BUFFETT PARTNERSHIP, LTD.
810 KIEWIT PLAZA
OMAHA 31, NEBRASKA
January 18, 1964
Our Performance in 1963
1963 was a good year. It was not a good year because we had an overall gain of \$3,637,167 or 38.7% on our beginning net assets, pleasant as that experience may be to the pragmatists in our group. Rather it was a good year because our performance was substantially better than that of our fundamental yardstick --the Dow-Jones Industrial Average (hereinafter called the “Dow”). If we had been down 20% and the Dow had been down 30%, this letter would still have begun “1963 was a good year.” Regardless of whether we are plus or minus in a particular year, if we can maintain a satisfactory edge on the Dow over an extended period of time, our long term results will be satisfactory -- financially as well as philosophically.
To bring the record up to date, the following summarizes the year-by-year performance of the Dow, the performance of the Partnership before allocation to the general partner, and the limited partners' results for all full years of BPL's and predecessor partnerships' activities:
| Year | Overall Results From Dow (1) | Partnership Results (2) | Limited Partners’ Results (3) |
| 1957 | -8.4% | 10.4% | 9.3% |
| 1958 | 38.5% | 40.9% | 32.2% |
| 1959 | 20.0% | 25.9% | 20.9% |
| 1960 | -6.2% | 22.8% | 18.6% |
| 1961 | 22.4% | 45.9% | 35.9% |
| 1962 | -7.6% | 13.9% | 11.9% |
| 1963 | 20.7% | 38.7% | 30.5% |
(1) Based on yearly changes in the value of the Dow plus dividends that would have been received through ownership of the Dow during that year.
(2) For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout the entire year after all expenses but before distributions to partners or allocations to the general partner.
(3) For 1957-61 computed on the basis of the preceding column of partnership results allowing for allocation to the general partner based upon the present partnership agreement.
One wag among the limited partners has suggested I add a fourth column showing the results of the general partner --let's just say he, too, has an edge on the Dow.
The following table shows the cumulative or compounded results based on the preceding table:
| Year | Overall Results From Dow | Partnership Results | Limited Partners’ Results |
| 1957 | -8.4% | 10.4% | 9.3% |
| 1957 – 58 | 26.9% | 55.6% | 44.5% |
| 1957 – 59 | 52.3% | 95.9% | 74.7% |
| 1957 – 60 | 42.9% | 140.6% | 107.2% |
| 1957 – 61 | 74.9% | 251.0% | 181.6% |
| 1957 – 62 | 61.6% | 299.8% | 215.1% |
| 1957 – 63 | 95.1% | 454.5% | 311.2% |
| Annual Compounded Rate | 10.0% | 27.7% | 22.3% |
It appears that we have completed seven fat years. With apologies to Joseph we shall attempt to ignore the biblical script. (I've never gone overboard for Noah's ideas on diversification either.)
In a more serious vein, I would like to emphasize that, in my judgment; our 17.7 margin over the Dow shown above is unattainable over any long period of time. A ten percentage point advantage would be a very satisfactory accomplishment and even a much more modest edge would produce impressive gains as will be touched upon later. This view (and it has to be guesswork -- informed or otherwise) carries with it the corollary that we must expect prolonged periods of much narrower margins over the Dow as well as at least occasional years when our record will be inferior (perhaps substantially so) to the Dow.
Much of the above sermon is reflected in "The Ground Rules" sent to everyone in November, but it can stand repetition.
Investment Companies
We regularly compare our results with the two largest open-end investment companies (mutual funds) that follow a policy of being, typically, 95 -100% invested in common stocks, and the two largest diversified closedend investment companies. These four companies, Massachusetts Investors Trust, Investors Stock Fund, Tri-Continental Corp. and Lehman Corp. manage about \$4 billion and are probably typical of most of the \$25 billion investment company industry. My opinion is that their results roughly parallel those of the vast majority or other investment advisory organizations which handle, in aggregate, vastly greater sums.
The purpose or this tabulation, which is shown below, is to illustrate that the Dow is no pushover as an index or investment achievement. The advisory talent managing just the four companies shown commands' annual fees of over \$7 million, and this represents a very small fraction of the industry. The public batting average of this highly-paid talent indicates they achieved results slightly less favorable than the Dow.
Both our portfolio and method of operation differ substantially from the investment companies in the table. However, most partners, as an alternative to their interest in the Partnership would probably have their funds invested in media producing results comparable with investment companies, and I, therefore, feel they offer a meaningful standard of performance.
YEARLY RESULTS
| Year | Mass. Inv. Trust (1) | Investors Stock (1) | Lehman (2) | Tri-Cont. (2) | Dow | Limited Partners |
| 1957 | -11.4% | -12.4% | -11.4% | -2.4% | -8.4% | 9.3% |
| 1958 | 42.7% | 47.5% | 40.8% | 33.2% | 38.5% | 32.2% |
| 1959 | 9.0% | 10.3% | 8.1% | 8.4% | 20.0% | 20.9% |
| 1960 | -1.0% | -0.6% | 2.5% | 2.8% | -6.2% | 18.6% |
| 1961 | 25.6% | 24.9% | 23.6% | 22.5% | 22.4% | 35.9% |
| 1962 | -9.8% | -13.4% | -14.4% | -10.0% | -7.6% | 11.9% |
| 1963 | 20.0% | 16.5% | 23.8% | 19.5% | 20.7% | 30.5% |
(1) Computed from changes in asset value plus any distributions to holders of record during year.
(2) From 1963 Moody's Bank & Finance Manual for 1957-62; Estimated for 1963.
COMPOUNDED
| Year | Mass. Inv. Trust | Investors Stock | Lehman | Tri-Cont. | Dow | Limited Partners |
| 1957 | -11.4% | -12.4% | -11.4% | -2.4% | -8.4% | 9.3% |
| 1957 – 58 | 26.4% | 29.2% | 24.7% | 30.0% | 26.9% | 44.5% |
| 1957 – 59 | 37.8% | 42.5% | 34.8% | 40.9% | 52.3% | 74.7% |
| 1957 – 60 | 36.4% | 41.6% | 38.2% | 44.8% | 42.9% | 107.2% |
| 1957 – 61 | 71.3% | 76.9% | 70.8% | 77.4% | 74.9% | 181.6% |
| 1957 – 62 | 54.5% | 53.2% | 46.2% | 59.7% | 61.6% | 215.1% |
| 1957 – 63 | 85.4% | 78.5% | 81.0% | 90.8% | 95.1% | 311.2% |
| Annual Compounded Rate | 9.2% | 8.6% | 8.8% | 9.7% | 10.0% | 22.3% |
The Dow, of course, is an unmanaged index, and it may seem strange to the reader to contemplate the high priests of Wall Street striving vainly to surpass or even equal it. However, this is demonstrably the case. Moreover, such a failure cannot be rationalized by the assumption that the investment companies et al are handling themselves in a more conservative manner than the Dow. As the table above indicates, and as more extensive studies bear out, the behavior of common stock portfolio managed by this group, on average, have declined in concert with the Dow. By such a test of behavior in declining markets, our own methods of operation have proven to be considerably more conservative than the common stock component of the investment company or investment advisor group. While this has been true in the past, there obviously can be no guarantees about the future.
