BUFFETT PARTNERSHIP, LTD. 810 KIEWIT PLAZA OMAHA 31, NEBRASKA
January 20, 1966
Our Performance in 1965
Our War on Poverty was successful in 1965.
Specially, we were \$12,304,060 less poor at the end of the year.
Last year under a section in the annual letter entitled “Our Goal” (please particularly note it was not headed "Our Promise"), I stated we were trying to achieve “… An average advantage (relative to the Dow) 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.”
My fallibility as a forecaster was quickly demonstrated when the first year fell outside my parameters. We achieved our widest margin over the Dow in the history of BPL with an overall gain of 47.2% compared to an overall gain (including dividends which would have been received through ownership of the Dow) of 14.2% for the Dow. Naturally, no writer likes to be publicly humiliated by such a mistake. It is unlikely to be repeated.
The following summarizes the year-by-year performance of the Dow, the performance of the Partnership before allocation (one quarter of the excess over 6%) to the general partner, and the results for limited partners:
| 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% |
| 1965 | 14.2% | 47.2% | 36.9% |
(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% | 140.6% | 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% |
| 1957 – 64 | 131.3% | 608.7% | 402.9% |
| 1957 – 65 | 164.1% | 943.2% | 588.5% |
| Annual Compounded Rate | 11.4% | 29.8% | 23.9% |
After last year the question naturally arises, "What do we do for an encore?” A disadvantage of this business is that it does not possess momentum to any significant degree. If General Motors accounts for 54% of domestic new car registrations in 1965, it is a pretty safe bet that they are going to come fairly close to that figure in 1966 due to owner loyalties, dealer capabilities, productive capacity, consumer image, etc. Not so for BPL. We start from scratch each year with everything valued at market when the gun goes off. Partners in 1966, new or old, benefit to only a very limited extent from the efforts of 1964 and 1965. The success of past methods and ideas does not transfer forward to future ones.
I continue to hope, on a longer-range basis, for the sort of achievement outlined in the "Our Goal" section of last year's letter (copies still available). However, those who believe 1965 results can be achieved with any frequency are probably attending weekly meetings of the Halley’s Comet Observers Club. We are going to have loss years and are going to have years inferior to the Dow - no doubt about it. But I continue to believe we can achieve average performance superior to the Dow in the future. If my expectation regarding this should change, you will hear immediately.
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 closed-end investment companies. These four companies, Massachusetts Investors Trust, Investors Stock Fund, Tri-Continental Corp., and Lehman Corp. manage over \$5 billion, are owned by about 600,000 shareholders, and are probably typical of most of the \$35 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 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 about \$10 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) | InvestorsStock (1) | Lehman (2) | Tri-Cont(2) | Dow | LimitedPartners |
| 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% |
| 1965 | 10.2% | 9.8% | 19.0% | 10.7% | 14.2% | 36.9% |
(1) Computed from changes in asset value plus any distributions to holders of record during year.
(2) From 1965 Moody's Bank & Finance Manual for 1957-64. Estimated for 1965.
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% |
| 1957 – 65 | 136.8% | 124.0% | 145.3% | 138.4% | 164.1% | 588.5% |
| Annual | 10.1% | 9.4% | 10.5% | 10.1% | 11.4% | 23.9% |
| Compounded Rate |
A number of the largest investment advisory operations (managing, in some cases, well into the billions of dollars) also manage investment companies partly as a convenience for smaller clients and partly as a public showcase. The results of these funds roughly parallel those of the four funds on which we report.
I strongly believe in measurement. The investment managers mentioned above utilize measurement constantly in their activities. They constantly study changes in market shares, profit margins, return on capital, etc. Their entire decision-making process is geared to measurement - of managements, industries, comparative yields, etc. I am sure they keep score on their new business efforts as well as the profitability of their advisory operation. What then can be more fundamental than the measurement, in turn, of investment ideas and decisions? I certainly do not believe the standards I utilize (and wish my partners to utilize) in measuring my performance are the applicable ones for all money managers. But I certainly do believe anyone engaged in the management of money should have a standard of measurement, and that both he and the party whose money is managed should have a clear understanding why it is the appropriate standard, what time period should be utilized, etc.
Frank Block put it very well in the November-December 1965 issue of the Financial Analysts Journal. Speaking of measurement of investment performance he said," ...However, the fact is that literature suffers a yawning hiatus in this subject. If investment management organizations sought always the best performance, there would be nothing unique in careful measurement of investment results. It does not matter that the customer has failed to ask for a formal presentation of the results. Pride alone should be sufficient to demand that each or us determine objectively the quality of his recommendations. This can hardly be done without precise knowledge of the outcome. Once this knowledge is in hand, it should be possible to extend the analysis to some point at which patterns of weakness and strength begin to assert themselves. We criticize a corporate management for failure to use the best of tools to keep it aware of the progress of a complicated industrial organization. We can hardly be excused for failure to provide ourselves with equal tools to show the efficiency of our own efforts to handle other people’s money. ...Thus, it is our dreary duty to report that systems of performance measurement are not automatically included in the data processing programs of most investment management organizations. The sad fact is that some seem to prefer not to know how well or poorly they are doing.
Frankly, I have several selfish reasons for insisting that we apply a yardstick and that we both utilize the same yardstick. Naturally, I get a kick out of beating par - in the lyrical words of Casey Stengel, "Show me a good loser, and I’ll show you a loser.” More importantly, I insure that I will not get blamed for the wrong reason (having losing years) but only for the right reason (doing poorer than the Dow). Knowing partners will grade me on the right basis helps me do a better job. Finally, setting up the relevant yardsticks ahead of time insures that we will all get out of this business if the results become mediocre (or worse). It means that past successes cannot cloud judgment of current results. It should reduce the chance of ingenious rationalizations of inept performance. (Bad lighting has been bothering me at the bridge table lately.) While this masochistic approach to measurement may not sound like much of an advantage, I can assure you from my observations of business entities that such evaluation would have accomplished a great deal in many investment and industrial organizations.
