BUFFETT PARTNERSHIP, LTD.
810 KIEWIT PLAZA
OMAHA 31, NEBRASKA
January 18, 1965
Our Performance in 1964
Although we had an overall gain of \$4,846,312.37 in 1964, it was not one of our better years as judged by our fundamental yardstick, the Dow-Jones Industrial Average (hereinafter called the "Dow"). The overall result for BPL was plus 27.8% compared to an overall plus 18.7% for the Dow. The overall result for limited partners was plus 22.3%. Both the advantage of 9.1 percentage points on a partnership basis and 3.6 points by the limited partners were the poorest since 1959, which was a year of roughly comparable gains for the Dow.
Nevertheless, I am not depressed. It was a strong year for the general market, and it is always tougher for us to outshine the Dow in such a year. We are certain to have years when the Dow gives us a drubbing and, in some respects, I feel rather fortunate that 1964 wasn't the year. Because of the problems that galloping markets pose for us, a Dow repeat in 1965 of 1964 results would make it most difficult for us to match its performance, let alone surpass it by a decent margin.
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 partner's results:
| 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 | 20.6% | 38.7% | 30.5% |
| 1964 | 18.7% | 27.8% | 22.3% |
(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. The table includes all complete years of partnership activity.
(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, but before monthly withdrawals by limited partners.
On a cumulative or compounded basis, the results are:
| 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% | 140.9% | 107.2% |
| 1957 – 61 | 74.9% | 251.0% | 181.6% |
| 1957 – 62 | 61.6% | 299.8% | 215.1% |
| 1957 – 63 | 94.9% | 454.5% | 311.2% |
| 1957 – 64 | 131.3% | 608.7% | 402.9% |
| Annual Compounded Rate | 11.1% | 27.7% | 22.3% |
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 stock, and the two largest diversified closedend investment companies. These four companies, Massachusetts Investors Trust, Investors Stock Fund, Tri-Continental Corporation, and Lehman Corporation, manage about \$4.5 billion, are owned by about 550,000 shareholders, and are probably typical of most of the \$30 billion investment company industry. My opinion is that their results roughly parallel those of the overwhelming majority of other investment advisory organizations which handle, in aggregate, vastly greater sums.
The purpose of this tabulation, which is shown below, is to illustrate that the Dow is no pushover as an index of investment achievement. The advisory talent managing just the four companies shown commands annual fees of over \$8 million and this represents a very small fraction of the professional investment management industry. The public batting average of this highly-paid and widely respected talent indicates performance a shade below that of the Dow, an unmanaged index.
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% | 23.7% | 18.3% | 20.6% | 30.5% |
| 1964 | 15.9% | 14.3% | 13.6% | 12.6% | 18.7% | 22.3% |
(1) Computed from changes in asset value plus any distributions to holders of record during year.
(2) From 1964 Moody's Bank & Finance Manual for 1957-63. Estimated for 1964.
COMPOUNDED
| 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% |
| 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% | 80.8% | 88.9% | 94.9% | 311.2% |
| 1957 – 64 | 114.9% | 104.0% | 105.4% | 112.7% | 131.3% | 402.9% |
| Annual | 10.0% | 9.3% | 9.4% | 9.9% | 11.1% | 22.3% |
| Compounded Rate |
The repetition of these tables has caused partners to ask: "Why in the world does this happen to very intelligent managements working with (1) bright, energetic staff people, (2) virtually unlimited resources, (3) the most extensive business contacts, and (4) literally centuries of aggregate investment experience?" (The latter qualification brings to mind the fellow who applied for a job and stated he had twenty years of experience - which was corrected by the former employer to read “one year's experience -twenty times.”)
This question is of enormous importance, and you would expect it to be the subject of considerable study by investment managers and substantial investors. After all, each percentage point on \$30 billion is \$300 million per year. Curiously enough, there is practically nothing in the literature of Wall Street attracting this problem, and discussion of it is virtually absent at security analyst society meetings, conventions, seminars, etc. My opinion is that the first job of any investment management organization is to analyze its own techniques and results before pronouncing judgment on the managerial abilities and performance of the major corporate entities of the United States.
In the great majority of cases the lack of performance exceeding or even matching an unmanaged index in no way reflects lack of either intellectual capacity or integrity. I think it is much more the product of: (1) group decisions - my perhaps jaundiced view is that it is close to impossible for outstanding investment management to come from a group of any size with all parties really participating in decisions; (2) a desire to conform to the policies and (to an extent) the portfolios of other large well-regarded organizations; (3) an institutional framework whereby average is "safe" and the personal rewards for independent action are in no way commensurate with the general risk attached to such action; (4) an adherence to certain diversification practices which are irrational; and finally and importantly, (5) inertia.
Perhaps the above comments are unjust. Perhaps even our statistical comparisons are unjust. Both our portfolio and method of operation differ substantially from the investment companies in the table. However, I believe both our partners and their stockholders feel their managements are seeking the same goal - the maximum longterm average return on capital obtainable with the minimum risk of permanent loss consistent with a program of continuous investment in equities. Since we should have common goals, and most partners, as an alternative to their interest in BPL, would probably have their funds invested in media producing results comparable with these investment companies, I feel their performance record is meaningful in judging our own results.
There is no question that an important service is provided to investors by investment companies, investment advisors, trust departments, etc. This service revolves around the attainment of adequate diversification, the preservation of a long-term outlook, the ease of handling investment decisions and mechanics, and most importantly, the avoidance of the patently inferior investment techniques which seem to entice some individuals. All but a few of the organizations do not specifically promise to deliver superior investment performance although it is perhaps not unreasonable for the public to draw such an inference from their advertised emphasis on professional management.
One thing I pledge to you as partners - just as I consider the previously stated performance comparison to be meaningful now, so will I in future years, no, matter what tale unfolds. Correspondingly, I ask that you, if you do not feel such a standard to be relevant, register such disagreement now and suggest other standards which can be applied prospectively rather than retrospectively.
One additional thought - I have not included a column in my table for the most widely-used investment advisor in the world - Bell management. People who watch their weight, golf scores, and fuel bills seem to shun quantitative evaluation of their investment management skills although it involves the most important client in the world - themselves. While it may be of academic interest to evaluate the management accomplishments of Massachusetts Investors Trust or Lehman Corporation, it is of enormous dollars-and-cents importance to evaluate objectively the accomplishments of the fellow who is actually handling your money - even if it’s you.
The Question of Conservatism
In looking at the table of investment company performance, the question might be asked: “Yes, but aren't those companies run more conservatively than the Partnership?" If you asked that question of the investment company managements, they, in absolute honesty, would say they were more conservative. If you asked the first hundred security analysts you met, I am sure that a very large majority of them also would answer for the investment companies. I would disagree. I have over 90% of my net worth in BPL, and most of my family have percentages in that area, but of course, that only demonstrates the sincerity of my view - not the validity of it.
It is unquestionably true that the investment companies have their money more conventionally invested than we do. To many people conventionality is indistinguishable from conservatism. In my view, this represents erroneous thinking. Neither a conventional nor an unconventional approach, per se, is conservative.
Truly conservative actions arise from intelligent hypotheses, correct facts and sound reasoning. These qualities may lead to conventional acts, but there have been many times when they have led to unorthodoxy. In some corner of the world they are probably still holding regular meetings of the Flat Earth Society.
We derive no comfort because important people, vocal people, or great numbers of people agree with us. Nor do we derive comfort if they don't. A public opinion poll is no substitute for thought. When we really sit back with a smile on our face is when we run into a situation we can understand, where the facts are ascertainable and clear, and the course of action obvious. In that case - whether other conventional or unconventional - whether others agree or disagree - we feel - we are progressing in a conservative manner.
