Buffett's Letter to Shareholders 1961-1962

1961 Summary

At this time, Buffett was 31 years old.

Part 1: Our Performance in 1961

The Dow Jones Industrial Average (including dividends) returned 22.2%, while our partnership returned 45.9%. Cumulative returns to date: Dow 74.3%, Partnership 251%.

Buffett uses the Dow as a benchmark and believes a minimum of three years is necessary for performance evaluation, preferably covering a full market cycle. He notes that outperforming the Dow is not easy, citing examples where only 6 out of 38 investment funds achieved this.

Part 2: Our Investment Approach

The portfolio is divided into three parts:

Stocks purchased with a margin of safety have significant appreciation potential.

1. Undervalued securities: The largest portion but without influencing company policy. 5-6 major holdings account for 5%-10% of total capital each, while another 10-15 smaller positions use less capital.
2. Work-out (arbitrage) investments: Mergers, liquidations, reorganizations, spin-offs, etc. These provide relatively stable annual profits and, due to their safety, can be supplemented with borrowed funds.
3. Control investments or influencing company policy through significant ownership stakes. Example: Dempster Mill Manufacturing Company.

Part 3: On Conservatism

Conservatism cannot be equated simply with buying government bonds or blue-chip stocks. True conservatism depends on whether the investment method and results withstand scrutiny.

Long-term government bonds and blue-chip stocks may seem conservative but ignore purchasing power risk, valuation, and dividends, making them potentially dangerous.

Market consensus or authoritative approval does not equate to correctness. The key is whether assumptions, facts, and reasoning can withstand repeated transaction validations.

Whether an investment portfolio is conservative can only be judged by its own logic and long-term results, not by comparison with market-conservative portfolios.

Part 4: On Scale

Passive or small trades: The larger the capital, the harder it is to trade, and performance suffers.

Control investments: Larger capital allows targeting bigger opportunities with fewer competitors, increasing opportunities.

Buffett believes that even reverting to smaller capital does not guarantee better performance.

Part 5: A Prediction

Buffett first clarifies that he avoids making predictions, stating he knows nothing about market conditions in the next year or two.

He believes the market will always fluctuate, and long-term investors can ignore these fluctuations.

Over the long term, he expects the Dow to achieve a 5% to 7% annual compound growth rate (including dividends). His goal is to outperform the Dow by 10% and hopes for a long-term compound growth rate of 15%-17% for his portfolio.

It can be seen that each year's letter actually lowers investors' expectations and aims to verify results over the long term.

1962 Summary

At this time, Buffett was 32 years old.

Part 1: On the Partnership Agreement

Basic Rules

1. Any promise of guaranteed returns is nonsense.
2. If returns in any year are below 6%, partners who choose to receive monthly distributions in the following year will see reduced capital.
3. Returns are calculated based on changes in portfolio market value relative to the beginning of the year, unrelated to taxes.
4. Outperformance of the Dow Jones is the annual benchmark.
5. The minimum evaluation period is three years.
6. No predictions on market trends or business cycles.
7. No commitments:
   1. Invest based on value, not popular opinion.
   2. Strive to reduce permanent capital loss through margin of safety.
   3. All personal and family net worth is invested in the partnership.

Part 2: Our Performance in 1962

The Dow returned -7.6%, while we returned 13.9%. Cumulative returns: Dow 61.6, Partnership 299.8.

Buffett denies that capital growth leads to lower investment performance, noting that increased capital currently has both advantages and disadvantages for investments.

The letter first mentions the magic of compound interest.

From Buffett's annual emphasis on "above-average performance in bear markets and average performance in bull markets," I believe investment success is determined by controlling drawdowns, due to compounding.

$XIAOMI-W(01810.HK) $Constellation Brands(STZ.US) $Alphabet - C(GOOG.US) $Unitedhealth(UNH.US) Continue holding.