The above may seem like rather strong medicine, but it is offered as a factual presentation and in no way as criticism. Within their institutional framework and handling the many billions of dollars involved, the results achieved are the only ones attainable. To behave unconventionally within this framework is extremely difficult. Therefore, the collective record of such investment media is necessarily tied to the record of corporate America. Their merits, except in the unusual case, do not lie in superior results or greater resistance to decline in value. Rather, I feel they earn their keep by the ease of handling, the freedom from decision making and the automatic diversification they provide, plus, perhaps most important, the insulation afforded from temptation to practice patently inferior techniques which seem to entice so many world-be investors.
The Joys of Compounding
Now to the pulse-quickening portion of our essay. Last year, in order to drive home the point on compounding, I took a pot shot at Queen Isabella and her financial advisors. You will remember they were euchred into such an obviously low-compound situation as the discovery of a new hemisphere.
Since the whole subject of compounding has such a crass ring to it, I will attempt to introduce a little class into this discussion by turning to the art world. Francis I of France paid 4,000 ecus in 1540 for Leonardo da Vinci’s Mona Lisa. On the off chance that a few of you have not kept track of the fluctuations of the ecu 4,000 converted out to about \$20,000.
If Francis had kept his feet on the ground and he (and his trustees) had been able to find a 6% after-tax investment, the estate now would be worth something over \$1,000,000,000,000,000.00. That's \$1 quadrillion or over 3,000 times the present national debt, all from 6%. I trust this will end all discussion in our household about any purchase or paintings qualifying as an investment.
However, as I pointed out last year, there are other morals to be drawn here. One is the wisdom of living a long time. The other impressive factor is the swing produced by relatively small changes in the rate of compound.
Below are shown the gains from \$100,000 compounded at various rates:
| 4% | 8% | 12% | 16% | |
| 10 Years | $48,024 | $115,892 | $210,584 | $341,143 |
| 20 Years | $119,111 | $366,094 | $864,627 | $1,846,060 |
| 30 Years | $224,337 | $906,260 | $2,895,970 | $8,484,940 |
It is obvious that a variation of merely a few percentage points has an enormous effect on the success of a compounding (investment) program. It is also obvious that this effect mushrooms as the period lengthens. If, over a meaningful period of time, Buffett Partnership can achieve an edge of even a modest number of percentage points over the major investment media, its function will be fulfilled.
Some of you may be downcast because I have not included in the above table the rate of 22.3% mentioned on page 3. This rate, of course, is before income taxes which are paid directly by you --not the Partnership. Even excluding this factor, such a calculation would only prove the absurdity of the idea of compounding at very high rates -- even with initially modest sums. My opinion is that the Dow is quite unlikely to compound for any important length of time at the rate it has during the past seven years and, as mentioned earlier, I believe our margin over the Dow cannot be maintained at its level to date. The product of these assumptions would be a materially lower average rate of compound for BPL in the future than the rate achieved to date. Injecting a minus 30% year (which is going to happen from time to time) into our tabulation of actual results to date, with, say, a corresponding minus 40% for the Dow brings both the figures on the Dow and BPL more in line with longer range possibilities. As the compounding table above suggests, such a lowered rate can still provide highly satisfactory long term investment results.
Our Method of Operation
At this point I always develop literary schizophrenia. On the one hand, I know that we have in the audience a number of partners to whom details of our business are interesting. We also have a number to whom this whole thing is Greek and who undoubtedly wish I would quit writing and get back to work.
To placate both camps, I am just going to sketch briefly our three categories at this point and those who are interested in getting their doctorate can refer to the appendix for extended treatment of examples.
Our three investment categories are not differentiated by their expected profitability over an extended period of time. We are hopeful that they will each, over a ten or fifteen year period, produce something like the ten percentage point margin over the Dow that is our goal. However, in a given year they will have violently different behavior characteristics, depending primarily on the type of year it turns out to be for the stock market generally. Briefly this is how they shape up:
“Generals” - A category of generally undervalued stocks, determined primarily by quantitative standards, but with considerable attention also paid to the qualitative factor. There is often little or nothing to indicate immediate market improvement. The issues lack glamour or market sponsorship. Their main qualification is a bargain price; that is, an overall valuation on the enterprise substantially below what careful analysis indicates its value to a private owner to be. Again let me emphasize that while the quantitative comes first and is essential, the qualitative is important. We like good management - we like a decent industry - we like a certain amount of “ferment” in a previously dormant management or stockholder group. But we demand value. The general group behaves very much in sympathy with the Dow and will turn in a big minus result during a year of substantial decline by the Dow. Contrarywise, it should be the star performer in a strongly advancing market. Over the years we expect it, of course, to achieve a satisfactory margin over the Dow.
“Workouts” - These are the securities with a timetable. They arise from corporate activity - sell-outs, mergers, reorganizations, spin-offs, etc. In this category we are not talking about rumors or "inside information" pertaining to such developments, but to publicly announced activities of this sort. We wait until we can read it in the paper. The risk pertains not primarily to general market behavior (although that is sometimes tied in to a degree), but instead to something upsetting the applecart so that the expected development does not materialize. Such killjoys could include anti-trust or other negative government action, stockholder disapproval, withholding of tax rulings, etc. The gross profits in many workouts appear quite small. A friend refers to this as getting the last nickel after the other fellow has made the first ninety-five cents. However, the predictability coupled with a short holding period produces quite decent annual rates of return. This category produces more steady absolute profits from year to year than generals do. In years of market decline, it piles up a big edge for us; during bull markets, it is a drag on performance. On a long term basis, I expect it to achieve the same sort of margin over the Dow attained by generals.
“Controls” - These are rarities, but when they occur they are likely to be of significant size. Unless we start off with the purchase of a sizable block or stock, controls develop from the general category. They result from situations where a cheap security does nothing price-wise for such an extended period of time that we are able to buy a significant percentage of the company's stock. At that point we are probably in a position to assume some degree of, or perhaps complete, control of the company's activities; whether we become active or remain relatively passive at this point depends upon our assessment of the company’s future and the management's capabilities. The general we have been buying the most aggressively in recent months possesses excellent management following policies that appear to make very good sense to us. If our continued buying puts us in a controlling position at some point in the future, we will probably remain very passive regarding the operation or this business.
We do not want to get active merely for the sake of being active. Everything else being equal I would much rather let others do the work. However, when an active role is necessary to optimize the employment of capital you can be sure we will not be standing in the wings.
Active or passive, in a control situation there should be a built-in profit. The sine qua non of this operation is an attractive purchase price. Once control is achieved, the value of our investment is determined by the value of the enterprise, not the oftentimes irrationalities of the marketplace.
Our willingness and financial ability to assume a controlling position gives us two-way stretch on many purchases in our group of generals. If the market changes its opinion for the better, the security will advance in price. If it doesn't, we will continue to acquire stock until we can look to the business itself rather than the market for vindication of our judgment.