The above may seem highly subjective. It is. You should prefer an objective approach to the question. I do. My suggestion as to one rational way to evaluate the conservativeness of past policies is to study performance in declining markets. We have only three years of declining markets in our table and unfortunately (for purposes of this test only) they were all moderate declines. In all three of these years we achieved appreciably better investment results than any of the more conventional portfolios.
Specifically, if those three years had occurred in sequence, the cumulative results would have been:
| Tri-Continental Corp. | -9.7% |
| Dow | -20.6% |
| Mass. Investors Trust | -20.9% |
| Lehman Corp. | -22.3% |
| Investors Stock Fund | -24.6% |
| Limited Partners | +45.0% |
We don’t think this comparison is all important, but we do think it has some relevance. We certainly think it makes more sense than saying “We own (regardless of price) A.T. &T., General Electric, IBM and General Motors and are therefore conservative.” In any event, evaluation of the conservatism of any investment program or management (including self-management) should be based upon rational objective standards, and I suggest performance in declining markets to be at least one meaningful test.
The Joys of Compounding
Readers of our early annual letters registered discontent at a mere recital of contemporary investment experience, but instead hungered for the intellectual stimulation that only could be provided by a depth study of investment strategy spanning the centuries. Hence, this section.
Our last two excursions into the mythology of financial expertise have revealed that purportedly shrewd investments by Isabella (backing the voyage of Columbus) and Francis I (original purchase of Mona Lisa) bordered on fiscal lunacy. Apologists for these parties have presented an array of sentimental trivia. Through it all, our compounding tables have not been dented by attack.
Nevertheless, one criticism has stung a bit. The charge has been made that this column has acquired a negative tone with only the financial incompetents of history receiving comment. We have been challenged to record on these pages a story of financial perspicacity which will be a bench mark of brilliance down through the ages.
One story stands out. This, of course, is the saga of trading acumen etched into history by the Manhattan Indians when they unloaded their island to that notorious spendthrift, Peter Minuit in 1626. My understanding is that they received \$24 net. For this, Minuit received 22.3 square miles which works out to about 621,688,320 square feet. While on the basis of comparable sales, it is difficult to arrive at a precise appraisal, a \$20 per square foot estimate seems reasonable giving a current land value for the island of \$12,433,766,400 (\$12 1/2 billion). To the novice, perhaps this sounds like a decent deal. However, the Indians have only had to achieve a 6 1/2% return (The tribal mutual fund representative would have promised them this.) to obtain the last laugh on Minuit. At 6 1/2%, \$24 becomes \$42,105,772,800 (\$42 billion) in 338 years, and if they just managed to squeeze out an extra half point to get to 7%, the present value becomes \$205 billion.
So much for that.
Some of you may view your investment policies on a shorter term basis. For your convenience, we include our usual table indicating the gains from compounding \$100,000 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 |
This table indicates the financial advantages of:
(1) A long life (in the erudite vocabulary of the financial sophisticate this is referred to as the Methusalah Technique)
(2) A high compound rate
(3) A combination of both (especially recommended by this author)
To be observed are the enormous benefits produced by relatively small gains in the annual earnings rate. This explains our attitude which while hopeful of achieving a striking margin of superiority over average investment results, nevertheless, regards every percentage point of investment return above average as having real meaning.
Our Goal
You will note that there are no columns in the preceding table for the 27.7% average of the Partnership during its eight-year lifespan or the 22.3% average of the limited partners. Such figures are nonsensical for the long term for several reasons: (Don't worry about me "holding back" to substantiate this prophecy.)
(1) Any significant sums compounded at such rates take on national debt proportions at alarming speed.
(2) During our eight-year history a general revaluation of securities has produced average annual rates of overall gain from the whole common stock field which I believe unattainable in future decades. Over a span of 20 or 30 years, I would expect something more like 6% - 7% overall annual gain from the Dow instead of the 11.1% during our brief history. This factor alone would tend to knock 4 points or so off of our annual compounding rate. It would only take a minus 20.5% year in 1965 for the Dow to bring it down to a 7% average figure for the nine years. Such years (or worse) should definitely be expected from time to time by those holding equity investments. If a 20% or 30% drop in the market value of your equity holdings (such as BPL) is going to produce emotional or financial distress, you should simply avoid common stock type investments. In the words of the poet - Harry Truman – “If you can’t stand the heat, stay out of the kitchen. It is preferable, of course, to consider the problem before you enter the “kitchen.”
(3) We do not consider it possible on an extended basis to maintain the 16.6 percentage point advantage over the Dow of the Partnership or the 11.2 percentage point edge enjoyed by the limited partners. We have had eight consecutive years in which our pool of money has out-performed the Dow, although the profit allocation arrangement left the limited partners short of Dow results in one of those years. We are certain to have years (note the plural) when the Partnership results fall short of the Dow despite considerable gnashing of teeth by the general partner (I hope not too much by the limited partners). When that happens our average margin of superiority will drop sharply. I might say that I also think we will continue to have some years of very decent margins in our favor. However, to date we have benefited by the fact that we have not had a really mediocre (or worse) year included in our average, and this obviously cannot be expected to be a permanent experience.
So what can we expect to achieve? Of course, anything I might say is largely guesswork, and my own investment philosophy has developed around the theory that prophecy reveals far more of the frailties of the prophet than it reveals of the future.
Nevertheless, you, as partners, are entitled to know my expectations, tenuous as they may be. I am hopeful that our longer term experience will unfold along the following basis:
(1) An overall gain from the Dow (including dividends, of course) averaging in the area of 7% per annum, exhibiting customarily wide amplitudes in achieving this average -- say, on the order or minus 40% to plus 50% at the extremes with the majority of years in the minus 10% to plus 20% range;
(2) An average advantage of ten percentage points per annum for BPL before allocation to the general partner - again with large amplitudes in the margin from perhaps 10 percentage points worse than the Dow in a bad year to 25 percentage points better when everything clicks; and
(3) The product of these two assumptions gives an average of 17% to BPL or about 14% to limited partners. This figure would vary enormously from year to year; the final amplitudes, of course, depending, on the interplay of the extremes hypothesized in (1) and (2).
I would like to emphasize that the above is conjecture, perhaps heavily influenced by self-interest, ego, etc. Anyone with a sense of financial history knows this sort of guesswork is subject to enormous error. It might better be left out of this letter, but it is a question frequently and legitimately asked by partners. Long-range expectable return is the primary consideration of all of us belonging to BPL, and it is reasonable that I should be put on record, foolish as that may later make me appear. My rather puritanical view is that any investment manager, whether operating as broker, investment counselor, trust department, Investment Company, etc., should be willing to state unequivocally what he is going to attempt to accomplish and how he proposes to measure the extent to which he gets the job done.
Our Method of Operation
In past annual letters I have always utilized three categories to describe investment operations we conduct. I now feel that a four-category division is more appropriate. Partially, the addition of a new section - "Generals Relatively Undervalued" - reflects my further consideration of essential differences that have always existed to a small extent with our "Generals" group. Partially, it reflects the growing importance of what once was a very small sub-category but is now a much more significant part of our total portfolio. This increasing importance has been accompanied by excellent results to date justifying significant time and effort devoted to finding additional opportunities in this area. Finally, it partially reflects the development and implementation of a new and somewhat unique investment technique designed to improve the expectancy and consistency of operations in this category. Therefore, our four present categories are:
- “Generals -Private Owner Basis” - a category of generally undervalued stocks, determined 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 of 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.