So if you are evaluating others (or yourself!) in the investment field, think out some standards - apply them - interpret them. If you do not feel our standard (a minimum of a three-year test versus the Dow) is an applicable one, you should not be in the Partnership. If you do feel it is applicable, you should be able to take the minus years with equanimity in the visceral regions as well as the cerebral regions -as long as we are surpassing the results of the Dow.
The Sorrows of Compounding
Usually, at this point in my letter, I have paused to modestly attempt to set straight the historical errors of the last four or five hundred years. While it might seem difficult to accomplish this in only a few paragraphs a year, I feel I have done my share to reshape world opinion on Columbus, Isabella, Francis I, Peter Minuit and the Manhattan Indians. A by-product of this endeavor has been to demonstrate the overwhelming power of compound interest. To insure reader attention I have entitled these essays "The Joys of Compounding. " The sharp-eyed may notice a slight change this year.
A decent rate (better we have an indecent rate) of compound -plus the addition of substantial new money has brought our beginning capital this year to \$43,645,000. Several times in the past I have raised the question whether increasing amounts of capital would harm our investment performance. Each time I have answered negatively and promised you that if my opinion changed, I would promptly report it.
I do not feel that increased capital has hurt our operation to date. As a matter of fact, I believe that we have done somewhat better during the past few years with the capital we have had in the Partnership than we would have done if we had been working with a substantially smaller amount. This was due to the partly fortuitous development of several investments that were just the right size for us -big enough to be significant and small enough to handle.
I now feel that we are much closer to the point where increased size may prove disadvantageous. I don't want to ascribe too much precision to that statement since there are many variables involved. What may be the optimum size under some market and business circumstances can be substantially more or less than optimum under other circumstances. There have been a few times in the past when on a very short-term basis I have felt it would have been advantageous to be smaller but substantially more times when the converse was true.
Nevertheless, as circumstances presently appear, I feel substantially greater size is more likely to harm future results than to help them. This might not be true for my own personal results, but it is likely to be true for your results.
Therefore, unless it appears that circumstances have changed (under some conditions added capital would improve results) or unless new partners can bring some asset to the Partnership other than simply capital, I intend to admit no additional partners to BPL.
The only way to make this effective is to apply it across-the-board and I have notified Susie that if we have any more children, it is up to her to find some other partnership for them.
Because I anticipate that withdrawals (for taxes, among other reasons) may well approach additions by present partners and also because I visualize the curve of expectable performance sloping only very mildly as capital increases, I presently see no reason why we should restrict capital additions by existing partners.
The medically oriented probably will interpret this entire section as conclusive evidence that an effective antithyroid pill has been developed.
Trends in Our Business
Last year I discussed our various categories of investments. Knowing the penalties for cruel and unusual punishments, I will skip a rehash of the characteristics of each category, but merely refer you to last year's letter. However, a few words should be said to bring you up to date on the various segments of the business, and perhaps to give you a better insight into their strengths and weaknesses.
The "Workout" business has become very spasmodic. We were able to employ an average of only about \$6 million during the year in the Workout section, and this involved only a very limited number of situations. Although we earned about \$1,410,000 or about 23 ½% on average capital employed (this is calculated on an all equity basis - borrowed money is appropriate in most Workout situations, and we utilize it, which improves our rate of return above this percentage), over half of this was earned from one situation. I think it unlikely that a really interesting rate of return can be earned consistently on large sums of money in this business under present conditions. Nevertheless, we will continue to try to remain alert for the occasional important opportunity and probably continue to utilize a few of the smaller opportunities where we like the probabilities.
The "Generals-Private Owner Basis" category was very good to us in 1965. Opportunities in this area have become more scarce with a rising Dow, but when they come along, they are often quite significant. I mentioned at the start of last year that we were the largest stockholder of three companies in this category. Our largest yearend 1964 investment in this category was disposed of in 1965 pursuant to a tender offer resulting in a realized gain for BPL of \$3,188,000. At yearend 1964 we had unrealized appreciation in this investment of \$451,000. Therefore, the economic gain attributable to 1965 for this transaction was only \$2,737,000 even though the entire tax effect fell in that year. I mention these figures to illustrate how our realized gain for tax purposes in any year bears no necessary relationship to our economic gain.
The fundamental concept underlying the Generals-Private Owner category is demonstrated by the above case. A private owner was quite willing (and in our opinion quite wise) to pay a price for control of the business which isolated stock buyers were not willing to pay for very small fractions of the business. This has been a quite common condition in the securities markets over many years, and although purchases in this category work out satisfactorily in terms of just general stock market behavior, there is the occasional dramatic profit due to corporate action such as the one above.
The "Control" section of our business received a transfer member from our “Private Owner” category. Shares in Berkshire Hathaway had been acquired since November 1962 on much the same line of reasoning as prevailed in the security mentioned above. In the case of Berkshire, however, we ended up purchasing enough stock to assume a controlling position ourselves rather than the more usual case of either selling our stock in the market or to another single buyer.
Our purchases of Berkshire started at a price of \$7.60 per share in 1962. This price partially reflected large losses incurred by the prior management in closing some of the mills made obsolete by changing conditions within the textile business (which the old management had been quite slow to recognize). In the postwar period the company had slid downhill a considerable distance, having hit a peak in 1948 when about \$29 1/2 million was earned before tax and about 11,000 workers were employed. This reflected output from 11 mills.
At the time we acquired control in spring of 1965, Berkshire was down to two mills and about 2,300 employees. It was a very pleasant surprise to find that the remaining units had excellent management personnel, and we have not had to bring a single man from the outside into the operation. In relation to our beginning acquisition cost of \$7.60 per share (the average cost, however, was \$14.86 per share, reflecting very heavy purchases in early 1965), the company on December 31, 1965, had net working capital alone (before placing any value on the plants and equipment) of about \$19 per share.