Investment results in the control category have to be measured on the basis of at least several years. Proper buying takes time. If needed, strengthening management, re-directing the utilization of capital, perhaps effecting a satisfactory sale or merger, etc., are also all factors that make this a business to be measured in years rather than months. For this reason, in controls, we are looking for wide margins of profit-if it looks at all close, we pass.
Controls in the buying stage move largely in sympathy with the Dow. In the later stages their behavior is geared more to that of workouts.
As I have mentioned in the past, the division of our portfolio among the three categories is largely determined by the accident or availability. Therefore, in a minus year for the Dow, whether we are primarily in generals or workouts is largely a matter of luck, but it will have a great deal to do with our performance relative to the Dow. This is one or many reasons why a single year's performance is of minor importance and, good or bad, should never be taken too seriously.
If there is any trend as our assets grow, I would expect it to be toward controls which heretofore have been our smallest category. I may be wrong in this expectation - a great deal depends, of course, on the future behavior of the market on which your guess is as good as mine (I have none). At this writing, we have a majority of our capital in generals, workouts rank second, and controls are third.
Miscellaneous
We are starting off the year with net assets of \$17,454,900. Our rapid increase in assets always raises the question of whether this will result in a dilution of future performance. To date, there is more of a positive than inverse correlation between size of the Partnership and its margin over the Dow. This should not be taken seriously however. Larger sums may be an advantage at some times and a disadvantage at others. My opinion is that our present portfolio could not be improved if our assets were \$1 million or \$5 million. Our idea inventory has always seemed to be 10% ahead of our bank account. If that should change, you can count on hearing from me.
Susie and I have an investment of \$2,392,900 in the Partnership. For the first time I had to withdraw funds in addition to my monthly payments, but it was a choice of this or disappointing the Internal Revenue Service. Susie and I have a few non-marketable (less than 300 holders) securities of nominal size left over from earlier years which in aggregate are worth perhaps 1% of our partnership interest. In addition we have one nonmarketable holding of more material size of a local company purchased in 1960 which we expect to hold indefinitely. Aside from this all our eggs are in the BPL basket and they will continue to be. I can't promise results but I can promise a common destiny. In addition, that endless stream of relatives of mine consisting of my three children, mother, father, two sisters, two brothers-in-law, father-in-law, four aunts four cousins and five nieces and nephews, have interests in BPL directly or indirectly totaling \$1,247,190.
Bill Scott is also in with both feet, having an interest along with his wife or \$237,400, the large majority or their net worth. Bill has done an excellent job and on several or our more interesting situations going into 1964, he has done the majority or the contact work. I have also shoved off on him as much as possible of the administrative work so if you need anything done or have any questions, don't hesitate to ask for Bill if I'm not around.
Beth and Donna have kept an increasing work load flowing in an excellent manner. During December and January, I am sure they wish they had found employment elsewhere, but they always manage to keep a mountain of work ship-shape.
Peat, Marwick, Mitchell has done their usual excellent job of meeting a tough timetable. We have instructed them to conduct two surprise checks a year (rather than one as in past years) on our securities, cash, etc., in the future. These are relatively inexpensive, and I think make a good deal of sense in any financial organization.
Within the next week you will receive:
(1) A tax letter giving you all BPL information needed for your 1963 federal income tax return. This letter
is the only item that counts for tax purposes.
(2) An audit from Peat, Marwick, Mitchell & Co. for 1963, setting forth the operations and financial position of BPL as well as your own capital account.
(3) A letter signed by me setting forth the status of your BPL interest on 1/1/64. This is identical with the figure developed in the audit.
(4) Schedule “A” to the partnership agreement listing all partners.
Let me know if anything needs clarifying. As we grow, there is more chance of missing letters, a name skipped over, a figure transposition, etc., so speak up if it appears we might have erred. Our next letter will be about July 15th summarizing the first half.
Cordially,
Warren E. Buffett
APPENDIX
TEXAS NATIONAL PETROLEUM
This situation was a run-of-the-mill workout arising from the number one source of workouts in recent years -- the sellouts of oil and gas producing companies.
TNP was a relatively small producer with which I had been vaguely familiar for years.
Early in 1962 I heard rumors regarding a sellout to Union Oil of California. I never act on such information, but in this case it was correct and substantially more money would have been made if we had gone in at the rumor stage rather than the announced stage. However, that's somebody else's business, not mine.
In early April, 1962, the general terms of the deal were announced. TNP had three classes of securities outstanding:
(1) 6 1/2% debentures callable at 104 1/4 which would bear interest until the sale transpired and at that time would be called. There were \$6.5 million outstanding of which we purchased \$264,000 principal amount before the sale closed.
(2) About 3.7 million shares of common stock of which the officers and directors owned about 40%. The proxy statement estimated the proceeds from the liquidation would produce \$7.42 per share. We purchased 64,035 shares during the six months or so between announcement and closing.
(3) 650,000 warrants to purchase common stock at \$3.50 per share. Using the proxy statement estimate of \$7.42 for the workout on the common resulted in \$3.92 as a workout on the warrants. We were able to buy 83,200 warrants or about 13% of the entire issue in six months.
The risk of stockholder disapproval was nil. The deal was negotiated by the controlling stockholders, and the price was a good one. Any transaction such as this is subject to title searches, legal opinions, etc., but this risk could also be appraised at virtually nil. There were no anti-trust problems. This absence of legal or anti-trust problems is not always the case, by any means.
The only fly in the ointment was the obtaining of the necessary tax ruling. Union Oil was using a standard ABC production payment method of financing. The University of Southern California was the production payment holder and there was some delay because of their eleemosynary status.
This posed a new problem for the Internal Revenue Service, but we understood USC was willing to waive this status which still left them with a satisfactory profit after they borrowed all the money from a bank. While getting this ironed out created delay, it did not threaten the deal.
When we talked with the company on April 23rd and 24th, their estimate was that the closing would take place in August or September. The proxy material was mailed May 9th and stated the sale "will be consummated during the summer of 1962 and that within a few months thereafter the greater part of the proceeds will be distributed to stockholders in liquidation.” As mentioned earlier, the estimate was \$7.42 per share. Bill Scott attended the stockholders meeting in Houston on May 29th where it was stated they still expected to close on September 1st.
The following are excerpts from some of the telephone conversations we had with company officials in ensuing months:
On June 18th the secretary stated "Union has been told a favorable IRS ruling has been formulated but must be passed on by additional IRS people. Still hoping for ruling in July.”
On July 24th the president said that he expected the IRS ruling “early next week.”
On August 13th the treasurer informed us that the TNP, Union Oil, and USC people were all in Washington attempting to thrash out a ruling.
On September 18th the treasurer informed us "No news, although the IRS says the ruling could be ready by next week.”
The estimate on payout was still \$7.42.
The ruling was received in late September, and the sale closed October 31st. Our bonds were called November 13th. We converted our warrants to common stock shortly thereafter and received payments on the common of \$3.50 December 14, 1962, \$3.90 February 4, 1963, and 15 cent on April 24, 1963. We will probably get another 4 cent in a year or two. On 147,235 shares (after exercise of warrants) even 4 cent per share is meaningful.