Many times in this category we have the desirable "two strings to our bow" situation where we should either achieve appreciation of market prices from external factors or from the acquisition of a controlling position in a business at a bargain price. While the former happens in the overwhelming majority of cases, the latter represents an insurance policy most investment operations don't have. We have continued to enlarge the positions in the three companies described in our 1964 midyear report where we are the largest stockholder. All three companies are increasing their fundamental value at a very satisfactory rate, and we are completely passive in two situations and active only on a very minor scale in the third. It is unlikely that we will ever take a really active part in policy-making in any of these three companies, but we stand ready if needed.
- "Generals -Relatively Undervalued" - this category consists of securities selling at prices relatively cheap compared to securities of the same general quality. We demand substantial discrepancies from current valuation standards, but (usually because of large size) do not feel value to a private owner to be a meaningful concept. It is important in this category, of course, that apples be compared to apples - and not to oranges, and we work hard at achieving that end. In the great majority of cases we simply do not know enough about the industry or company to come to sensible judgments -in that situation we pass.
As mentioned earlier, this new category has been growing and has produced very satisfactory results. We have recently begun to implement a technique, which gives promise of very substantially reducing the risk from an overall change in valuation standards; e.g. I we buy something at 12 times earnings when comparable or poorer quality companies sell at 20 times earnings, but then a major revaluation takes place so the latter only sell at 10 times.
This risk has always bothered us enormously because of the helpless position in which we could be left compared to the "Generals -Private Owner" or "Workouts" types. With this risk diminished, we think this category has a promising future.
-
"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. It's a little like looking for parking meters with some time left on them. However, the predictability coupled with a short holding period produces quite decent average annual rates of return after allowance for the occasional substantial loss. This category produces more steady absolute profits from year to year than generals do. In years of market decline it should usually pile up a big edge for us; during bull markets it will probably be a drag on performance. On a long-term basis, I expect the workouts 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 of stock, controls develop from the general - private owner category. They result from situations where a cheap security does nothing pricewise 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 a 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 managements capabilities.
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 market place.
Any of the three situations where we are now the largest stockholders mentioned under Generals - Private Owner could, by virtue of the two-way stretch they possess, turn into controls. That would suit us fine, but it also suits us if they advance in the market to a price more in line with intrinsic value enabling us to sell them, thereby completing a successful generals - private owner operation.
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, redirecting 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 appears at all close, we quitclaim.
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.
You might be interested to know that the buyers of our former control situation, Dempster Mill Manufacturing, seem to be doing very well with it. This fulfills our expectation and is a source of satisfaction. An investment operation that depends on the ultimate buyer making a bum deal (in Wall Street they call this the "Bigger Fool Theory") is tenuous indeed. How much more satisfactory it is to buy at really bargain prices so that only an average disposition brings pleasant results.
As I have mentioned in the past, the division of our portfolio among categories is largely determined by the accident of availability. Therefore, in any given year the mix between generals, workouts, or controls is largely a matter of chance, and this fickle factor will have a great deal to do with our performance relative to the Dow. This is one of many reasons why single year's performance is of minor importance and good or bad, should never be taken too seriously.
To give an example of just how important the accident of division between these categories is, let me cite the example of the past three years. Using an entirely different method of calculation than that used to measure the performance of BPL in entirety, whereby the average monthly investment at market value by category is utilized, borrowed money and office operating expenses excluded, etc., (this gives the most accurate basis for intergroup comparisons but does not reflect overall BPL results) the generals (both present categories combined), workouts, and the Dow, shape up as follows:
| Year | Generals | Workouts | Dow |
| 1962 | -1.0% | 14.6% | -8.6% |
| 1963 | 20.5% | 30.6% | 18.4% |
| 1964 | 27.8% | 10.3% | 16.7% |
Obviously the workouts (along with controls) saved the day in 1962, and if we had been light in this category that year, our final result would have been much poorer, although still quite respectable considering market conditions during the year. We could just as well have had a much smaller percentage of our portfolio in workouts that year; availability decided it, not any notion on my part as to what the market was going to do. Therefore, it is important to realize that in 1962 we were just plain lucky regarding mix of categories.
In 1963 we had one sensational workout which greatly influenced results, and generals gave a good account of themselves, resulting in a banner year. If workouts had been normal, (say, more like 1962) we would have looked much poorer compared to the Dow. Here it wasn't our mix that did much for us, but rather excellent situations.
Finally, in 1964 workouts were a big drag on performance. This would be normal in any event during a big plus year for the Dow such as 1964, but they were even a greater drag than expected because of mediocre experience. In retrospect it would have been pleasant to have been entirely in generals, but we don’t play the game in retrospect.
I hope the preceding table drives home the point that results in a given year are subject to many variables - some regarding which we have little control or insight. We consider all categories to be good businesses and we are very happy we have several to rely on rather than just one. It makes for more discrimination within each category and reduces the chance we will be put completely out of operation by the elimination of opportunities in a single category.
Taxes
We have had a chorus of groans this year regarding partners' tax liabilities. Of course, we also might have had a few if the tax sheet had gone out blank.
More investment sins are probably committed by otherwise quite intelligent people because of "tax considerations" than from any other cause. One of my friends - a noted West Coast philosopher maintains that a majority of life's errors are caused by forgetting what one is really trying to do. This is certainly the case when an emotionally supercharged element like taxes enters the picture (I have another friend -a noted East Coast philosopher who says it isn't the lack of representation he minds -it's the taxation).
Let's get back to the West Coast. What is one really trying to do in the investment world? Not pay the least taxes, although that may be a factor to be considered in achieving the end. Means and end should not be confused, however, and the end is to come away with the largest after-tax rate of compound. Quite obviously if two courses of action promise equal rates of pre-tax compound and one involves incurring taxes and the other doesn't the latter course is superior. However, we find this is rarely the case.
It is extremely improbable that 20 stocks selected from, say, 3000 choices are going to prove to be the optimum portfolio both now and a year from now at the entirely different prices (both for the selections and the alternatives) prevailing at that later date. If our objective is to produce the maximum after-tax compound rate, we simply have to own the most attractive securities obtainable at current prices, And, with 3,000 rather rapidly shifting variables, this must mean change (hopefully “tax-generating” change).
It is obvious that the performance of a stock last year or last month is no reason, per se, to either own it or to not own it now. It is obvious that an inability to "get even" in a security that has declined is of no importance. It is obvious that the inner warm glow that results from having held a winner last year is of no importance in making a decision as to whether it belongs in an optimum portfolio this year.
If gains are involved, changing portfolios involves paying taxes. Except in very unusual cases (I will readily admit there are some cases), the amount of the tax is of minor importance if the difference in expectable performance is significant. I have never been able to understand why the tax comes as such a body blow to many people since the rate on long-term capital gain is lower than on most lines of endeavor (tax policy indicates digging ditches is regarded as socially less desirable than shuffling stock certificates).
I have a large percentage of pragmatists in the audience so I had better get off that idealistic kick. There are only three ways to avoid ultimately paying the tax: (1) die with the asset - and that's a little too ultimate for me even the zealots would have to view this "cure" with mixed emotions; (2) give the asset away - you certainly don't pay any taxes this way, but of course you don't pay for any groceries, rent, etc., either; and (3) lose back the gain if your mouth waters at this tax-saver, I have to admire you -you certainly have the courage of your convictions.
So it is going to continue to be the policy of BPL to try to maximize investment gains, not minimize taxes. We will do our level best to create the maximum revenue for the Treasury -at the lowest rates the rules will allow.
An interesting sidelight on this whole business of taxes, vis-à-vis investment management, has appeared in the last few years. This has arisen through the creation of so-called "swap funds" which are investment companies created by the exchange of the investment company's shares for general market securities held by potential investors. The dominant sales argument has been the deferment (deferment, when pronounced by an enthusiastic salesman, sometimes comes very close phonetically to elimination) of capital gains taxes while trading a single security for a diversified portfolio. The tax will only finally be paid when the swap fund's shares are redeemed. For the lucky ones, it will be avoided entirely when any of those delightful alternatives mentioned two paragraphs earlier eventuates.
