public belief in the inevitability of profits from investment in stocks will
 lead to eventual trouble. Should this occur, prices, but not intrinsic values in my opinion, of even undervalued
 securities can be expected to be substantially affected.
 RESULTS IN 1958.
 In my letter of last year, I wrote:
 “Our performance, relatively, is likely to be better in a bear market than in a bull market so that
 deductions made from the above results should be tempered by the fact that it was the type of year when
 we should have done relatively will. In a year when the general market had a substantial advance, I
 would be well satisfied to match the advance of the averages.”
 The latter sentence describes the type of year we had in 1958 and my forecast worked out. The Dow-Jones
 Industrial average advanced from 435 to 583 which, after adding back dividends of about 20 points, gave an
 overall gain of 38.5% from the Dow-Jones unit. The five partnerships that operated throughout the entire year
 obtained results averaging slightly better than this 38.5%. Based on market values at the end of both years, their
 gains ranged from 36.7% to 46.2%. Considering the fact that a substantial portion of assets has been and still is
 invested in securities, which benefit very little from a fast-rising market, I believe these results are reasonably
 good. I will continue to forecast that our results will be above average in a declining or level market, but it will
 be all we can do to keep pace with a rising market.
 TYPICAL SITUATION.
 So that you may better understand our method of operation, I think it would be well to review a specific activity
 of 1958. Last year I referred to our largest holding which comprised 10% to 20% of the assets of the various
 partnerships. I pointed out that it was to our interest to have this stock decline or remain relatively steady, so that
 we could acquire an even larger position and that for this reason such a security would probably hold back our
 comparative performance in a bull market.
 This stock was the Commonwealth Trust Co. of Union City, New Jersey. At the time we started to purchase the
 stock, it had an intrinsic value $125 per share computed on a conservative basis. However, for good reasons, it
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 paid no cash dividend at all despite earnings of about $10 per share which was largely responsible for a
 depressed price of about $50 per share. So here we had a very well managed bank with substantia1 earnings
 power selling at a large discount from intrinsic value. Management was friendly to us as new stockholders and
 risk of any ultimate loss seemed minimal.
 Commonwealth was 25.5% owned by a larger bank (Commonwealth had assets of about $50 Million – about
 half the size of the First National in Omaha), which had desired a merger for many years. Such a merger was
 prevented for persona1 reasons, but there was evidence that this situation would not continue indefinitely. Thus
 we had a combination of:
 1. Very strong defensive characteristics;
 2. Good solid value building up at a satisfactory pace and;
 3. Evidence to the effect that eventually this value would be unlocked although it might be one year or ten
 years. If the latter were true, the value would presumably have been built up to a considerably larger
 figure, say, $250 per share.
 Over a period of a year or so, we were successful in obtaining about 12% of the bank at a price averaging about
 $51 per share. Obviously it was definitely to our advantage to have the stock remain dormant in price. Our block
 of stock increased in value as its size grew, particularly after we became the second largest stockholder with
 sufficient voting power to warrant consultation on any merger proposa1.
 Commonwealth only had about 300 stockholders and probably averaged two trades or so per month, so you can
 understand why I say that the activity of the stock market generally had very little effect on the price movement
 of some of our holdings.
 Unfortunately we did run into some competition on buying, which railed the price to about $65 where we were
 neither buyer nor seller. Very small buying orders can create price changes of this magnitude in an inactive
 stock, which explains the importance of not having any "Leakage" regarding our portfolio holdings.
 Late in the year we were successful in finding a special situation where we could become the largest holder at an
 attractive price, so we sold our block of Commonwealth obtaining $80 per share although the quoted market was
 about 20% lower at the time.
 It is obvious that we could still be sitting with $50 stock patiently buying in dribs and drabs, and I would be
 quite happy with such a program although our performance relative to the market last year would have looked
 poor. The year when a situation such at Commonwealth results in a realized profit is, to a great extent,
 fortuitous. Thus, our performance for any single year has serious limitations as a basis for estimating long term
 results. However, I believe that a program of investing in such undervalued well protected securities offers the
 surest means of long term profits in securities.
 I might mention that the buyer of the stock at $80 can expect to do quite well over the years. However, the
 relative undervaluation at $80 with an intrinsic value $135 is quite different from a price $50 with an intrinsic
 value of $125, and it seemed to me that our capital could better be employed in the situation which replaced it.
 This new situation is somewhat larger than Commonwealth and represents about 25% of the assets of the
 various partnerships. While the degree of undervaluation is no greater than in many other securities we own (or
 even than some) we are the largest stockholder and this has substantial advantages many times in determining
 the length of time required to correct the undervaluation. In this particular holding we are virtually assured of a
 performance better than that of the Dow-Jones for the period we hold it.
 THE CURRENT SITUATION
 The higher the level of the market, the fewer the undervalued securities and I am finding some difficulty in
 ecuring an adequate number of attractive investments. I would prefer to increase the percentage of our assets in
 work-outs, but these are very difficult to find on the right terms.
 To the extent possible, therefore, I am attempting to create my own work-outs by acquiring large positions in
 several undervalued securities. Such a policy should lead to the fulfillment of my earlier forecast – an above
 average performance in a bear market. It is on this basis that I hope to be judged. If you have any questions, feel
 free to ask them.
 WARREN E. BUFFETT 2-11-59