To the Partners of Buffett Partnership Ltd.

# 1967 Letter to Partners ## BUFFETT PARTNERSHIP, LTD. 810 KIEWIT PLAZA, OMAHA, NEBRASKA 68131 March 14, 1968 ## 1967 in Review 1967 was a good year for the partnership—perhaps too good. Our overall gain was approximately 35.9% for limited partners versus a Dow advance of 19.0%. While this sounds like a spectacular result, it actually represents less work for me personally than some of the leaner years. This is the paradox of investment management: **the best absolute investment years are often produced in declining or flat markets, while the most difficult years occur in rising markets.** When stocks are cheap and neglected, our systematic approach shines. When stocks become expensive and popular, even our best efforts produce smaller margins of superiority. ## The Five Mountains Our investment approach can be visualized as five mountains. Each requires a different climbing technique: 1. **Generals** — statistically cheap securities purchased at discounts to net current assets 2. **Workouts** — corporate events (mergers, liquidations, spin-offs) with defined timetables 3. **Controls** — businesses we acquire and operate, buying at depressed prices 4. **International** — arbitrage in foreign securities (limited in this era) 5. **Sanity** — simply being patient when prices are absurdly high or low The mix shifts constantly. Right now, the first two categories offer limited opportunities. The third and fourth require more capital and more patience. The fifth—patience—is always available. ## Valuation Changes The most significant development of 1967 is not our portfolio performance but the general expansion of price-to-earnings multiples across the market. Stocks that were reasonably valued in 1960 now trade at multiples that would have seemed impossible. > "The graveyard of successful investment programs is populated largely by those who were convinced that good times from the past would continue indefinitely. They were wrong, but they were seldom early in recognizing their error." This does not mean the market will decline tomorrow or next year. It does mean that prospective returns from equities are lower than they were, and that our investment assumptions must be recalibrated accordingly. ## Compounding: The Real Miracle [[Benjamin Graham]] often said that the most important concept in investment is **compound interest**. If you earn 20% annually and reinvest all gains, capital doubles every 3.8 years. Over 30 years, $10,000 becomes $2.4 million. The partnership's ten-year record demonstrates this power. What matters is not the single-year spectacular performance, but the sustained application of sound principles over decades. [[Charlie Munger]] has reinforced this lesson. He has taught me that the best investment is often one that is simply held for decades while the miracle of compounding does its work. ## The Transition Approaches The partnership structure served us well for a decade. However, the coming years will bring a transition. The capital we have built will need a permanent home. [[Charlie Munger]] and I are increasingly focused on acquiring entire businesses at attractive prices rather than merely purchasing securities. This shift does not change our fundamental philosophy. Whether buying partial interests in public companies or entire private businesses, the principle is identical: pay far less than something is worth, and hold until reality catches up with price. ## Looking Forward I have no particular forecast for the market in 1968. What I do know is that our approach—the patient, disciplined, value-oriented method we have employed for a decade—will continue to serve us well. The market may go up or down; our job is to find securities trading below intrinsic value and to hold them until the discrepancy is corrected. Warren E. Buffett March 14, 1968