The reasoning implicit in the swapee's action is rather interesting. He obviously doesn't really want to hold what he is holding or he wouldn't jump at the chance to swap it (and pay a fairly healthy commission - usually up to \$100,000) for a grab-bag of similar hot potatoes held by other tax-numbed investors. In all fairness, I should point out that after all offerees have submitted their securities for exchange and had a chance to review the proposed portfolio they have a chance to back out but I understand a relatively small proportion do so.
There have been twelve such funds (that I know of) established since origination of the idea in 1960, and several more are currently in the works. The idea is not without appeal since sales totaled well over \$600 million. All of the funds retain an investment manager to whom they usually pay 1/2 of 1% of asset value. This investment manager faces an interesting problem; he is paid to manage the fund intelligently (in each of the five largest funds this fee currently ranges from \$250,000 to \$700,000 per year), but because of the low tax basis inherited from the contributors of securities, virtually his every move creates capital gains tax liabilities. And, of course, he knows that if he incurs such liabilities, he is doing so for people who are probably quite sensitive to taxes or they wouldn't own shares in the swap fund in the first place.
I am putting all of this a bit strongly, and I am sure there are some cases where a swap fund may be the best answer to an individual's combined tax and investment problems. Nevertheless, I feel they offer a very interesting test-tube to measure the ability of some of the most respected investment advisors when they are trying to manage money without paying (significant) taxes.
The three largest swap funds were all organized in 1961, and combined have assets now of about \$300 million. One of these, Diversification Fund, reports on a fiscal year basis which makes extraction of relevant data quite difficult for calendar year comparisons. The other two, Federal Street Fund and Westminster Fund (respectively first and third largest in the group) are managed by investment advisors who oversee at least \$2 billion of institutional money.
Here's how they shape up for all full years of existence:
| Year | Federal Street | Westminster | Dow |
| 1962 | -19.0% | -22.5% | -7.6% |
| 1963 | 17.0% | 18.7% | 20.6% |
| 1964 | 13.8% | 12.3% | 18.7% |
| Annual Compounded Rate | 2.6% | 1.1% | 9.8% |
This is strictly the management record. No allowance has been made for the commission in entering and any taxes paid by the fund on behalf of the shareholders have been added back to performance.
Anyone for taxes?
Miscellaneous
In the December 21st issue of AUTOMOTIVE NEWS it was reported that Ford Motor Co. plans to spend \$700 million in 1965 to add 6,742,000 square feet to its facilities throughout the world. Buffett Partnership, Ltd., never far behind, plans to add 227 1/4 square feet to its facilities in the spring of 1965.
Our growth in net assets from \$105,100 (there's no prize for guessing who put in the \$100) on May 5, 1956 when the first predecessor limited partnership.(Buffett Associates, Ltd. ) was organized, to \$26,074,000 on 1/1/65 creates the need for an occasional reorganization in internal routine. Therefore, roughly contemporaneously with the bold move from 682 to 909 ¼ square feet, a highly capable is going to join our organization with responsibility for the administrative (and certain other) functions. This move will particularly serve to free up more of Bill Scott's time for security analysis which is his forte. I’ll have more to report on this in the midyear letter.
Bill (who continues to do a terrific job) and his wife have an investment in the Partnership of \$298,749, a very large majority of their net worth. Our new associate (his name is being withheld until his present employer has replaced him), along with his wife and children, has made an important investment in the Partnership. Susie and I presently have an interest of \$3,406,700 in BPL which represents virtually our entire net worth, with the exception of our continued holding of Mid-Continent Tab Card Co., a local company into which I bought in 1960 when it had less than 10 stockholders. Additionally, my relatives, consisting of three children, mother , two sisters, two brothers-in-law, father-in-Law, four aunts, four cousins and six nieces and nephews, have interests in BPL, directly or indirectly, totaling \$1,942,592. So we all continue to eat home cooking.
We continue to represent the ultimate in seasonal businesses --open one day a year. This creates real problems in keeping the paper flowing smoothly, but Beth and Donna continue to do an outstanding job of coping with this and other problems.
Peat, Marwick, Mitchell has distinguished itself in its usual vital role of finding out what belongs to whom. We continue to throw impossible deadlines at them --and they continue to perform magnificently. You will note in their certificate this year that they have implemented the new procedure whereby they now pounce on us unannounced twice a year in addition to the regular yearend effort.
Finally -and most sincerely -let me thank you partners who cooperate magnificently in getting things to us promptly and properly and thereby maximize the time we can spend working where we should be -by the cash register. I am extremely fortunate in being able to spend the great majority of my time thinking about where our money should be invested, rather than getting bogged down in the minutiae that seems to overwhelm so many business entities. We have an organizational structure which makes this efficiency a possibility, and more importantly, we have a group of partners that make it a reality. For this, I am most appreciative and we are all wealthier.
Our past policy has been to admit close relatives of present partners without a minimum capital limitation. This year a flood of children, grandchildren, etc., appeared which called this policy into question; therefore, I have decided to institute a \$25,000 minimum on interests of immediate relatives of present partners.
Within the coming two weeks you will receive:
(1) A tax letter giving you all BPL information needed for your 1964 federal income tax return. This letter is the only item that counts for tax purposes.
(2) An audit from Peat, Marwick, Mitchell & Co. for 1964, 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 111165. This is identical with the figure developed in the audit.
(4) Schedule “A” to the partnership agreement listing all partners.
Let Bill or me know if anything needs clarifying. Even with our splendid staff our growth means there is more chance of missing letters, overlooked instructions, a name skipped over, a figure transposition, etc., so speak up if you have any question at all that we might have erred. My next letter will be about July 15th" summarizing the first half of this year.
