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 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:
- Very strong defensive characteristics;
- Good solid value building up at a satisfactory pace and;
- 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 securing 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
1958年股市概况
一位经营中型投资信托的朋友最近写道：“美国人特有的反复无常的性情，在1958年带来了重大转变，而用‘狂热’来形容当下的股市，至少是恰当的。”
我认为这句话概括了1958年主导股市的心理变化——无论业余投资者还是专业人士皆如此。过去一年里，几乎任何理由都被拿来为市场的“投资”行为辩护。毫无疑问，现在股市里反复无常的人比过去许多年都多，他们能待多久，取决于他们认为自己能多快、多轻松地赚到钱。虽然无法判断他们的人数还会增加多久、继而进一步推高股价，但我认为可以说：他们待得越久，反噬就越猛烈。
我从不试图预测大市——我的精力都放在寻找低估类股票上。但我确实相信，公众普遍认为投资股票必然赚钱这样的信念，最终会带来麻烦。如果这种情况发生，即使是低估类股票的价格，也会受到重大影响——但我认为，其内在价值不会。
1958年业绩
在去年的信中，我写道：
“我们的相对业绩在熊市中往往比牛市中更好，因此从上述结果得出的结论应有所保留——那一年属于我们本应表现相对较好的那种市场环境。在股市大幅上涨的年份，若能跟平指数的涨幅，我就很满意了。”
后一句描述的就是我们1958年所经历的市场类型，而我的预测也应验了。道琼斯工业平均指数从435点上涨到583点，加上约20点的股息回报，道指单位整体收益为38.5%。五个全年运营的合伙企业，获得的业绩平均略高于这个38.5%。按两年年末市值计算，它们的收益在36.6%到46.2%之间。考虑到我们相当一部分资产一直且现在仍然投资于那些从快速上涨市场中获益甚微的证券，我认为这些业绩是相当不错的。我继续预测：在下跌或横盘市场中，我们的业绩将超越平均水平；但在上涨市场中，我们拼尽全力也只能勉强跟平。
典型投资案例
为了让您更好地理解我们的操作方式，我想回顾一下1958年的一个具体案例。去年我提到，我们的最大持仓占各合伙企业资产的10%到20%。当时我指出，这只股票下跌或保持相对稳定对我们有利，这样我们才能买进更多仓位——正因如此，这种证券在牛市中会拖累我们的相对表现。
这只股票是新泽西州尤宁城的Commonwealth Trust Co.（联邦信托公司）。我们开始买入时，按保守估算，其内在价值约125美元/股。然而，有充分的理由说明它尽管每股盈利约10美元，却完全不派发现金股息——这很大程度上导致了股价低迷在50美元左右。于是，我们遇到了一家管理非常出色的银行：盈利能力显著，却以相对于内在价值的大幅折价交易。管理层对我们新股东很友善，最终亏损的风险似乎微乎其微。
Commonwealth由一家更大的银行持有25.5%的股份（Commonwealth资产约5000万美元——约为奥马哈First National［第一国民银行］规模的一半），该大行多年来一直希望并购。这一并购因个人原因未能实现，但有证据表明这种情况不会永远持续下去。因此我们具备了以下组合：
- 极强的防御性；
- 坚实的内在价值以令人满意的速度增长；
- 有证据表明最终这一价值将被释放——尽管可能是一年，也可能是十年。如果是后者，那么价值很可能已经增长到相当大的数字，比如250美元/股。
在大约一年的时间里，我们成功买入了该银行约12%的股份，均价约51美元/股。显然，股价保持低迷对我们绝对有利。随着持股规模增大，我们的持股价值也在增加——尤其是当我们成为第二大股东，拥有足够的投票权以确保在任何并购提案上获得咨询权之后。
Commonwealth只有约300名股东，每月大概只有两笔交易——所以你就能理解为什么我说股票市场的总体活跃度对我们部分持仓的价格走势影响甚微。
不幸的是，我们在买入时确实遇到了一些竞争，将股价推高到了65美元左右，此时我们既不买也不卖。在不活跃的股票中，很小的买入订单就能造成如此大的价格波动，这解释了为什么我们的投资组合不能有任何“泄密”。
那年晚些时候，我们成功找到了一个特殊机会，让我们能够以有吸引力的价格成为最大股东，于是我们卖掉了Commonwealth的持股，以80美元/股的价格成交，尽管当时的市场报价大约低了20%。
显然，我们本可以继续持有50美元/股的股票，耐心地一点一点买入，而且我对这样的计划会非常满意——尽管我们去年相对市场的业绩看起来会很差。像Commonwealth这样的案例在当年实现盈利，在很大程度上是偶然的。因此，任何单一年度的业绩作为衡量长期结果的依据都有严重局限性。然而，我相信，投资于这种低估且有充分安全边际的证券，是在证券领域实现长期盈利的最可靠方法。
顺便提一下，以80美元/股买入该股的买家，未来几年预期会做得相当不错。然而，80美元/股相对于135美元内在价值的低估程度，与50美元/股相对于125美元内在价值的低估程度截然不同。在我看来，我们的资本可以更好地用于接替它的那个新机会上。
这个新机会的规模比Commonwealth稍大，占各合伙企业资产的约25%。虽然低估程度并不比我们拥有的许多其他证券更大（甚至不及其中一些），但我们是最大股东——这往往在决定修正低估所需的时间方面具有显著优势。对于这一特定持仓，我们几乎可以保证，持有期间的业绩将优于道指。
当前情况
市场越活跃，低估的证券就越少。我现在发现要找到足够数量的有吸引力的投资有些困难。我更愿意将更大比例的资产配置于套利类投资，但符合合适条件的套利机会非常难找。
因此，在可能的范围内，我正尝试通过大量买入几只低估证券来创造我自己的“套利机会”。这样的策略应该会应验我之前的预测——在熊市中取得超越平均水平的业绩。我希望各位据此来评判我。如有任何疑问，请随时提出。
WARREN E. BUFFETT
1959年2月11日