Berkshire is a delight to own. There is no question that the state of the textile industry is the dominant factor in determining the earning power of the business, but we are most fortunate to have Ken Chace running the business in a first-class manner, and we also have several of the best sales people in the business heading up this end of their respective divisions.
While a Berkshire is hardly going to be as profitable as a Xerox, Fairchild Camera or National Video in a hypertensed market, it is a very comfort able sort of thing to own. As my West Coast philosopher says, “It is well to have a diet consisting of oatmeal as well as cream puffs.”
Because of our controlling interest, our investment in Berkshire is valued for our audit as a business, not as a marketable security. If Berkshire advances \$5 per share in the market, it does BPL no good - our holdings are not going to be sold. Similarly, if it goes down \$5 per share, it is not meaningful to us. The value of our holding is determined directly by the value of the business. I received no divine inspiration in that valuation of our holdings. (Maybe the owners of the three wonder stocks mentioned above do receive such a message in respect to their holdings -I feel I would need something at least that reliable to sleep well at present prices.) I attempt to apply a conservative valuation based upon my knowledge of assets, earning power, industry conditions, competitive position, etc. We would not be a seller of our holdings at such a figure, but neither would we be a seller of the other items in our portfolio at yearend valuations –otherwise, we would already have sold them.
Our final category is "Generals-Relatively Undervalued.” This category has been growing in relative importance as opportunities in the other categories become less frequent.
Frankly, operating in this field is somewhat more ethereal than operating in the other three categories, and I'm just not an ethereal sort. Therefore, I feel accomplishments here are less solid and perhaps less meaningful for future projections than in the other categories. Nevertheless, our results in 1965 were quite good in the “Relatively Undervalued” group, partly due to implementation of the technique referred to in last year's letter which serves to reduce risk and potentially augment gains. It should reduce risk in any year, and it definitely augmented the gains in 1965. It is necessary to point out that results in this category were greatly affected for the better by only two investments.
Candor also demands I point out that during 1965 we had our worst single investment experience in the history of BPL on one idea in this group.
Overall, we had more than our share of good breaks in 1965. We did not have a great quantity of ideas, but the quality, with the one important exception mentioned above, was very good and circumstances developed which accelerated the timetable in several. I do not have a great flood of good ideas as I go into 1966, although again I believe I have at least several potentially good ideas of substantial size. Much depends on whether market conditions are favorable for obtaining a larger position.
All in all, however, you should recognize that more came out of the pipeline in 1965 than went in.
Diversification
Last year in commenting on the inability of the overwhelming majority of investment managers to achieve performance superior to that of pure chance, I ascribed it primarily to 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.”
This year in the material which went out in November, I specifically called your attention to a new Ground Rule reading, "7. We diversify substantially less than most investment operations. We might invest up to 40% of our net worth in a single security under conditions coupling an extremely high probability that our facts and reasoning are correct with a very low probability that anything could drastically change the underlying value of the investment."
We are obviously following a policy regarding diversification which differs markedly from that of practically all public investment operations. Frankly, there is nothing I would like better than to have 50 different investment opportunities, all of which have a mathematical expectation (this term reflects the range of all possible relative performances, including negative ones, adjusted for the probability of each - no yawning, please) of achieving performance surpassing the Dow by, say, fifteen percentage points per annum. If the fifty individual expectations were not intercorelated (what happens to one is associated with what happens to the other) I could put 2% of our capital into each one and sit back with a very high degree of certainty that our overall results would be very close to such a fifteen percentage point advantage.
It doesn't work that way.
We have to work extremely hard to find just a very few attractive investment situations. Such a situation by definition is one where my expectation (defined as above) of performance is at least ten percentage points per annum superior to the Dow. Among the few we do find, the expectations vary substantially. The question always is, “How much do I put in number one (ranked by expectation of relative performance) and how much do I put in number eight?" This depends to a great degree on the wideness of the spread between the mathematical expectation of number one versus number eight.” It also depends upon the probability that number one could turn in a really poor relative performance. Two securities could have equal mathematical expectations, but one might have .05 chance of performing fifteen percentage points or more worse than the Dow, and the second might have only .01 chance of such performance. The wider range of expectation in the first case reduces the desirability of heavy concentration in it.
The above may make the whole operation sound very precise. It isn't. Nevertheless, our business is that of ascertaining facts and then applying experience and reason to such facts to reach expectations. Imprecise and emotionally influenced as our attempts may be, that is what the business is all about. The results of many years of decision-making in securities will demonstrate how well you are doing on making such calculations - whether you consciously realize you are making the calculations or not. I believe the investor operates at a distinct advantage when he is aware of what path his thought process is following.
There is one thing of which I can assure you. If good performance of the fund is even a minor objective, any portfolio encompassing one hundred stocks (whether the manager is handling one thousand dollars or one billion dollars) is not being operated logically. The addition of the one hundredth stock simply can't reduce the potential variance in portfolio performance sufficiently to compensate for the negative effect its inclusion has on the overall portfolio expectation.
Anyone owning such numbers of securities after presumably studying their investment merit (and I don't care how prestigious their labels) is following what I call the Noah School of Investing - two of everything. Such investors should be piloting arks. While Noah may have been acting in accord with certain time-tested biological principles, the investors have left the track regarding mathematical principles. (I only made it through plane geometry, but with one exception, I have carefully screened out the mathematicians from our Partnership.)
Of course, the fact that someone else is behaving illogically in owning one hundred securities doesn't prove our case. While they may be wrong in overdiversifying, we have to affirmatively reason through a proper diversification policy in terms of our objectives.
The optimum portfolio depends on the various expectations of choices available and the degree of variance in performance which is tolerable. The greater the number of selections, the less will be the average year-to-year variation in actual versus expected results. Also, the lower will be the expected results, assuming different choices have different expectations of performance.