Cordially,
Warren E. Buffett
巴菲特合伙有限公司
基威特广场810号
内布拉斯加州奥马哈31
1965年1月18日
1964年业绩
尽管1964年我们的总收益为4,846,312.37美元，但用我们的基本衡量标准——道琼斯工业平均指数（以下简称"道指"）来衡量，这并不是我们表现最好的年份之一。BPL的整体收益率为+27.8%，而道指的整体收益率为+18.7%。有限合伙人的整体收益率为+22.3%。就合伙企业本身而言，领先9.1个百分点，就有限合伙人而言，领先3.6个百分点，这都是自1959年以来的最差表现，而1959年道指的收益率大致与今年相当。
尽管如此，我并不沮丧。今年对整体市场来说是强劲的一年，在这样的年份里，我们想要超越道指总是更难。我们肯定会有被道指打败的年份，从某些方面来说，我甚至觉得1964年没被打败已经算是幸运了。因为市场飙升给我们带来了问题，如果1965年道指复制1964年的表现，我们将很难追上它，更不用说以可观的优势超越它了。
为了更新记录，下表总结了道指逐年业绩、普通合伙人分配前合伙企业的业绩以及有限合伙人的业绩：
| 年份 | 道指整体结果 (1) | 合伙企业结果 (2) | 有限合伙人结果 (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 | 20.6% | 38.7% | 30.5% |
| 1964 | 18.7% | 27.8% | 22.3% |
(1) 基于道指价值的年度变化加上当年持有道指所获得的股息。该表包含合伙企业完整运营的所有年份。
(2) 1957-61年包括所有前身有限合伙企业在整个年度内扣除所有费用后、但在向合伙人分配或向普通合伙人分配之前的合并结果。
(3) 1957-61年根据前一列合伙企业结果计算，基于当前合伙协议向普通合伙人进行分配，但扣除有限合伙人月度提款之前。
按累计或复利基础计算，结果如下：
| 年份 | 道指整体结果 | 合伙企业结果 | 有限合伙人结果 |
| 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% | 140.9% | 107.2% |
| 1957 – 61 | 74.9% | 251.0% | 181.6% |
| 1957 – 62 | 61.6% | 299.8% | 215.1% |
| 1957 – 63 | 94.9% | 454.5% | 311.2% |
| 1957 – 64 | 131.3% | 608.7% | 402.9% |
| 年化复利收益率 | 11.1% | 27.7% | 22.3% |
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）和两家最大的多元化封闭式投资公司进行比较，这两家开放式基金的投资政策是通常95-100%投资于普通股。这四家公司——Massachusetts Investors Trust、Investors Stock Fund、Tri-Continental Corporation和Lehman Corporation——管理着约45亿美元资产，拥有约55万名股东，可能代表了整个300亿美元投资公司行业的典型情况。我的看法是，它们的业绩大致与其他绝大多数投资咨询机构（合计管理着大得多的资金量）的业绩相似。
下面这个表格的目的是说明，道指作为一个投资业绩指标并非软柿子。仅管理这四家公司所列的咨询人才每年收取超过800万美元的管理费，而这还只是专业投资管理行业中很小的一部分。这些高薪且广受尊敬的人才的公开业绩表明，他们的表现略逊于道指——一个未经管理的指数。
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% | 23.7% | 18.3% | 20.6% | 30.5% |
| 1964 | 15.9% | 14.3% | 13.6% | 12.6% | 18.7% | 22.3% |
(1) 根据资产价值变动加上年度内向登记持有人的任何分配计算。
(2) 1957-63年数据来自1964年Moody's银行与金融手册。1964年为估计值。
累计复合
| 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% |
| 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% | 80.8% | 88.9% | 94.9% | 311.2% |
| 1957 – 64 | 114.9% | 104.0% | 105.4% | 112.7% | 131.3% | 402.9% |
| 年化 | 10.0% | 9.3% | 9.4% | 9.9% | 11.1% | 22.3% |
| 复利收益率 |
重复这些表格让一些合伙人问："这些极其精明的管理层，拥有（1）聪明、精力充沛的员工，（2）几乎无限的资源，（3）最广泛的商业关系，（4）累计起来数百年的投资经验——到底为什么会发生这种事？"（后一项资质让我想起有个家伙申请工作，声称自己有二十年的经验——结果前雇主更正说，那是"一年经验——重复了二十次"。)
这个问题极为重要，你会认为它应该是投资经理和大额投资者重点研究的课题。毕竟，300亿美元的每个百分点就是每年3亿美元。奇怪的是，华尔街文献中几乎没有任何东西关注这个问题，而在证券分析师协会会议、研讨会、论坛等场合也几乎无人讨论。我的看法是，任何投资管理组织的首要工作，是在对美国大中型企业的管理能力和业绩做出评判之前，先分析自己的方法和结果。
在绝大多数情况下，业绩未能超越甚至追平一个未经管理的指数，绝不代表缺乏智力或诚信。我认为这更多是以下因素的产物：（1）群体决策——我或许抱有偏见，但我觉得任何真正让所有人参与决策的群体，几乎不可能产生卓越的投资管理；（2）渴望与其他大型知名机构的政策和（一定程度上）投资组合保持一致；（3）一种体制框架，使得平均水平"安全"，而独立行动的个人回报与其所承担的普遍风险完全不成比例；（4）遵循某些不合理的分散投资做法；（5）以及最后但同样重要的是，惯性。
也许上述评论不公正。也许我们的统计比较也不公正。无论是我们的投资组合还是运营方式，都与表中投资公司存在显著差异。但我相信，我们的合伙人和它们的股东都认为，他们的管理层追求同一个目标——在持续投资于权益类资产的计划下，以最小的永久性资本损失风险，获取长期平均资本回报的最大化。既然我们应有共同的目标，而大多数合伙人如果不把资金放在BPL，可能会选择投资于业绩与这些投资公司相当的其他媒介，因此我认为它们的业绩记录对于评判我们自己的结果是有意义的。
毫无疑问，投资公司、投资顾问、信托部门等为投资者提供了重要的服务。这种服务涉及实现充分的分散投资、保持长期视角、简化投资决策和操作流程，以及最重要的是，避免那些似乎会引诱某些个人的明显低劣的投资技巧。除了极少数机构外，这些组织并没有明确承诺提供卓越的投资业绩，尽管公众从它们广告中强调的"专业管理"中得出这样的推断或许也不算过分。
我向各位合伙人承诺一件事——正如我现在认为上述业绩比较有意义一样，无论未来发生什么情况，我在未来年份都会继续这样做。相应地，我要求你们，如果你们觉得这样的标准不相关，现在就提出异议，并建议其他可以前瞻性（而非追溯性）应用的标准。
另外还有一点——我没有在表中为世界上最广泛使用的投资顾问——"贝尔管理"——留一列。那些关注体重、高尔夫分数和燃料账单的人，似乎回避对自己投资管理技能进行量化评估，尽管这涉及世界上最重要的客户——他们自己。虽然评估Massachusetts Investors Trust或Lehman Corporation的管理成就是学术上有趣的事，但客观评估实际在管理你资金的那个人的成就——哪怕那个人就是你自己——则具有巨大的实际利益。
关于保守主义的问题