This illustrates the usual pattern: (1) the deals take longer than originally projected; and (2) the payouts tend to average a little better than estimates. With TNP it took a couple of extra months, and we received a couple of extra percent.
The financial results of TNP were as follows:
(1) On the bonds we invested \$260,773 and had an average holding period of slightly under five months. We received 6 ½% interest on our money and realized a capital gain of \$14,446. This works out to an overall rate of return of approximately 20% per annum.
(2) On the stock and warrants we have realized capital gain of \$89,304, and we have stubs presently valued at \$2,946. From an investment or \$146,000 in April, our holdings ran to \$731,000 in October. Based on the time the money was employed, the rate or return was about 22% per annum.
In both cases, the return is computed on an all equity investment. I definitely feel some borrowed money is warranted against a portfolio of workouts, but feel it is a very dangerous practice against generals.
We are not presenting TNP as any earth-shaking triumph. We have had workouts which were much better and some which were poorer. It is typical of our bread-and-butter type of operation. We attempt to obtain all facts possible, continue to keep abreast of developments and evaluate all of this in terms of our experience. We certainly don't go into all the deals that come along -- there is considerable variation in their attractiveness. When a workout falls through, the resulting market value shrink is substantial. Therefore, you cannot afford many errors, although we fully realize we are going to have them occasionally.
DEMPSTER MILL MFG.
This situation started as a general in 1956. At that time the stock was selling at \$18 with about \$72 in book value of which \$50 per share was in current assets (Cash, receivables and inventory) less all liabilities. Dempster had earned good money in the past but was only breaking even currently.
The qualitative situation was on the negative side (a fairly tough industry and unimpressive management), but the figures were extremely attractive. Experience shows you can buy 100 situations like this and have perhaps 70 or 80 work out to reasonable profits in one to three years. Just why any particular one should do so is hard to say at the time of purchase, but the group expectancy is favorable, whether the impetus is from an improved industry situation, a takeover offer, a change in investor psychology, etc.
We continued to buy the stock in small quantities for five years. During most or this period I was a director and was becoming consistently less impressed with the earnings prospects under existing management. However, I also became more familiar with the assets and operations and my evaluation of the quantitative factors remained very favorable.
By mid-1961 we owned about 30% or Dempster (we had made several tender offers with poor results), but in August and September 1961 made, several large purchases at \$30.25 per share, which coupled with a subsequent tender offer at the same price, brought our holding to over 70%. Our purchases over the previous five years had been in the \$16-\$25 range.
On assuming control, we elevated the executive vice president to president to see what he would do unfettered by the previous policies. The results were unsatisfactory and on April 23, 1962 we hired Harry Bottle as president.
Harry was the perfect man for the job. I have recited his triumphs before and the accompanying comparative balance sheets speak louder than any words in demonstrating the re-employment of capital.
| 11/30/61 | 7/31/63 (unaudited) | |
| Cash | $166,000 | $89,000 |
| US Gov’t Securities – at cost | $289,000 | |
| Other marketable securities – at market (which exceeds cost) | $2,049,000 | |
| Total Cash and Securities | $166,000 | $2,436,000 |
| Accounts receivable (net) | $1,040,000 | $864,000 |
| Inventory | $4,203,000 | $890,000 |
| Prepaid expenses, etc. | $82,000 | $12,000 |
| Current Assets | $5,491,000 | $4,202,000 |
| Other Assets | $45,000 | $62,000 |
| Net Plant and Equipment | $1,383,000 | $862,000 |
| Total Assets | $6,919,000 | $5,126,000 |
| Notes Payable | $1,230,000 | |
| Other Liability | $1,088,000 | $274,000 |
| Total Liabilities | $2,318,000 | $274,000 |
| Net worth | ||
| 60,146 shs. 11/30/61 | ||
| 62,146 shs. 7/31/63 | $4,601,000 | $4,852,000 |
| Total liabilities and net worth | $6,919,000 | $5,126,000 |
Harry:
(1) took the inventory from over \$4 million (much of it slow moving) to under \$1 million reducing carrying costs and obsolescence risks tremendously;
(2) correspondingly freed up capital for marketable security purchases from which we gained over
\$400,000
(3) cut administration and selling expense from \$150,000 to \$75,000 per month;
(4) cut factory overhead burden from \$6 to \$4.50 per direct labor hour;
(5) closed the five branches operating unprofitably (leaving us with three good ones) and replaced them with more productive distributors;
(6) cleaned up a headache at an auxiliary factory operation at Columbus, Nebraska;
(7) eliminated jobbed lines tying up considerable money (which could be used profitably in securities) while producing no profits;
(8) adjusted prices of repair parts, thereby producing an estimated \$200,000 additional profit with virtually no loss of volume; and most important;
(9) through these and many other steps, restored the earning capacity to a level commensurate with the capital employed.
In 1963, the heavy corporate taxes we were facing (Harry surprised me by the speed with which he had earned up our tax loss carry-forward) coupled with excess liquid funds within the corporation compelled us to either in some way de-incorporate or to sell the business.
We set out to do either one or the other before the end of 1963. De-incorporating had many problems but would have, in effect, doubled earnings for our partners and also eliminated the problem of corporate capital gain tax on Dempster securities.
At virtually the last minute, after several earlier deals had fallen through at reasonably advanced stages, a sale of assets was made. Although there were a good many wrinkles to the sale, the net effect was to bring approximately book value. This, coupled with the gain we have in our portfolio of marketable securities, gives us a realization of about \$80 per share. Dempster (now named First Beatrice Corp. - we sold the name to the new Co.) is down to almost entirely cash and marketable securities now. On BPL's yearend audit, our First Beatrice holdings were valued at asset value (with securities at market) less a \$200,000 reserve for various contingencies.
I might mention that we think the buyers will do very well with Dempster. They impress us as people of ability and they have sound plans to expand the business and its profitability. We would have been quite happy to operate Dempster on an unincorporated basis, but we are also quite happy to sell it for a reasonable price. Our business is making excellent purchases -- not making extraordinary sales.
Harry works the same way I do -- he likes big carrots. He is presently a limited partner of BPL, and the next belt-tightening operation we have, he's our man.
The Dempster saga points up several morals:
(1) Our business is one requiring patience. It has little in common with a portfolio of high-flying glamour stocks and during periods of popularity for the latter, we may appear quite stodgy.
It is to our advantage to have securities do nothing price wise for months, or perhaps years, why we are buying them. This points up the need to measure our results over an adequate period of time. We
suggest three years as a minimum.
(2) We cannot talk about our current investment operations. Such an open-mouth policy could never improve our results and in some situations could seriously hurt us. For this reason, should anyone, including partners, ask us whether we are interested in any security, we must plead the “5th Amendment.”
BUFFETT PARTNERSHIP, LTD.