I am willing to give up quite a bit in terms of leveling of year-to-year results (remember when I talk of “results,” I am talking of performance relative to the Dow) in order to achieve better overall long-term performance. Simply stated, this means I am willing to concentrate quite heavily in what I believe to be the best investment opportunities recognizing very well that this may cause an occasional very sour year - one somewhat more sour, probably, than if I had diversified more. While this means our results will bounce around more, I think it also means that our long-term margin of superiority should be greater.
You have already seen some examples of this. Our margin versus the Dow has ranged from 2.4 percentage points in 1958 to 33.0 points in 1965. If you check this against the deviations of the funds listed on page three, you will find our variations have a much wider amplitude. I could have operated in such a manner as to reduce our amplitude, but I would also have reduced our overall performance somewhat although it still would have substantially exceeded that of the investment companies. Looking back, and continuing to think this problem through, I feel that if anything, I should have concentrated slightly more than I have in the past. Hence, the new Ground Rule and this long-winded explanation.
Again let me state that this is somewhat unconventional reasoning (this doesn't make it right or wrong - it does mean you have to do your own thinking on it), and you may well have a different opinion - if you do, the Partnership is not the place for you. We are obviously only going to go to 40% in very rare situations - this rarity, of course, is what makes it necessary that we concentrate so heavily, when we see such an opportunity. We probably have had only five or six situations in the nine-year history of the Partnership where we have exceeded 25%. Any such situations are going to have to promise very significantly superior performance relative to the Dow compared to other opportunities available at the time. They are also going to have to possess such superior qualitative and/or quantitative factors that the chance of serious permanent loss is minimal (anything can happen on a short-term quotational basis which partially explains the greater risk of widened yearto-year variation in results). In selecting the limit to which I will go in anyone investment, I attempt to reduce to a tiny figure the probability that the single investment (or group, if there is intercorrelation) can produce a result for our total portfolio that would be more than ten percentage points poorer than the Dow.
We presently have two situations in the over 25% category - one a controlled company, and the other a large company where we will never take an active part. It is worth pointing out that our performance in 1965 was overwhelmingly the product of five investment situations. The 1965 gains (in some cases there were also gains applicable to the same holding in prior years) from these situations ranged from about \$800,000 to about \$3 1/2 million. If you should take the overall performance of our five smallest general investments in 1965, the results are lackluster (I chose a very charitable adjective).
Interestingly enough, the literature of investment management is virtually devoid of material relative to deductive calculation of optimal diversification.
All texts counsel "adequate" diversification, but the ones who quantify "adequate" virtually never explain how they arrive at their conclusion. Hence, for our summation on overdiversification, we turn to that eminent academician Billy Rose, who says, "You've got a harem of seventy girls; you don't get to know any of them very well.”
Miscellaneous
Last year we boldly announced an expansion move, encompassing an additional 227 1/4 square feet. Older partners shook their heads. I feel that our gain from operations in 1965 of \$12,304,060 indicates that we did not overextend ourselves. Fortunately, we didn't sign a percentage lease. Operationally, things have never been running more smoothly, and I think our present setup unquestionably lets me devote a higher percentage of my time to thinking about the investment process than virtually anyone else in the money management business. This, of course, is the result of really outstanding personnel and cooperative partners.
John Harding has taken complete charge of all administrative operations with splendid results. Bill Scott continues to develop detailed information on investments which substantially enhances our net profit figure. Beth Feehan, Donna Walter and Elizabeth Hanon (who joined us in November) have all handled large work loads (secretary's note -Amen!) accurately and efficiently.
The above people, their spouses (one apiece) and children have a combined investment in the Partnership of over \$600,000. Susie and I have an investment of \$6,849,936, which should keep me from slipping away to the movies in the afternoon. This represents virtually our entire net worth, with the exception of our continued holding of Mid-Continent Tab Card, 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, three aunts, two uncles, five cousins, and six nieces and nephews have interests in BPL, directly or indirectly, totaling \$2,708,233. So don't get any ideas about voting a change in the Partnership name.
Peat, Marwick, Mitchell & Co. has done the customary excellent job of expediting the audit and tax information. This requires great effort and ability, and they supply both. This year a computer was brought to bear on our problems, and naturally, I was a little worried someone else would come out as the general partner. However, it all worked quite smoothly.
Within the coming two weeks you will receive:
-
A tax letter giving you all BPL information needed for your 1965 federal income tax return. This letter is the only item that counts for tax purposes.
-
An audit from Peat, Marwick, Mitchell & Co. for 1965, setting forth the operations and financial
position of BPL, as well as your own capital account.
- A letter signed by me setting forth the status of your BPL interest on 1/1/66. This is identical with the figures developed in the audit.
Let me know if anything in this letter or that occurs during the year needs clarifying. It is difficult to anticipate all of the questions you may have and if there is anything that is confusing, I want to hear about it. For instance, we received an excellent suggestion last year from a partner regarding the presentation of the reconciliation of personal capital accounts.
My next letter will be about July 15th, summarizing the first ha1f of this year.
