To the Partners of Buffett Partnership Ltd.

# 1968 Letter to Partners ## BUFFETT PARTNERSHIP, LTD. 810 KIEWIT PLAZA, OMAHA, NEBRASKA 68131 July 12, 1968 ## First Half 1968 The first half of 1968 produced overall partnership gains of approximately 16.0% versus a Dow advance of 0.9%. While the spread is gratifying, I want to put these results in proper perspective. A 16% six-month gain against a 0.9% market advance looks spectacular. But it is important to remember that our investment universe has changed dramatically. The simple, obvious mispricings that were available in the late 1950s and early 1960s have been largely arbitraged away by thousands of investors using similar methods. ## The Evolution of the Opportunity Set [[Benjamin Graham]]'s original approach to investment was heavily quantitative. By the 1960s, however, the market had become much more efficient. Securities that appeared cheap by historical standards often deserved to be cheap. The easy money has been made. This does not mean the partnership cannot continue to achieve superior results. It means that achieving them requires: - More sophisticated analysis - Greater patience - Willingness to act when opportunities do appear - The capital and temperament to exploit situations that others miss or avoid Our controlled companies continue to contribute meaningfully. We estimate they will generate approximately $3 million in earnings this year, providing a foundation that is not dependent on market conditions. ## Investment Categories: Where We Stand **Generals (Statistically Cheap Securities):** Extremely difficult to find. Most cheap-looking securities are cheap for good reasons. **Workouts (Corporate Event Arbitrage):** Reasonably active, but competition has intensified. **Controls:** Our most promising area. We have meaningful ownership in several businesses that we believe are worth significantly more than current market prices. > "The most rewarding investment opportunities are never popular. When an investment idea is widely known and agreed upon, the opportunity has almost certainly already been exploited." ## Capital and Performance One of the central tensions in investment management is the relationship between capital size and returns. As the partnership's capital has grown, the percentage return it can generate has logically tended to decline. An investment that could generate a 50% return on $100,000 might generate only 5% on $10 million. This is not a complaint—it is a mathematical reality. Our goal is still to achieve the best possible returns on our capital, but the absolute level of performance should be viewed in the context of the much larger capital base we now manage. ## The Partnership's Future I have begun to think more seriously about what form our investment activities should take over the coming years. The partnership structure has served us well, but it has certain limitations that become more significant as capital grows. [[Charlie Munger]] and I continue to discuss the optimal structure. Whatever form we choose, the underlying principles—paying far less than something is worth, thinking independently, and holding for the long term—will remain unchanged. ## Conclusion The first half of 1968 demonstrated again that our disciplined approach produces results that compare favorably with the market. More importantly, it produced results that do not require us to take extraordinary risks or to abandon our principles. I remain cautiously optimistic about the partnership's future. The environment is more challenging than it was a decade ago, but our methods are proven, our capital is substantial, and our team—including [[Charlie Munger]] and our excellent legal and administrative staff—gives us advantages that most investors do not possess. Warren E. Buffett July 12, 1968