810 KIEWIT PLAZA
OMAHA 31, NEBRASKA
1964年1月18日
1963年的业绩
1963年是个好年景。说它好，并不是因为我们年初净资产实现了3,637,167美元、即38.7%的整体收益——虽然这个数字对我们中的实用主义者来说确实令人愉悦。真正的好，在于我们的业绩远远超过了我们的基本标尺——道琼斯工业平均指数（以下简称“道指”）。假如我们跌了20%，而道指跌了30%，这封信的开头仍然会是“1963年是个好年景”。无论某个年度我们是赚是赔，只要能长期保持对道指令人满意的领先优势，长期结果就会令人满意——无论财务上还是理念上。
为了更新记录，以下总结了道指每年的表现、合伙企业在分配给普通合伙人之前的业绩，以及BPL及前身合伙企业在所有完整年份中有限合伙人的结果：
| 年份 | 道指整体收益(1) | 合伙企业收益率(2) | 有限合伙人收益率(3) |
| 1957 | -8.4% | 10.4% | 9.3% |
| 1958 | 38.5% | 40.9% | 32.2% |
| 1959 | 20.0% | 25.9% | 20.9% |
| 1960 | -6.2% | 22.8% | 18.6% |
| 1961 | 22.4% | 45.9% | 35.9% |
| 1962 | -7.6% | 13.9% | 11.9% |
| 1963 | 20.7% | 38.7% | 30.5% |
(1) 基于道指当年价值变化加上持有道指所获股息。
(2) 1957-1961年，涵盖所有前身有限合伙企业整年运营结果（扣除所有费用后，未扣除分配给合伙人或普通合伙人的部分）。
(3) 1957-1961年，基于上一栏合伙企业结果，并根据现行合伙协议扣除分配给普通合伙人的部分。
一位有限合伙人中的幽默大师建议我再加一列，显示普通合伙人的结果——不妨说，他对道指也保持着优势。
下表显示了基于上述表格的累计或复利结果：
| 年份 | 道指整体收益 | 合伙企业收益率 | 有限合伙人收益率 |
| 1957 | -8.4% | 10.4% | 9.3% |
| 1957 – 58 | 26.9% | 55.6% | 44.5% |
| 1957 – 59 | 52.3% | 95.9% | 74.7% |
| 1957 – 60 | 42.9% | 140.6% | 107.2% |
| 1957 – 61 | 74.9% | 251.0% | 181.6% |
| 1957 – 62 | 61.6% | 299.8% | 215.1% |
| 1957 – 63 | 95.1% | 454.5% | 311.2% |
| 年复利收益率 | 10.0% | 27.7% | 22.3% |
看来我们已经过了七个丰年。在此向约瑟夫致歉（注：圣经中七个丰年与七个荒年的典故），但我们得尽量不去理会圣经的剧本。（我对诺亚的多元化理念也从未特别热衷。）
说正经的，我想强调：在我看来，我们对道指17.7个百分点的领先优势，长期是不可能维持的。十个百分点的优势就已经是非常令人满意的成就，哪怕优势更小，也能产生可观收益——这点后面会提到。这个观点（当然只能是猜测——无论是否有依据）必然意味着，我们得准备好经历长期对道指优势大幅收窄的时期，甚至偶尔有年份（或许是很糟糕的年份）我们会跑输道指。
以上说教大多已在11月寄给各位的“基本规则”中反映过，但值得再重复一遍。
投资公司
我们定期将自己的业绩与两家最大的开放式投资公司（共同基金）以及两家最大的多元化封闭式投资公司比较。这些公司遵循通常95%-100%投资于普通股的政策。这四家公司——Massachusetts Investors Trust、Investors Stock Fund、Tri-Continental Corp. 和 Lehman Corp.——管理着大约40亿美元，很可能代表了整个250亿美元投资公司行业的典型。我的看法是，它们的结果与绝大多数其他投资咨询机构大体相当，而后者管理着远为庞大的资金总额。
下面这张表的目的，是说明道指作为投资业绩指标绝非等闲之辈。仅管理这四家公司所需的投资顾问人才，每年收取的管理费就超过700万美元，而这在整个行业中所占比例极小。这些高薪人才的公开业绩记录显示，他们的结果略逊于道指。
我们的投资组合和操作方法都与表中的投资公司大不相同。不过，大多数合伙人如果不投资于合伙企业，其资金很可能投向与这些投资公司业绩相近的媒介，因此我认为它们提供了一个有意义的业绩标尺。
年度业绩
| 年份 | Mass. Inv. Trust (1) | Investors Stock (1) | Lehman (2) | Tri-Cont. (2) | 道指 | 有限合伙人 |
| 1957 | -11.4% | -12.4% | -11.4% | -2.4% | -8.4% | 9.3% |
| 1958 | 42.7% | 47.5% | 40.8% | 33.2% | 38.5% | 32.2% |
| 1959 | 9.0% | 10.3% | 8.1% | 8.4% | 20.0% | 20.9% |
| 1960 | -1.0% | -0.6% | 2.5% | 2.8% | -6.2% | 18.6% |
| 1961 | 25.6% | 24.9% | 23.6% | 22.5% | 22.4% | 35.9% |
| 1962 | -9.8% | -13.4% | -14.4% | -10.0% | -7.6% | 11.9% |
| 1963 | 20.0% | 16.5% | 23.8% | 19.5% | 20.7% | 30.5% |
(1) 根据资产价值变化加上年度内登记持有人的分配计算。
(2) 1957-1962年数据来自1963年Moody's Bank & Finance Manual；1963年为估算值。
累计
| 年份 | Mass. Inv. Trust | Investors Stock | Lehman | Tri-Cont. | 道指 | 有限合伙人 |
| 1957 | -11.4% | -12.4% | -11.4% | -2.4% | -8.4% | 9.3% |
| 1957 – 58 | 26.4% | 29.2% | 24.7% | 30.0% | 26.9% | 44.5% |
| 1957 – 59 | 37.8% | 42.5% | 34.8% | 40.9% | 52.3% | 74.7% |
| 1957 – 60 | 36.4% | 41.6% | 38.2% | 44.8% | 42.9% | 107.2% |
| 1957 – 61 | 71.3% | 76.9% | 70.8% | 77.4% | 74.9% | 181.6% |
| 1957 – 62 | 54.5% | 53.2% | 46.2% | 59.7% | 61.6% | 215.1% |