Cordially,
Warren E. Buffett
BUFFETT PARTNERSHIP, LTD.（巴菲特合伙有限公司）810 KIEWIT PLAZA OMAHA 31, NEBRASKA（810 基维特广场，奥马哈 31，内布拉斯加州）
1966年1月20日
1965年业绩
我们1965年的"脱贫战争"打得很漂亮。
具体来说，到年底我们少了12,304,060美元的"贫困"。
去年在年度信件中，我在"我们的目标"一节（请特别注意，标题不是"我们的承诺"）里说过：我们力求实现"……BPL相对于道指年均领先十个百分点（在分配给普通合伙人之前），而且波动幅度很大——差年景可能比道指差十个百分点，好年景什么都顺的时候领先二十五个百分点。"
结果第一年就超出了我的参数，迅速证明了我预测的不可靠。我们实现了BPL历史上相对于道指的最大领先幅度：整体收益47.2%，而道指整体收益（包括持有道指所能获得的股息）为14.2%。当然，没有哪个作者喜欢被这样的错误公开羞辱。这种事不太可能重复发生。
下表汇总了道指逐年业绩、合伙企业在分配前（超出6%部分的四分之一归普通合伙人）的业绩以及有限合伙人的结果：
| 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% |
| 1965 | 14.2% | 47.2% | 36.9% |
(1) 基于道指年度变化加上当年持有道指所能获得的股息。表格包含合伙企业的所有完整经营年份。
(2) 1957-61年包括所有前身有限合伙企业在整个年度的合并结果，扣除所有费用，但在分配给合伙人或普通合伙人之前。
(3) 1957-61年基于前一列合伙企业结果计算，并根据现行合伙协议考虑对普通合伙人的分配，但在有限合伙人每月提款之前。
按累计或复利计算，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% | 140.6% | 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% |
| 1957–64 | 131.3% | 608.7% | 402.9% |
| 1957–65 | 164.1% | 943.2% | 588.5% |
| 年复合收益率 | 11.4% | 29.8% | 23.9% |
去年之后，人们自然要问："接下来还能怎么翻盘？"这行当的一个缺点就是没什么显著的动能。如果通用汽车1965年占国内新车注册量的54%，那么由于车主忠诚度、经销商能力、产能、消费者形象等因素，1966年他们很可能还能接近这个数字。但BPL不是这样。我们每年从零开始，枪声一响，所有东西都按市价估值。1966年的合伙人（新的旧的）只能极有限地受益于1964年和1965年的努力。过去的方法和思路的成功不会自动转移到未来。
从更长期来看，我依然希望实现去年信件"我们的目标"一节中概述的那种成就（副本仍可索取）。不过，那些认为1965年的结果能经常重现的人，大概是在定期参加哈雷彗星观测俱乐部的聚会吧。我们肯定会有亏损的年份，也会有跑输道指的年份——这毫无疑问。但我依然相信未来我们能实现平均业绩优于道指。如果我对这一预期的看法发生改变，你们会立刻知道。
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，这些公司通常遵循95%-100%投资于普通股的政策。这四家公司——马萨诸塞投资者信托、投资者股票基金、泛大陆公司和雷曼公司——管理着超过50亿美元，拥有约60万股东，很可能代表了总规模350亿美元的投资公司行业中的典型。我的看法是，它们的结果大致与绝大多数其他投资咨询机构（合计管理着大得多的资金）的结果相当。
这个表格的目的是说明道指并不是一个容易战胜的投资业绩指标。光这四家公司所展示的咨询人才，每年收取的费用就约1000万美元，而这只占专业投资管理行业的一小部分。这些高薪且备受尊重的人才的公开"打击率"表明，他们的业绩略低于道指这个未加管理的指数。
年度结果
| 年份 | 马萨诸塞投资者信托 (1) | 投资者股票 (1) | 雷曼 (2) | 泛大陆 (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% |
| 1965 | 10.2% | 9.8% | 19.0% | 10.7% | 14.2% | 36.9% |
(1) 根据资产价值变化加上当年向登记持有人的分配计算。
(2) 1957-64年来自1965年《穆迪银行与金融手册》。1965年为估计值。
复合结果
| 年份 | 马萨诸塞投资者信托 (1) | 投资者股票 (1) | 雷曼 (2) | 泛大陆 (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% |
| 1957–65 | 136.8% | 124.0% | 145.3% | 138.4% | 164.1% | 588.5% |
| 年复合收益率 | 10.1% | 9.4% | 10.5% | 10.1% | 11.4% | 23.9% |
许多大型投资咨询机构（有些管理着数十亿美元）也管理投资公司，部分是为了方便小客户，部分是为了面向公众的展示。这些基金的结果与我们报告的四只基金大致相当。
我坚信衡量标准。上述投资经理在他们的活动中不断使用衡量标准。他们不断研究市场份额、利润率、资本回报率等的变化。他们的整个决策过程都与衡量挂钩——衡量管理层、行业、相对收益率等等。我确信他们也在给自己的新业务努力和咨询业务的盈利能力记分。那么，有什么比衡量投资想法和决策本身更基本的呢？我当然不认为我用来衡量自己业绩的标准（也希望我的合伙人使用）适用于所有资金管理者。但我确实相信，任何从事资金管理的人都应该有一个衡量标准，而且他和资金所有者双方都应该清楚理解为什么这个标准是合适的、应该使用什么时间段等。