看了投资公司业绩表，可能会有人问："没错，但那些公司不是比合伙企业运营得更保守吗？"如果你问投资公司管理层这个问题，他们会非常诚实地说自己更保守。如果你问遇到的前一百位证券分析师，我敢说绝大多数也会替投资公司这么回答。我不同意。我把自己超过90%的净资产放在BPL，我的大部分家人也是如此，但这只能证明我观点的真诚，并不能证明其正确性。
毫无疑问，投资公司的资金配置比我们更传统。对许多人来说，传统就等于保守。在我看来，这是错误的想法。无论是传统方法还是非传统方法，本身都不是保守的。
真正保守的行动源于聪明的假设、正确的事实和可靠的推理。这些品质可能导致传统行为，但很多时候它们也会导致非正统做法。在世界的某个角落，可能至今还在定期举行"地平说学会"的会议。
我们不会因为重要人物、大声说话的人或大量的人同意我们的观点而感到安慰。同样，如果他们不同意，我们也不会感到不安。民意调查不能代替思考。当我们真正能够放松地坐下来微笑时，是因为遇到了一种我们能理解的情况——事实可查明且清晰，行动路线显而易见。在这种情况下——无论传统还是非传统——无论别人同意还是反对——我们感觉——我们正以保守的方式前进。
以上可能听起来很主观。确实如此。你们应该希望对这个问题的客观方法。我也希望。我对评估过去政策保守性的一种理性方法的建议，是研究市场下跌时的表现。在我们的表格中，只有三年是下跌市场，不幸（仅就这个测试而言）它们都属于温和下跌。在这三年中，我们每一年的投资业绩都显著优于任何更传统的投资组合。
具体来说，如果这三年连续发生，累计结果将是：
| Tri-Continental Corp. | -9.7% |
| 道指 | -20.6% |
| Mass. Investors Trust | -20.9% |
| Lehman Corp. | -22.3% |
| Investors Stock Fund | -24.6% |
| 有限合伙人 | +45.0% |
我们不认为这个比较至关重要，但我们确实觉得它有一定意义。我们当然觉得它比说"我们持有（不管价格）AT&T、通用电气、IBM和通用汽车，因此我们是保守的"要更有道理。无论如何，对任何投资计划或管理（包括自我管理）的保守性评估，都应基于理性的客观标准，我建议将市场下跌时的表现至少作为一个有意义的测试。
复利的乐趣
我们早期年度信件的读者对仅仅是当代投资经验的陈述表示不满，他们渴望只有通过对跨越几个世纪的投资策略进行深度研究才能提供的智力刺激。因此，有了这一节。
我们前两次对金融专业知识的传说进行的探索表明，伊莎贝拉女王（资助哥伦布航行）和弗朗西斯一世（最初购买蒙娜丽莎）所谓精明的投资近乎金融上的疯狂。这些当事人的辩护者提供了一堆感性的琐碎理由。尽管如此，我们的复利表格并未因攻击而受损。
然而，有一种批评确实刺痛了我们。有人指责这个专栏变得消极，只评论历史上的金融无能者。我们被要求在这几页中记录一个金融智慧的传说，使之成为贯穿时代的卓越标杆。
有一个故事很突出。当然，这就是曼哈顿印第安人在1626年将他们的岛屿卖给那个臭名昭著的挥霍者彼得·米纽伊特时铭刻在历史上的交易智慧传奇。据我了解，他们净得24美元。为此，米纽伊特获得了22.3平方英里，约合621,688,320平方英尺。虽然根据可比销售很难得出精确估价，但每平方英尺20美元的估计似乎合理，得出该岛当前土地价值为12,433,766,400美元（125亿美元）。对外行人来说，这听起来可能还不错。然而，印第安人只需要实现6.5%的收益率（部落共同基金代表会向他们保证这一点）就能笑到最后。按6.5%计算，24美元在338年后变成42,105,772,800美元（420亿美元），而如果他们设法多挤出半个点达到7%，现值就会变成2,050亿美元。
就说这么多。
你们中有些人可能以较短的时间来看待自己的投资策略。为了方便，我们附上常用的表格，显示以各种收益率复利投资10万美元的收益：
| 4% | 8% | 12% | 16% | |
| 10年 | 48,024美元 | 115,892美元 | 210,584美元 | 341,143美元 |
| 20年 | 119,111美元 | 366,094美元 | 864,627美元 | 1,846,060美元 |
| 30年 | 224,337美元 | 906,260美元 | 2,895,970美元 | 8,484,940美元 |
该表显示了以下方面的财务优势：
(1) 长寿（用金融行家的博学词汇来说，这被称为"玛土撒拉技术"）
(2) 高复利收益率
(3) 两者结合（本文作者特别推荐）
值得注意的是，年收益率相对较小的增长就能带来巨大的收益。这解释了我们的态度：虽然我们希望获得显著超越平均投资业绩的利润率，但我们仍然认为，相对于平均水平的每一个百分点的投资回报都有实际意义。
我们的目标
你会注意到，前表中没有一列是合伙企业在其八年寿命中27.7%的平均收益率或有限合伙人22.3%的平均收益率。从长期来看，这样的数字是荒谬的，原因有几个：（别担心我会"保留"来证明这个预言。）
(1) 任何大额资金按这样的收益率复利，都会以惊人的速度达到国债般的规模。
(2) 在我们八年的历史中，证券的普遍重估使得整个普通股领域的年均总收益率达到了我认为未来几十年无法达到的水平。在20或30年的时间跨度内，我预计道指的年均总收益率大约在6%-7%左右，而不是我们短暂历史中的11.1%。仅这一因素就会将我们的年复利收益率降低大约4个百分点。只要1965年道指出现-20.5%的年份，就会使九年的平均收益率降至7%。持有权益类投资的人肯定应该时不时地预期到这样的年份（或更糟）。如果你的权益类投资（如BPL）市值下跌20%或30%会给你带来情绪或财务上的困扰，那么你干脆就不要投资普通股这类资产。用诗人——哈里·杜鲁门的话来说——"受不了热，就别进厨房。"当然，最好在进入"厨房"之前就考虑好这个问题。
(3) 我们认为长期保持合伙企业领先道指16.6个百分点或有限合伙人领先11.2个百分点的优势是不可能的。我们已经连续八年实现资金池跑赢道指，尽管利润分配安排使得有限合伙人有一年未达到道指水平。我们肯定会有合伙企业业绩落后于道指的年份（注意是复数），届时普通合伙人将咬牙切齿（希望有限合伙人不要太难受）。当这种情况发生时，我们的平均优势幅度将急剧下降。我也可以说，我认为我们仍然会有一些年份获得相当可观的优势。但迄今为止，我们受益于这样一个事实：我们的平均值中还没有包含一个真正平庸（或更差）的年份，这显然不能指望成为常态。
那么我们可以期待实现什么？当然，我所说的任何话很大程度上都是猜测，我自己的投资哲学正是基于这样的理论：预言更多地揭示了预言者的弱点，而非未来的真相。
尽管如此，作为合伙人，你们有权知道我的预期，尽管这些预期可能很薄弱。我希望我们的长期经验将沿着以下基础展开：
(1) 道指（当然包括股息）的年均总收益率大约在7%左右，在实现这一平均水平时表现出通常的大幅波动——比如极端情况下在-40%到+50%之间，大多数年份在-10%到+20%的范围内；
(2) BPL在向普通合伙人分配前，年均领先优势大约为10个百分点——同样，优势幅度波动很大，可能在某一年比道指差10个百分点，到一切顺利时好25个百分点；
(3) 这两个假设的乘积给BPL带来大约17%的平均收益率，即有限合伙人约14%。这个数字每年都会发生巨大变化；最终的波幅当然取决于(1)和(2)中假设的极端情况之间的相互作用。
我想强调的是，以上都是推测，可能深受自我利益、自负等因素的影响。任何有金融历史感的人都知道这类猜测存在巨大误差。也许最好把这部分从信中删掉，但这是合伙人经常且合理提出的问题。长期预期回报是我们BPL所有成员的主要考虑因素，我有责任记录在案，尽管这日后可能让我看起来像个傻瓜。我相当清教徒式的观点是，任何投资经理，无论是作为经纪人、投资顾问、信托部门、投资公司等，都应该愿意明确陈述他打算实现什么目标，以及他打算如何衡量自己完成工作的程度。
我们的运作方式