| 1957 – 63 | 85.4% | 78.5% | 81.0% | 90.8% | 95.1% | 311.2% |
| 年复利收益率 | 9.2% | 8.6% | 8.8% | 9.7% | 10.0% | 22.3% |
当然，道指是一个无人管理的指数，读者可能会觉得奇怪：华尔街的大祭司们拼命想超越甚至打平道指，却总是徒劳。但事实确实如此。而且，这种失败不能用“投资公司等机构比道指更保守”来开脱。如上表所示，以及更广泛的研究证实，这一群体管理的普通股投资组合，平均而言在下跌市场中与道指同进退。用下跌市场行为来衡量，我们自己的操作方法已被证明比投资公司或投资顾问群体的普通股部分保守得多。虽然过去如此，但未来显然无法保证。
上面的话可能听起来像猛药，但这是事实陈述，绝不是批评。在它们的制度框架内，管理着数十亿美元资金，取得的成绩已是唯一可能达到的。在这样的框架内做出非常规行为极其困难。因此，这类投资媒介的整体记录必然与美国企业界的记录挂钩。除非在特殊情况下，它们的优点并不在于业绩优异或抗跌能力更强。相反，我认为它们的价值在于操作便利、免于决策、自动分散化，以及——可能最重要的——提供了一道屏障，抵御诱惑，避免使用那些吸引了许多潜在投资者的明显低劣技巧。
复利的乐趣
现在来到我们文章中让人心跳加速的部分。去年，为了强调复利的威力，我拿伊莎贝拉女王和她的财务顾问开了个玩笑。你们还记得，他们被愚弄去搞了个显然极低复利的事情——发现一个新半球。
既然复利这个话题听起来如此粗俗，我打算引入一点艺术格调来提升讨论档次。1540年，法国国王弗朗西斯一世花4000埃居买了达·芬奇的《蒙娜丽莎》。万一你们有人没关注埃居的汇率波动，4000埃居大约相当于20,000美元。
如果弗朗西斯当时脚踏实地，他（和他的受托人）能找到一项税后收益6%的投资，那么现在的价值会超过1,000,000,000,000,000美元（注：即1 quadrillion，1000万亿）。这个数字是美国目前国债的3000多倍，而且这一切都源于6%的复利。我相信这足以终结我们家里关于购买任何“符合投资条件的”画作的讨论了。
不过，正如去年指出的，这里还能引出其他启示。一是长寿的智慧。另一个令人印象深刻的因素是复合利率的微小变化产生的巨大波动。
以下是100,000美元以不同利率复利增长的收益：
| 4% | 8% | 12% | 16% | |
| 10年 | 48,024 | 115,892 | 210,584 | 341,143 |
| 20年 | 119,111 | 366,094 | 864,627 | 1,846,060 |
| 30年 | 224,337 | 906,260 | 2,895,970 | 8,484,940 |
显然，仅仅几个百分点的差异对复利（投资）计划的成功就有巨大影响。同样明显的是，这种影响随着时间推移会像滚雪球一样放大。如果巴菲特合伙公司在足够长的时间内，能相对于主要投资媒介保持哪怕几个百分点的微弱优势，它的使命就完成了。
你们有些人可能会因为我在上表中没有列出第3页提到的22.3%利率而沮丧。这项利率当然是税前数据——所得税由你们直接支付，而非合伙企业。即使不考虑这个因素，这样的计算只会证明以非常高利率复利的荒谬性——即使初始金额很小。我的看法是，道指在未来很长一段时间内，不太可能像过去七年那样以如此之高的利率复利增长，而且如前所述，我相信我们相对于道指的优势也无法维持在迄今的水平。这些假设的乘积，将使BPL未来平均复利利率远低于迄今为止所达到的水平。如果在我们的实际结果中插入一个下跌30%的年份（这种事时不时就会发生），假设道指对应下跌40%，那么道指和BPL的数据都会更接近长期可能性。正如上面的复利表所暗示的，这样的较低利率仍然可以提供非常令人满意的长期投资结果。
我们的操作方法
到了这里，我总会有文学上的精神分裂症。一方面，我知道听众中有不少合伙人对我们业务细节感兴趣。另一方面，也有些合伙人觉得这完全是希腊文，无疑希望我别再写了，赶紧回去干活。
为了安抚两派人马，我此刻只简要勾勒一下我们的三个类别。想拿博士学位的可以参阅附录中更详细的例子。
我们的三个投资类别，并不以长期预期盈利性来区分。我们希望它们各自在十年或十五年内，能产生大约十个百分点的相对于道指的优势——这是我们的目标。但是，在特定年份，它们会有截然不同的行为特征，主要取决于那一年股市的整体类型。简单来说，它们的情况如下：
“低估类投资” ——这一类以定量标准为主、同时相当注重定性因素的一般低估股票。通常很少或没有迹象表明市场会立即好转。这些股票缺乏魅力或市场关注。它们的主要资格是价格低廉；也就是说，对企业的整体估值远低于细致分析所判断的私人所有者价值。让我再次强调，虽然定量是第一位的、不可或缺的，但定性也很重要。我们喜欢好的管理层——我们喜欢体面的行业——我们喜欢之前沉寂的管理层或股东群体出现一定程度的“发酵”。但我们要求价值。低估类投资的走势与道指高度同步，在道指大幅下跌的年份，它会录得巨大的负收益。相反，在强劲上涨的市场中，它应该是明星表现者。多年来，我们当然期望它获得对道指令人满意的优势。
“套利类投资” ——这些是带有时间表的证券。它们源于公司活动——出售、并购、重组、分拆等。在这个类别中，我们谈论的不是关于这些动态的谣言或“内幕信息”，而是公开宣布的此类活动。我们等到能在报上读到才行动。风险主要不在于整体市场行为（尽管有时也部分相关），而在于干扰了苹果车的因素，使得预期的发展未能实现。这些扫兴的事情可能包括反垄断或其他政府负面行动、股东反对、税务裁定的保留等。许多套利类投资的毛利润看起来相当小。一位朋友称之为在别人赚了头九毛五分后，去捡最后一枚镍币。然而，可预测性加上较短的持有期，能产生相当不错的年化收益率。与低估类投资相比，这类投资的年度绝对利润更稳定。在市场下跌的年份，它为我们积累巨大优势；在牛市中，它拖累业绩。长期而言，我预期它也能像低估类投资一样获得对道指同样的优势。
“控制类投资” ——这类投资很少见，但一旦出现，规模通常不小。除非我们一开始就购买大量股票，否则控制类投资从低估类中演化而来。它们源自这样的情况：一只廉价证券在价格上长期无所作为，以至于我们能买到公司相当比例的股份。那时我们可能得以对公司活动取得某种程度的、甚至完全的控制权；我们是变得积极还是保持相对被动，取决于我们对公司未来和管理层能力的评估。我们最近几个月最积极买入的那只低估类股票，拥有出色的管理层，其政策在我们看来非常合理。如果我们的持续买入未来某个时候使我们处于控股地位，我们很可能在这项业务的运营上保持非常被动的态度。
我们不想为了活跃而活跃。在其他条件相同的情况下，我宁愿让其他人来做这些工作。然而，当需要主动角色来优化资本运用时，你放心，我们不会袖手旁观。
无论主动还是被动，在控制类投资中，应该存在内在的利润。这类操作的先决条件是诱人的买入价。一旦实现控制，我们投资的价值就由企业本身的价值决定，而非市场常常非理性的波动。