Frank Block 在1965年11-12月的《金融分析师杂志》上说得很好。在谈到投资业绩衡量时，他说："……然而，事实上，文献在这个主题上存在巨大的空白。如果投资管理组织总是追求最佳业绩，那么仔细衡量投资结果就不算什么独特的事。客户没有要求正式的结果展示并不重要。仅凭自尊就应足以要求我们每个人客观地确定自己建议的质量。没有对结果的精确了解，这几乎不可能做到。一旦掌握了这些知识，就应该能够将分析扩展到某种程度，使弱点和强点的模式开始显现。我们批评企业管理层未能使用最好的工具来了解复杂工业组织的进展。如果我们不能为自己提供同样的工具来展示我们管理他人资金的效率，那几乎是不可原谅的。……因此，我们有责任报告，业绩衡量系统并没有自动包含在大多数投资管理组织的数据处理程序中。可悲的事实是，有些人似乎宁愿不知道自己做得好还是差。"
坦率地说，我坚持要应用一个衡量标准、并且我们双方使用同一个标准，有几个自私的理由。自然，超越基准让我乐在其中——用Casey Stengel（凯西·斯坦格尔）的话来说："给我看一个好输家，我就给你看一个真正的输家。"更重要的是，我确保自己不会因为错误的原因（亏损年份）受到指责，而只会因为正确的原因（跑输道指）被问责。知道合伙人会用正确的标准给我打分，有助于我做得更好。最后，提前设定好相关的衡量标准，能确保如果结果变得平庸（或更糟），我们都会退出这个行业。这意味着过去的成功不会模糊对当前结果的判断。它应该会减少对拙劣业绩进行巧妙合理化的机会。（最近桥牌桌上的灯光让我很不舒服。）尽管这种受虐式的衡量方法听起来没什么好处，但我可以从我对商业实体的观察向你们保证，这种评估在许多投资和工业组织中已经发挥了很大作用。
所以，如果你在投资领域评价他人（或自己！），请想好一些标准——应用它们——解读它们。如果你觉得我们的标准（至少以三年为周期对比道指）不适用，你就不应该留在合伙企业里。如果你觉得它适用，那么只要我们在超越道指，你就应该能够心平气和地接受亏损年份——不仅在理智上，在情感上也要如此。
复利的悲哀
通常，在信中的这个位置，我会停下来谦虚地试图纠正过去四五百年里的历史错误。虽然每年只用几段话似乎很难做到这一点，但我感觉自己在重塑世界对哥伦布、伊莎贝拉、弗朗索瓦一世、彼得·米纽伊特和曼哈顿印第安人的看法方面已经尽了一份力。这一努力的副产品是展示了复利的巨大力量。为了确保读者注意，我把这些文章命名为"复利的喜悦"。眼光敏锐的人可能会注意到今年略有变化。
一个像样的复利率（我们最好有一个不像样的利率），再加上大量新资金的加入，使我们的期初资本今年达到了43,645,000美元。过去几次，我曾提出过一个问题：不断增长的资本规模是否会损害我们的投资业绩。每次我都给出了否定的回答，并承诺如果我的看法改变，我会立即报告。
到目前为止，我不觉得资本增加损害了我们的运作。事实上，我相信过去几年中，我们手头有现有规模的资本，比我们操作小得多的资本时做得还要好一些。这得益于几个投资机会的偶然出现，它们恰好适合我们的规模——大到足以有意义，小到足以处理。
我现在觉得，我们更接近那个临界点了，更大的规模可能会变得不利。我不想给这个说法赋予太多精确性，因为涉及很多变量。在某些市场和商业环境下，最优规模可能在另一些环境下会有很大不同。过去有几次，在非常短期的基础上，我感觉小一点会有优势，但在更多情况下正好相反。
不过，就当前情况来看，我感觉规模大幅增加更可能损害未来的结果，而不是帮助它们。这可能不会影响我个人的结果，但很可能会影响你们的结果。
因此，除非情况发生变化（在某些条件下，增加资本会改善结果），或者新合伙人除了资本之外还能给合伙企业带来其他资产，我打算不再接纳新的合伙人加入BPL。
唯一能有效执行这一政策的方法是全面适用，我已经通知Susie，如果我们再有孩子，她得自己给他们找别的合伙企业发展。
由于我预计提款（包括税务等原因）可能与现有合伙人的追加资金相抵，也因为我预期随着资本增加，可期待业绩曲线只会非常平缓地下降，所以目前我认为没有理由限制现有合伙人的资本追加。
医学背景的人可能会把这一整节解读为有效抗甲状腺药丸已被开发出来的确凿证据。
我们业务的趋势
去年我讨论了我们的各类投资。我知道对残忍和异常惩罚的后果，所以不再赘述每类投资的特征，只请你们参考去年的信件。不过，有必要说几句，让你们了解业务各个部分的最新情况，或许也能让你们更清楚它们的优势和劣势。
"套利类"业务变得非常断断续续。我们在这一年中平均只在套利类股票上投入了约600万美元，而且只涉及非常有限的几个标的。虽然我们赚了约1,410,000美元，占平均投入资本的约23½%（这是按全股权基础计算的——在大多数套利类标的中，借入资金是合适的，我们也在使用，这使我们的回报率高于这个百分比），但其中超过一半来自一个标的。我认为，在当前条件下，在这个领域用大量资金持续赚取真正可观的回报率不太可能。不过，我们会继续努力保持警觉，抓住偶尔出现的重要机会，并可能继续利用一些我们喜欢其概率的小机会。
"低估类-私人持有基础"类别在1965年对我们非常有利。随着道指上涨，这个领域的机会变得更加稀少，但当它们出现时，往往相当重要。去年年初我提到，我们是这个类别中三家公司的最大股东。1964年底我们在这一类别中最大的投资在1965年根据一项要约收购被处置，为BPL实现了3,188,000美元的已实现收益。1964年底我们在该投资中有451,000美元的未实现增值。因此，这一交易归属于1965年的经济收益只有2,737,000美元，尽管全部税务影响都落在当年。我提到这些数字是为了说明，我们在任何一年因税务目的而实现的收益与我们的经济收益之间没有必然联系。
支撑"低估类-私人持有基础"类别的基本概念可以通过上述案例来展示。一个私人所有者相当愿意（并且我们认为相当明智）为控制权支付一个价格，而零散的股票买家不愿意为很小的部分支付这个价格。多年来，这种情况在证券市场很常见，虽然这类买入仅根据一般的股市行为也会令人满意，但偶尔会有像上述那样的公司行动带来戏剧性的利润。