在过去的年度信函中，我通常使用三个类别来描述我们进行的投资操作。现在，我认为四类划分更为合适。新增一个部分——"低估类投资（相对低估）"——部分反映了我对我们"低估类投资"中一直存在少量本质差异的进一步思考。部分反映了曾经是一个非常小的子类但现在在我们整体投资组合中更为重要的一部分的增长。这种日益增长的重要性伴随着迄今为止优异的结果，证明了投入大量时间和精力寻找该领域更多机会是合理的。最后，它也部分反映了发展和实施一种新的、有些独特的投资技术，旨在改善这类操作的预期收益和一致性。因此，我们目前的四个类别是：
1."低估类投资（私人所有者基础）"——通常根据量化标准确定的低估股票类别，但也非常重视定性因素。通常很少有或没有迹象表明市场会立即改善。这些股票缺乏魅力和市场支持。它们的主要条件是便宜的价格；也就是说，企业的整体估值远低于仔细分析后得出的私人所有者价值。再次强调，量化因素是首要且必需的，但定性因素也很重要。我们喜欢良好的管理——我们喜欢体面的行业——我们喜欢先前休眠的管理层或股东团体中出现一定程度的"发酵"。但我们需要价值。
在这个类别中，我们经常遇到理想的"双保险"情况：要么通过外部因素实现市场价格上涨，要么以便宜价格获得企业控股权。虽然前者在绝大多数情况下发生，但后者是大多数投资操作所没有的保险单。我们继续增持了在1964年中期报告中描述的三家公司的股份，我们是其中最大的股东。这三家公司都以非常令人满意的速度提升其基础价值，我们在两个情况中完全被动，在第三个情况中仅以非常小的规模活跃。我们不太可能在这三家公司中的任何一家真正积极参与决策，但我们随时准备在需要时行动。
2."低估类投资（相对低估）"——这个类别包括与同等质量的证券相比价格相对便宜的证券。我们要求与当前估值标准存在显著差异，但（通常因为规模较大）不认为私人所有者价值是一个有意义的概念。在这个类别中，重要的是将苹果与苹果比较——而不是与橙子比较——我们努力实现这一目标。在绝大多数情况下，我们只是对行业或公司了解得不够，无法做出明智的判断——在这种情况下我们就放弃。
如前所述，这个新类别一直在增长并产生了非常令人满意的结果。我们最近开始实施一种技术，有望大幅降低因估值标准整体变化带来的风险；例如，我们以12倍市盈率买入某只股票，而可比或质量较差的公司以20倍市盈率交易，但随后发生了重大重估，导致后者仅以10倍市盈率交易。
这种风险一直让我们非常困扰，因为与"低估类投资（私人所有者基础）"或"套利类投资"相比，我们可能陷入无助的境地。在这种风险降低后，我们认为这个类别有光明的未来。
3."套利类投资"——这些是有时间表的证券。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进展的谣言或"内幕信息"，而是此类公开宣布的活动。我们等到可以在报纸上读到它。风险主要不在于整体市场行为（尽管有时也会有一定关联），而在于一些事情打乱了计划，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、税收裁定的保留等。许多套利的毛利润看起来相当小。有点像寻找还有剩余时间的停车计时器。然而，可预测性加上较短的持有期，在考虑偶尔的重大损失后，能产生相当不错的平均年化收益率。这个类别每年产生的绝对利润比低估类投资更稳定。在市场下跌的年份，它通常应该为我们积累很大的优势；在牛市中，它可能会拖累业绩。长期来看，我预计套利类投资将实现与低估类投资类似的超越道指的优势。
4."控制类投资"——这些很少见，但一旦出现，规模可能很显著。除非我们一开始就购买大量股票，否则控制类投资是从低估类（私人所有者基础）发展而来的。它们源于这样一种情况：一只便宜股票在长时间内价格毫无起色，以至于我们能够购买公司相当比例的股份。到那时，我们可能能够对公司活动承担一定程度的或完全的控制权。我们是否变得活跃或保持相对被动，取决于我们对公司未来和管理层能力的评估。
我们不想仅仅为了活跃而活跃。在其他条件相同的情况下，我更愿意让别人去做工作。然而，当活跃的角色对于优化资本运用是必要的时候，你可以肯定我们不会袖手旁观。
无论是主动还是被动，在控制类情况下都应该有内置的利润。这种操作的必要条件是有吸引力的买入价格。一旦实现控制，我们投资的价值取决于企业的价值，而不是市场经常表现出的非理性。
我们在"低估类（私人所有者基础）"下提到的目前我们是最大股东的那三种情况中的任何一种，都可能凭借其双向伸展性转变为控制类投资。那会令我们满意，但如果它们在市场上上涨到更接近内在价值的价格，使我们能够卖出，从而完成一项成功的低估类（私人所有者基础）操作，那也会令我们满意。
控制类别的投资结果必须基于至少几年的跨度来衡量。适当的买入需要时间。如果需要，加强管理、重新引导资本运用、或许实现令人满意的出售或并购等，都是使这成为一项以年而非月来衡量的业务的因素。因此，在控制类中，我们寻求宽幅的利润——如果看起来差不多，我们就放弃。
控制类投资在买入阶段很大程度上与道指同步波动。在后期阶段，它们的行为更接近于套利类投资。
你可能会有兴趣知道，我们以前的控制类投资——Dempster Mill Manufacturing——的买家似乎干得不错。这符合我们的预期，也令人满意。一项依赖最终买家做亏本交易的投资操作（华尔街称之为"博傻理论"）确实很脆弱。以真正的便宜价格买入，只需平均水平的处置就能带来令人愉快的结果，这有多令人满意啊。
正如我过去提到的，我们投资组合在不同类别之间的划分很大程度上取决于可用性的偶然性。因此，在任何特定年份，低估类、套利类或控制类之间的组合在很大程度上是运气问题，这个变幻莫测的因素将对我们相对于道指的表现有很大影响。这是为什么单一年度的表现并不重要，无论好坏都绝不应该太当真的众多原因之一。
为了举例说明类别划分的偶然性有多么重要，让我引用过去三年的例子。使用一种与衡量BPL整体业绩完全不同的计算方法——按类别使用月度平均市值投资额，排除借款资金和办公运营费用等（这提供了组间比较的最准确基础，但不反映BPL整体结果）——低估类（两个当前类别合并）、套利类和道指的情况如下：
| 年份 | 低估类 | 套利类 | 道指 |
| 1962 | -1.0% | 14.6% | -8.6% |
| 1963 | 20.5% | 30.6% | 18.4% |
| 1964 | 27.8% | 10.3% | 16.7% |
显然，套利类（以及控制类）在1962年挽救了局面，如果那一年我们在该类别中的仓位较轻，我们的最终结果会差得多，尽管考虑到当年的市场状况仍然相当可观。我们本可能在那一年将更小比例的投资组合放在套利类；是可用性决定的，而不是我对于市场会如何的任何预测。因此，重要的是要意识到，在1962年，我们在类别组合方面纯粹是运气好。
1963年我们有一个惊人的套利操作，大大影响了结果，低估类也表现良好，带来了一个丰收年。如果套利类表现正常（比如更像1962年），我们相对于道指的表现就会逊色得多。在这里，帮助我们的不是组合，而是出色的具体情况。
最后，在1964年，套利类严重拖累了业绩。在像1964年这样的道指大幅上涨年份，这本来在任何情况下都是正常的，但由于平庸的经历，它们比预期的拖累更大。事后看来，如果全部持有低估类会很愉快，但我们不是在事后回顾来玩这个游戏。
我希望前面的表格能说明一个观点：特定年份的结果受许多变量影响——其中一些我们几乎无法控制或洞察。我们认为所有类别都是好生意，我们很高兴有几个类别可以依赖，而不是只有一个。这促使每个类别内部更有辨识力，并降低了因单一类别机会消失而使我们完全无法运营的可能性。
税收
今年，我们听到了一连串关于合伙人纳税义务的抱怨。当然，如果纳税表是空白的，我们可能也会有一些抱怨。
更多投资罪行——可能由其他方面相当聪明的人犯下——是由于"税收考虑"而非其他原因造成的。我的一位朋友——一位著名的西海岸哲学家——认为，人生中大部分错误都是因为忘记了真正想要达到的目的。当税收这样情绪化的因素介入时，情况确实如此（我还有另一位朋友——一位著名的东海岸哲学家——说他在意的不是缺乏代表权——而是税收）。