我们愿意并有财务能力承担控股地位，这使我们在许多低估类投资的购买中获得双向伸展。如果市场改变看法趋于乐观，证券会涨价。如果市场不改，我们将继续购买股票，直到能指望企业本身而非市场来验证我们的判断。
控制类投资的投资结果必须以至少几年为基础来衡量。合适的买入需要时间。如果需要，加强管理、重新引导资本利用、或许实现满意的出售或合并等等，都是使得这一业务以年而非月来衡量的因素。因此，在控制类投资中，我们寻求宽幅的利润空间——如果看起来勉强，我们就放弃。
处于买入阶段的控制类投资，走势与道指大致同步。在后期阶段，其行为更接近于套利类投资。
就像我过去提到过的，我们投资组合在这三个类别之间的划分，很大程度上取决于偶然性或可获得性。因此，在道指下跌的年份，我们主要持有低估类还是套利类，很大程度上靠运气，但这会极大地影响我们相对于道指的业绩。这是一个（也是许多个）原因，说明单一年度的业绩并不重要，无论是好是坏，都不应过于当真。
如果随着资产增长存在某种趋势，我预计它会倾向于控制类投资——而这是迄今为止我们最小的类别。这个预测可能是错的——当然，很大程度上取决于市场的未来行为，你们的猜测和我的一样准（我没有任何猜测）。在撰写本文时，我们大部分资本在低估类投资中，套利类其次，控制类第三。
杂项
我们年初的净资产为17,454,900美元。资产的快速增长总是引发一个问题：这是否会稀释未来的业绩？迄今为止，合伙企业的规模与其相对于道指的优势之间，更多是一种正相关而非负相关。然而，这不应被认真对待。较大金额在某些时候可能是优势，在其他时候可能是劣势。我的看法是，如果我们资产只有100万美元或500万美元，我们目前的投资组合也无法改善。我们的想法库存似乎总是比银行账户多出10%。如果这种情况发生变化，你们一定会收到我的通知。
苏茜和我在合伙企业的投资为2,392,900美元。这是我第一次除了每月付款外提取资金，但要么这样，要么就得让国税局失望了。苏茜和我拥有少量早年遗留下来的非上市（持有者不足300人）证券，规模不大，合计价值大约相当于我们合伙企业权益的1%。此外，我们还持有一项规模更大的非上市资产，是1960年买入的一家本地公司，我们打算无限期持有。除此之外，我们所有的鸡蛋都在BPL的篮子里，并且将继续如此。我不能承诺结果，但我能承诺共同的命运。此外，我那源源不断的亲戚——包括我的三个孩子、母亲、父亲、两个姐妹、两个姐夫、岳父、四个姑妈、四个表亲、五个侄甥——直接或间接在BPL拥有总计1,247,190美元的权益。
Bill Scott（比尔·斯科特）也全身投入，他和妻子拥有237,400美元的权益，占他们净资产的大部分。Bill干得非常出色，在进入1964年的几个更有意思的标的中，他承担了大部分联络工作。我还尽可能把行政工作推给他，所以如果你们需要办什么事或有什么问题，我不在的时候尽管找Bill。
Beth（贝丝）和Donna（唐娜）一直出色地处理着越来越重的工作量。在十二月和一月，我相信她们一定希望当初找了别的工作，但她们总能将堆积如山的工作打理得井井有条。
Peat, Marwick, Mitchell & Co.（毕马威）像往常一样出色地完成了紧张的时间表。我们已指示他们未来每年对我们的证券、现金等做两次突击检查（而非过去的一次）。这些检查成本相对较低，而且我认为对任何金融组织来说都很有意义。
一周内你们将收到：
(1) 一封税务函，提供您1963年联邦所得税申报所需的所有BPL信息。该函是唯一用于税务目的的依据。
(2) 一份毕马威会计师事务所出具的1963年审计报告，说明BPL的经营和财务状况以及您个人的资本账户。
(3) 一封由我签署的信函，说明您在1964年1月1日的BPL权益状况。该数字与审计报告中的数字一致。
(4) 合伙协议附表“A”，列出所有合伙人。
如有任何需要澄清的地方，请告诉我。随着我们不断壮大，漏掉信件、跳过名字、数字错位等可能性增加，所以如果我们可能犯了错，请直言。我们的下一封信大约在7月15日，总结上半年的情况。
谨致问候，
Warren E. Buffett（沃伦·E·巴菲特）
附录
德克萨斯国家石油公司（TEXAS NATIONAL PETROLEUM）
这一情况是近年套利类的主要来源——石油天然气生产公司被出售——中一个常规的套利类标的。
TNP是一家规模相对较小的生产商，我多年来对它隐约有些了解。
1962年初，我听到传闻说它要被卖给加利福尼亚联合石油公司（Union Oil of California）。我从不对这种信息采取行动，但这次传闻是对的，而且如果我们在传闻阶段而非公告阶段就介入，会赚多得多。不过那是别人的事，不是我的。
1962年4月初，交易的大致条款公布。TNP有三类流通证券：
(1) 利率6.5%、可于104.25赎回的债券，在出售完成前一直计息，届时将被赎回。流通在外650万美元，我们在交易结束前购买了其中264,000美元本金。
(2) 约370万股普通股，其中高管和董事持有约40%。委托书估计清算收益约为每股7.42美元。我们在公告到交割之间大约六个月内购买了64,035股。
(3) 650,000份认股权证，可按每股3.50美元购买普通股。根据委托书对普通股工作的估计7.42美元，认股权证的工作价值约为3.92美元。我们在六个月内买入了83,200份认股权证，约占发行总量的13%。
股东否决的风险几乎为零。交易由控股股东谈判，价格很不错。这类交易需接受所有权调查、法律意见等，但这一风险也几乎可以忽略。没有反垄断问题。没有法律或反垄断问题并非总是如此，绝不是。
唯一的麻烦是获取必要的税务裁定。联合石油使用标准的ABC生产付款融资方式。南加州大学是生产付款持有者，由于它的慈善地位，出现了一些延迟。
这对国税局提出了新问题，但我们了解到USC愿意放弃这一地位，这使它们在从银行借入所有资金后仍能获得满意利润。虽然解决这个问题造成了延迟，但并未威胁到交易。
我们在4月23日和24日与公司交谈时，他们估计交割将在8月或9月进行。委托书于5月9日寄出，称出售“将于1962年夏季完成，此后几个月内大部分收益将分配给清算中的股东”。如前所述，估计为每股7.42美元。Bill Scott参加了5月29日在休斯顿召开的股东大会，会上表示他们仍预计9月1日交割。
以下是随后几个月我们与公司官员部分电话交谈的摘录：
6月18日，秘书说：“联合石油已被告知，有利的国税局裁定已经拟定，但须经过额外的国税局人员批准。仍希望在7月获得裁定。”
7月24日，总裁说他预计国税局裁定“下周初”下达。
8月13日，财务主管通知我们，TNP、联合石油和USC的人员都在华盛顿试图敲定一项裁定。
9月18日，财务主管通知我们：“没有消息，尽管国税局表示裁定可能下周准备好。”
对支付的估计仍是7.42美元。
裁定于9月底收到，交易于10月31日交割。我们的债券于11月13日被赎回。我们随后不久将认股权证转换为普通股，并于1962年12月14日收到普通股付款每股3.50美元，1963年2月4日每股3.90美元，1963年4月24日每股0.15美元。我们可能在一两年内再收到约4美分。对于147,235股（行使认股权证后），即使每股4美分也很有意义。
