To the Shareholders of Buffett Partnership Ltd.

# 1965 Letter to Partners ## To the Partners of Buffett Partnership Ltd. 1965 was the best year in the partnership's history—and by a wide margin. Our overall performance from all partnerships was approximately 47.2% versus a Dow decline of 14.2%. This substantial margin of superiority was achieved through a combination of excellent selection of undervalued securities and favorable market conditions. ## The Nature of Investment Success I want to address an important aspect of investment management that is often overlooked: the paradox of superior investment performance. The very fact that we have achieved superior results means that our opportunities for future superior performance are diminished. This is not false modesty—it is mathematical reality. > "The higher the level of investment acumen achieved, the less the margin of superiority that can be expected to remain." ## Compounding: The Eighth Wonder The true miracle of investment returns comes not from spectacular single-year gains, but from the power of **compounding** over long periods. If you compound at 20% annually for 30 years, $10,000 becomes nearly $2.4 million. This is what Einstein allegedly called "the eighth wonder of the world." [[Benjamin Graham]] taught me early that the individual investor's greatest advantage is patience. The stock market exists to serve investors, not to instruct them. When others are acting on short-term impulses, the patient investor stands ready to act on long-term rationality. ## The Margin of Safety Principle Our investment philosophy continues to be grounded in [[Benjamin Graham]]'s concept of **margin of safety**. We seek to purchase securities when they are trading significantly below their intrinsic value, creating a buffer against errors in our analysis and against the volatility of markets. This approach will not always work in the short term. There will be years when our margin of safety investments lag a rising market. However, over any extended period of time, I believe this approach will produce superior results with substantially less risk than the alternative. ## Looking Forward I remain optimistic about our ability to continue producing above-average results. However, I am increasingly realistic about the challenges. The larger our capital base grows, the more important it becomes to find investments that can meaningfully impact our performance. Small positions in excellent companies become less effective when they represent a tiny fraction of a large portfolio. The transition that will eventually occur—converting the partnership's capital into operating company ownership—will provide the framework for continued compounding over the decades to come. Warren E. Buffett January 1966