我们业务中的"控制类"部分从"私人持有基础"类别接收了一个转来的成员。自1962年11月以来，我们一直在买入伯克希尔·哈撒韦的股票，推理思路与上述证券大致相同。然而，对于伯克希尔，我们最终买入了足够多的股票，自己取得了控制地位，而不是更常见的在市场上或卖给另一个单一买家。
我们对伯克希尔的买入始于1962年，价格每股7.60美元。这个价格部分反映了前任管理层因关闭一些因纺织业条件变化而过时的工厂（旧管理层对此反应相当迟钝）而造成的巨大亏损。战后时期，公司业绩大幅下滑，1948年达到顶峰，当时税前盈利约2,950万美元，雇佣约11,000名工人，对应11家工厂的产出。
当我们于1965年春季取得控制权时，伯克希尔只剩下两家工厂和约2,300名员工。令人惊喜的是，我们发现剩余单位拥有出色的管理人员，我们不需要从外面带一个人进来。相对于我们每股7.60美元的初始收购成本（不过平均成本是每股14.86美元，反映了1965年初的大规模买入），截至1965年12月31日，仅净营运资本（未对厂房设备进行任何估值）就约为每股19美元。
拥有伯克希尔是一件令人愉快的事。毫无疑问，纺织业的状况是决定企业盈利能力的主导因素，但我们非常幸运地拥有Ken Chace以一流的方式经营业务，而且我们还有几位业界最好的销售人员领导各自部门的销售工作。
虽然伯克希尔很难在一个过度紧张的市场中像施乐、仙童相机或国家影像那样赚钱，但持有它是非常令人安心的。正如我那位西海岸哲学家所说："饮食中既要有麦片粥，也要有奶油泡芙。"
由于我们拥有控股权，我们对伯克希尔的投资在审计中按企业价值估值，而不是作为可交易证券。如果伯克希尔在市场上上涨每股5美元，对BPL没有好处——我们的持股不会卖出。同样，如果下跌每股5美元，对我们也没有意义。我们持有的价值直接由企业的价值决定。我在评估我们持有的资产时并没有得到什么神启。（也许上述三只神奇股票的拥有者确实得到了关于它们持有价值的信息——我觉得至少需要那么可靠的信息，才能在目前的价格下睡好觉。）我试图根据我对资产、盈利能力、行业状况、竞争地位等的了解，进行保守估值。我们不会以那样的价格出售我们的持股，但也不会以年终估值出售投资组合中的其他项目——否则我们早就卖掉了。
最后一个类别是"低估类-相对低估"。随着其他类别机会的减少，这个类别的重要性在增加。
坦率地说，在这个领域操作比其他三个类别要虚无缥缈一些，而我不是一个虚无缥缈的人。因此，我觉得这里的成果不如其他类别坚实，对未来预测的意义也可能较小。不过，1965年我们在"相对低估"组的成绩相当不错，部分原因是采用了去年信中提到的技术，该技术有助于降低风险并可能增加收益。它在任何年份都应该降低风险，而在1965年确实增加了收益。但需要指出的是，这个类别的结果在很大程度上受到仅两个投资的正面影响。
坦诚地说，我还必须指出，1965年，BPL历史上最糟糕的单笔投资经历就发生在这个类别中的一个标的上。
总体来说，1965年我们运气不错。好主意的数量并不多，但质量很高（除了上述一个重要例外），并且情况的发展加快了好几个的时间表。进入1966年，我手上并没有大量好主意，不过我相信至少还有几个规模可观的好主意。很大程度上取决于市场条件是否有利于获得更大的仓位。
但总的来说，你们应该认识到，1965年从管道里流出的东西比流进去的多。
分散化
去年，在评论绝大多数投资经理无法实现优于纯随机结果的业绩时，我主要将其归因于："(1)群体决策——我可能带些偏见的看法是，任何规模的群体，如果所有成员都真正参与决策，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及（在一定程度上）投资组合保持一致；(3)一种制度框架，在其中平均水平是"安全的"，而独立行动的个人回报与这种行动所附带的总体风险完全不成比例；(4)坚持某些非理性的分散化做法；以及最后但重要的一点，(5)惯性。"
今年，在11月份发出的材料中，我特别提请大家注意一条新的基本规则："7. 我们的分散化程度远低于大多数投资操作。在特定条件下，当事实和推理正确的概率极高，且任何可能大幅改变投资基础价值的概率极低时，我们可能将净值的40%投资于单一证券。"
我们显然正在实行一条与几乎所有公共投资操作截然不同的分散化政策。坦率地说，我最希望的是有50个不同的投资机会，每个都有数学期望（这个术语反映了所有可能的相对表现范围，包括负值，并根据每种情况的概率进行调整——请不要打哈欠）每年超越道指，比如十五个百分点。如果这50个期望彼此不相关（一个发生的情况与另一个有关联），我可以把2%的资本投入每个，然后高枕无忧，几乎可以确定我们的整体结果会非常接近那十五个百分点的优势。
但现实不是这样。
我们必须极其努力才能找到很少的几个有吸引力的投资机会。这样的机会定义为我的期望（如上定义）每年至少比道指高出十个百分点。在我们找到的少数几个中，期望值差异很大。问题总是："我应该把多少钱投入排名第一的（按相对表现期望排序），多少钱投入排名第八的？"这在很大程度上取决于第一和第八的数学期望之间的差距有多大。它还取决于第一出现真正糟糕相对表现的概率。两只证券可能有相同的数学期望，但第一只有0.05的概率表现比道指差十五个百分点或更多，而第二只有0.01的概率。第一种情况的更宽期望范围降低了高度集中持有的吸引力。
以上可能让整个操作听起来非常精确。但并非如此。不过，我们的业务就是查明事实，然后将经验和推理应用于这些事实以获得期望。尽管我们的尝试可能不精确且受情绪影响，但这正是业务的核心。多年在证券上的决策结果将显示你在进行计算方面做得如何——无论你是否意识到自己正在做这些计算。我相信，当投资者意识到自己的思维过程遵循什么路径时，他会处于明显的优势。
有一点我可以向你们保证。如果基金的良好表现哪怕是一个次要目标，那么任何包含一百只股票的投资组合（无论管理者处理的是1000美元还是10亿美元）都不是在逻辑上运作的。增加第一百只股票并不能足够地减少投资组合的潜在方差，以弥补其对整体投资组合期望的负面影响。