这展示了通常的模式：(1) 交易耗时比原先预计的长；(2) 支付金额往往略高于估计。就TNP而言，多花了几个月，我们多得到了几个百分点。
TNP的财务结果如下：
(1) 债券方面，我们投资了260,773美元，平均持有期略低于五个月。我们获得了6.5%的利息，并实现了14,446美元的资本利得。这相当于年化总回报率大约20%。
(2) 股票和认股权证方面，我们实现了89,304美元的资本利得，并且我们还有目前价值2,946美元的残值。从4月份投资146,000美元起，到10月份我们的持仓增至731,000美元。根据资金占用时间计算，年化回报率约为22%。
在这两种情况下，回报率都是基于全部股权投资计算的。我确实认为，对于套利类投资组合，利用一些借入资金是合理的，但认为对低估类投资这样做非常危险。
我们并非将TNP作为什么惊天动地的胜利来呈现。我们有过比这好得多的套利案例，也有过更差的。这是我们日常操作的典型模式。我们试图获取所有可能的事实，不断跟进事态发展，并根据经验评估这一切。我们当然不会参与所有找上门来的交易——它们的吸引力差异很大。当一项套利失败时，由此导致的市场价值缩水是巨大的。因此，你不能犯太多错误，尽管我们完全意识到偶尔还是会犯错。
邓普斯特制造厂（DEMPSTER MILL MFG.）
这一情况始于1956年的一只低估类股票。当时该股售价18美元，账面价值约72美元，其中每股50美元是流动资产（现金、应收款和存货）减去所有负债。邓普斯特过去业绩不错，但当时仅能勉强盈亏平衡。
定性方面是负面的（行业相当艰难，管理层不令人印象深刻），但数字极具吸引力。经验表明，你可以买入100个这样的标的，大约七八十个会在1到3年内实现合理利润。至于为什么某个特定的会如此，买入时很难说，但群体期望是有利的——无论动力来自行业状况改善、收购要约还是投资者心理变化等。
我们在五年内继续小批量购买该股。在此期间的大部分时间里，我担任董事，对现有管理层下的盈利前景越来越不看好。然而，我也对资产和运营更加熟悉，我对定量因素的评估依然非常有利。
到1961年年中，我们拥有邓普斯特约30%的股份（我们曾几次发出要约收购，但结果不佳），但在1961年8月和9月，我们以每股30.25美元的价格进行了几次大规模买入，加上随后以同样价格进行的要约收购，将我们的持股比例提高到70%以上。此前五年的买入价格在16至25美元之间。
在取得控制权后，我们将执行副总裁提升为总裁，看看他在不受前任政策束缚下能有何作为。结果不令人满意，1962年4月23日，我们聘请Harry Bottle（哈里·博特尔）担任总裁。
Harry是这份工作的完美人选。我之前讲述过他的功绩，随附的比较资产负债表比任何语言都更能说明资本的重新运用。
| 1961年11月30日 | 1963年7月31日 (未经审计) | |
| 现金 | $166,000 | $89,000 |
| 美国政府证券——成本价 | $289,000 | |
| 其他有价证券——市价（超过成本） | $2,049,000 | |
| 现金及证券合计 | $166,000 | $2,436,000 |
| 应收账款（净额） | $1,040,000 | $864,000 |
| 存货 | $4,203,000 | $890,000 |
| 预付费用等 | $82,000 | $12,000 |
| 流动资产 | $5,491,000 | $4,202,000 |
| 其他资产 | $45,000 | $62,000 |
| 厂房设备净额 | $1,383,000 | $862,000 |
| 资产总计 | $6,919,000 | $5,126,000 |
| 应付票据 | $1,230,000 | |
| 其他负债 | $1,088,000 | $274,000 |
| 负债总计 | $2,318,000 | $274,000 |
| 净资产 | ||
| 60,146股 1961.11.30 | ||
| 62,146股 1963.7.31 | $4,601,000 | $4,852,000 |
| 负债和净资产总计 | $6,919,000 | $5,126,000 |
Harry：
(1) 将存货从400多万美元（其中很多是缓慢周转的）降至不到100万美元，极大降低了持有成本和过时风险；
(2) 相应地释放了资本用于购买有价证券，我们从中获得了超过400,000美元的收益；
(3) 将管理和销售费用从每月150,000美元削减至75,000美元；
(4) 将工厂间接费用负担从每直接人工小时6美元降至4.50美元；
(5) 关闭了五个亏损运营的分支机构（留下三个好的），并用更高效率的分销商取而代之；
(6) 清理了内布拉斯加州哥伦布市一个辅助工厂运营中的麻烦；
(7) 取消了那些占用大量资金（本可有效投资于证券）却无利润的转包生产线；
(8) 调整了维修零件的价格，由此估计带来200,000美元的额外利润，而销量几乎未受影响；
最要紧的是，
(9) 通过这些以及许多其他措施，将盈利能力恢复到与所用资本相称的水平。
1963年，我们面临的沉重公司税（Harry迅速用完了我们的税收亏损结转，让我吃了一惊），加上公司内部过剩的流动资金，迫使我们要么以某种方式解除公司法人身份，要么出售业务。
我们着手在1963年底之前做这两件事中的一件。解除公司身份有很多问题，但实际上会让我们的合伙人收益翻倍，并消除邓普斯特证券上公司资本利得税的问题。
几乎在最后一刻，在几项早期交易已在相当后期阶段告吹之后，我们完成了资产出售。虽然出售有许多细节，但净效果是获得大约账面价值。加上我们有价证券投资组合中的收益，我们实现了每股约80美元的收益。邓普斯特（现在更名为First Beatrice Corp.——我们将原名称卖给了新公司）现在几乎只剩下现金和有价证券。在BPL的年末审计中，我们的First Beatrice持股按资产价值（证券按市价）减去200,000美元的各种意外情况准备金估值。
我或许可以提一下，我们认为买家会在邓普斯特上做得很好。他们给我们留下有能力的印象，并且有稳健的计划来扩大业务和提高盈利能力。我们本来会很乐意以非法人形式运营邓普斯特，但也很乐意以合理价格出售它。我们的业务是做出色买入，而非做出色卖出。
Harry的工作方式和我一样——他喜欢大胡萝卜。他目前是BPL的有限合伙人，下次我们再有需要勒紧腰带的时候，他就是我们的人。
邓普斯特的传奇故事指出了几点教训：
(1) 我们的业务需要耐心。它与一篮子高飞的热门股票很少共同点，在后者流行期间，我们可能显得相当乏味。
对我们有利的是，证券在价格上几个月甚至几年都无所作为，而我们在买入期间。这凸显了需要在一个足够长的时间段内衡量我们的结果。我们建议至少三年。
(2) 我们不能谈论当前的投资操作。这种大嘴巴政策永远不会改善我们的业绩，在某些情况下还可能严重伤害我们。因此，如果有人（包括合伙人）问我们是否对某只证券感兴趣，我们必须援引“第五修正案”。