让我们回到西海岸。在投资世界中，一个人真正想达到的目的是什么？不是缴最少的税，尽管这可能是实现目标时需要考虑的一个因素。然而，手段和目的不应混淆，目的是获得最大的税后复利收益率。很显然，如果两种行动方案承诺相同的税前复利收益率，而一种需要纳税，另一种不需要，那么后者更优。然而，我们发现这种情况很少见。
从大约3000个选择中选出的20只股票，极不可能在现在和一年后（当时的选择和替代方案的价格完全不同）都是最优的投资组合。如果我们的目标是产生最大的税后复利收益率，我们只需要拥有当前价格下最具吸引力的证券。而面对3000个快速变化的变量，这必然意味着变化（希望是"产生税收"的变化）。
很明显，一只股票去年或上个月的表现本身并不是现在持有或不持有它的理由。很明显，在一只已下跌的证券上无法"回本"并不重要。很明显，去年持有一只赢家所带来的内心温暖感觉，在决定它是否属于今年最优投资组合时并不重要。
如果涉及收益，改变投资组合就需要纳税。除非在非常特殊的情况下（我欣然承认存在一些情况），如果预期业绩差异显著，税额是次要的。我一直不明白为什么税收对许多人来说如此沉重打击，因为长期资本利得的税率低于大多数努力领域（税收政策表明，挖沟渠被认为在社会上不如倒腾股票证书可取）。
我的听众中有大量实用主义者，所以我最好还是别谈那个理想主义的说辞了。只有三种方法可以避免最终缴税：(1) 带着资产死去——这对我来说有点太终极，即使是狂热者也不得不对这种"疗方"抱以复杂的情感；(2) 赠送资产——这样你当然不用缴任何税，但你当然也没法买杂货、付房租等；(3) 把盈利亏回去——如果你对这个节税方法垂涎三尺，我不得不佩服你——你肯定有坚持信念的勇气。
因此，BPL将继续执行试图最大化投资收益的政策，而不是最小化税收。我们将尽最大努力为财政部创造最大的收入——按照规则允许的最低税率。
近年来，在税收与投资管理的关系方面出现了一个有趣的侧面问题。这源于所谓的"互换基金"的创建，这些投资公司通过用投资公司的股份交换潜在投资者持有的普通市场证券来创建。主要的销售卖点是递延（"递延"这个词在热情的推销员口中，有时在发音上非常接近"消灭"）资本利得税，同时将以单一证券换成一个分散的投资组合。只有在卖出互换基金股份时才会最终缴税。对幸运的人来说，它将在我之前两段提到的那些令人愉快的替代方案之一发生时被完全避免。
互换参与者的行动所隐含的推理相当有趣。他显然并不真正想持有他现在持有的东西，否则他不会抓住机会将其换成（并支付相当可观的佣金——通常高达10万美元）一个由其他被税收麻木的投资者持有的类似烫手山芋组成的混合包。公平地说，我应该指出，在所有认购人提交了他们的证券进行交换并有机会审阅拟议的投资组合后，他们有机会退出，但据我所知，这样做的人比例相对较小。
自1960年首次提出这个想法以来，已经成立了十二只这样的基金（据我所知），目前还有几只在筹备中。这个想法并非没有吸引力，因为销售额总计超过6亿美元。所有这些基金都聘请了一位投资经理，通常支付资产价值的0.5%作为管理费。这位投资经理面临一个有趣的问题：他被雇佣来明智地管理基金（在最大的五只基金中，这笔费用目前每年在25万美元到70万美元之间），但鉴于从证券贡献者那里继承的低税基，他的几乎每一个动作都会产生资本利得税负债。而且，当然，他知道如果他产生了这样的负债，他是在为可能对税收相当敏感的人这样做——否则他们一开始就不会拥有互换基金的股份。
我讲得有点过分，我确信有些情况下互换基金可能是解决个人税务和投资组合问题的最佳答案。尽管如此，我认为它们提供了一个非常有趣的试管，来衡量一些最受尊敬的投资顾问在努力管理资金而无需（大幅）缴税时的能力。
三只最大的互换基金都是在1961年成立的，目前总资产约3亿美元。其中一只，Diversification Fund，按财年报告，这使得提取相关数据与日历年比较相当困难。另外两只，Federal Street Fund和Westminster Fund（分别是该组中第一大和第三大基金），由管理至少20亿美元机构资金的投资顾问管理。
以下是它们所有完整运营年份的情况：
| 年份 | Federal Street | Westminster | 道指 |
| 1962 | -19.0% | -22.5% | -7.6% |
| 1963 | 17.0% | 18.7% | 20.6% |
| 1964 | 13.8% | 12.3% | 18.7% |
| 年化复利收益率 | 2.6% | 1.1% | 9.8% |
这是纯粹的管理记录。没有考虑进入时的佣金，基金代表股东支付的任何税款也已加回业绩。
有人想谈税收吗？
杂项
在12月21日的《汽车新闻》上，报道称福特汽车公司计划在1965年花费7亿美元，为其全球设施增加6,742,000平方英尺的面积。巴菲特合伙有限公司从不甘落后，计划在1965年春季为其设施增加227 1/4平方英尺。
我们的净资产从1956年5月5日第一个前身有限合伙企业（巴菲特联合有限公司）成立时的105,100美元（猜猜谁投入了那100美元——没有奖品）增长到1965年1月1日的26,074,000美元，这偶尔需要对内部流程进行重组。因此，大约在我们从682平方英尺大胆跃迁到909 1/4平方英尺的同时，一位非常有能力的人将加入我们的组织，负责行政（及某些其他）职能。这一举措尤其有助于释放Bill Scott更多时间用于证券分析——这是他的强项。我将在年中信函中进一步报告此事。
Bill（他继续表现出色）和他的妻子在合伙企业中的投资为298,749美元，占其净资产绝大部分。我们的新同事（在他现任雇主找到替代人选之前，他的名字暂不公布）及其妻子和孩子在合伙企业中进行了重要投资。Susie和我目前在BPL中拥有3,406,700美元的权益，这几乎是我们全部净资产，除了我们继续持有的Mid-Continent Tab Card Co.——我于1960年买入的一家本地公司，当时它只有不到10名股东。此外，我的亲属，包括三个孩子、母亲、两个姐妹、两个姐夫、岳父、四个姑姑、四个表亲和六个侄女侄子，在BPL中直接或间接持有总计1,942,592美元的权益。所以我们继续吃自家做的饭。
我们继续代表着终极的"季节性"业务——一年只营业一天。这给保持文件顺畅流动带来了真正的挑战，但Beth和Donna在应对这个问题和其他问题上继续表现出色。
Peat, Marwick, Mitchell一如既往地在找出谁有什么东西这个关键角色上表现出色。我们继续给他们设定不可能完成的截止日期——他们继续表现出色。你会注意到今年在他们的证明文件中，他们实施了新的程序，除了常规的年终工作外，现在每年还要对我们进行两次突击检查。
最后——也是最真诚的——让我感谢你们，合伙人，你们出色地合作，及时正确地提供信息，从而最大限度地增加了我们可以花在应该花的地方——收银机旁——的时间。我非常幸运能够将绝大部分时间用于思考我们的资金应该投资在哪里，而不是陷入似乎压垮许多商业实体的琐碎细节中。我们的组织结构使这种效率成为可能，更重要的是，我们拥有一个使其成为现实的合伙人群体。对此，我深表感激，我们所有人都因此而更加富有。
我们过去的政策是在没有最低资本限制的情况下接纳现有合伙人的近亲。今年，出现了大量子女、孙辈等，使这一政策受到质疑；因此，我决定对现有合伙人的直系亲属设定25,000美元的最低投资额限制。
在接下来的两周内，你将收到：
(1) 一封税务信函，提供你1964年联邦所得税申报所需的所有BPL信息。这封信是唯一用于税务目的的文件。
(2) Peat, Marwick, Mitchell & Co.的1964年审计报告，说明BPL的运营和财务状况以及你自己的资本账户。
(3) 由我签署的信函，说明你在1965年1月1日的BPL权益状况。这与审计报告中的数字相同。
(4) 合伙协议附表"A"，列出所有合伙人。
如有任何需要澄清的事项，请告知Bill或我。即使有出色的员工，我们的增长也意味着遗漏信件、忽略指示、跳过名字、数字错位等的可能性增加，所以如果你有任何疑问认为我们可能出了差错，请务必提出。我的下一封信将在7月15日左右，总结今年上半年的情况。
此致，
Warren E. Buffett