任何持有这么多证券的人，在据说研究了它们的投资价值之后（我不在乎它们的标签多么有威望），都是在遵循我所谓的"诺亚投资学派"——每种两个。这些人应该去驾驶方舟。虽然诺亚可能根据某些经过时间考验的生物学原理行事，但这些投资者在数学原理上已经偏离了轨道。（我只通过了平面几何，但有一个例外，我仔细地把数学家从我们的合伙企业中筛选掉了。）
当然，别人持有100只股票的不合逻辑并不能证明我们的情况。尽管它们可能在过度分散化方面犯了错，但我们必须根据我们的目标正面推理出一个适当的分散化政策。
最优投资组合取决于可用选择的各种期望以及可容忍的业绩方差程度。选择的数量越多，实际与预期结果之间的平均逐年变化就越小。同时，如果不同选择有不同的期望业绩，预期结果也会越低。
为了获得更好的长期整体业绩，我愿意放弃相当程度的逐年结果平滑（记住，当我谈"结果"时，我指的是相对于道指的表现）。简单地说，这意味着我愿意相当高度地集中在我认为最好的投资机会上，同时很清楚这可能导致偶尔非常糟糕的年份——可能比分散化更多时更糟糕。虽然这意味着我们的结果会波动更大，但我认为这也意味着我们的长期领先幅度应该更大。
你们已经看到了一些例子。我们相对于道指的领先幅度从1958年的2.4个百分点到1965年的33.0个百分点不等。如果你把这与第三页所列基金的偏离程度相比，你会发现我们的波动幅度大得多。我本可以用一种降低波动幅度的方式操作，但那样也会在一定程度上降低整体业绩，尽管它仍会大幅超越投资公司。回顾过去，并继续思考这个问题，我觉得如果有什么不同的话，我应该比过去更集中一点。因此有了新的基本规则和这篇冗长的解释。
再次让我说明，这是一些不太传统的推理（这并不让它是对是错——它意味着你必须自己思考），你们可能有不同的意见——如果有，这个合伙企业不适合你们。显然，我们只在非常罕见的情况下才会达到40%——这种罕见性当然意味着，当我们看到这样的机会时，有必要如此高度集中。在合伙企业的九年历史中，我们可能只有过五六次超过25%的情况。任何这样的机会都必须承诺相对于当时可用的其他机会，有非常显著地优于道指的表现。它们还必须具备如此优越的定性和/或定量因素，以至于发生严重永久损失的可能性极小（短期报价上什么都能发生，这也在一定程度上解释了逐年结果方差更大的风险）。在决定对任何单项投资投入多少上限时，我试图将单一投资（或相关的一组）能给我们的整体投资组合带来比道指差超过十个百分点结果的概率降低到微小数字。
目前我们有两个超过25%的标的——一个是受控公司，另一个是大型公司，我们永远不会在其中扮演积极角色。值得指出的是，1965年的业绩绝大部分来自五个投资标的。1965年的收益（有些情况下同一持有物的收益也适用于以前年份）从约80万美元到约350万美元不等。如果你看1965年我们最小的五项普通投资的表现，结果很平淡（我选了一个非常宽容的形容词）。
有趣的是，投资管理文献中几乎完全没有关于最优分散化的演绎计算的内容。
所有教科书都建议"适当"分散化，但那些量化"适当"的人几乎从不解他们是如何得出这个结论的。因此，关于过度分散化的总结，我们求助于那位杰出的学术人士Billy Rose（比利·罗斯），他说："你有一个七十个姑娘的后宫，你对她们任何一个都不会了解得很深。"
杂项
去年我们大胆宣布了一项扩张行动，增加了227.25平方英尺。老合伙人摇了摇头。我觉得我们1965年12,304,060美元的经营收益表明我们并没有过度扩张。幸运的是，我们没有签百分比租赁合同。经营上，一切从未如此顺利，我认为我们当前的设置无疑让我能够将更高比例的时间用于思考投资过程，这几乎比任何其他资金管理行业的人都要多。当然，这要归功于真正出色的员工和合作的合伙人。
John Harding完全接管了所有行政事务，取得了出色的成果。Bill Scott继续开发投资的详细信息，大大增加了我们的净利润数字。Beth Feehan、Donna Walter和Elizabeth Hanon（她于11月加入我们）都处理了大量工作（秘书注：阿门！），准确而高效。
以上人员、他们的配偶（每人一个）和子女在合伙企业中的合计投资超过600,000美元。Susie和我的投资为6,849,936美元，这应该能防止我下午溜去看电影。这几乎代表了我们所有的净资产，除了我们继续持有的Mid-Continent Tab Card（中大陆制卡公司），这是一家本地公司，我在1960年买入时它只有不到10个股东。
此外，我的亲属，包括三个孩子、母亲、两个姐妹、两个姐夫、岳父、三个姑姑、两个叔叔、五个堂兄弟姐妹、以及六个侄女侄子，在BPL中直接或间接拥有的权益总计2,708,233美元。所以别打主意投票更改合伙企业的名字。
Peat, Marwick, Mitchell & Co.（毕马威会计师事务所）一如既往地出色地加速完成了审计和税务信息。这需要巨大的努力和能力，他们两者都提供了。今年，一台计算机被用于处理我们的问题，自然地，我有点担心别人会成为普通合伙人。不过，一切都很顺利。
在未来两周内，你们将收到：
- 一封税务信，提供你们1965年联邦所得税申报所需的所有BPL信息。这封信是唯一对税务目的有效的文件。
- 一份Peat, Marwick, Mitchell & Co.的1965年审计报告，说明BPL的经营和财务状况，以及你们各自的资本账户。
- 一封由我签名的信，说明你们在1966年1月1日的BPL权益状况。这与审计中得出的数字相同。
如果这封信或这一年中发生的任何事需要澄清，请告诉我。很难预料所有你们可能有的问题，如果有任何令人困惑的地方，我希望听到。例如，去年我们收到了一位合伙人的绝佳建议，关于个人资本账户调节的呈现方式。
我的下一封信将在7月15日左右，总结今年上半年。
诚挚的，
Warren E. Buffett（沃伦·E·巴菲特）