1967 Letter to Partners

BUFFETT PARTNERSHIP. LTD. 610 KIEWIT PLAZA OMAHA, NEBRASKA 68131 TELEPHONE 042-4110

January 24, 1968

Our Performance in 1967

By most standards, we had a good year in 1967. Our overall performance was plus 35.9% compared to plus 19.0% for the Dow, thus surpassing our previous objective of performance ten points superior to the Dow. Our overall gain was $19,384,250 which, even under accelerating inflation, will buy a lot of Pepsi. And, due to the sale of some longstanding large positions in marketable securities, we had realized taxable income of $27,376,667 which has nothing to do with 1967 performance but should give all of you a feeling of vigorous participation in The Great Society on April 15th.

The minor thrills described above are tempered by any close observation of what really took place in the stock market during 1967. Probably a greater percentage of participants in the securities markets did substantially better than the Dow last year than in virtually any year in history. In 1967, for many, it rained gold and it paid to be out playing the bass tuba. I don't have a final tabulation at this time but my guess is that at least 95% of investment companies following a common stock program achieved better results than the Dow - in many cases by very substantial amounts. It was a year when profits achieved were in inverse proportion to age - and I am in the geriatric ward, philosophically.

The following summarizes the year-by-year performance of the Dow, 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)

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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% 1966 -15.6% 20.4% 16.8% 1967 19.0% 35.9% 28.4%

(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

         ’

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% 1957 – 66 122.9% 1156.0% 704.2% 1957 – 67 165.3% 1606.9% 932.6% Annual Compounded Rate 9.3% 29.4% 23.6%

Investment Companies

On the following page is the usual tabulation showing the results of what were the two largest mutual funds (they have stood at the top in size since BPL was formed - this year, however, Dreyfus Fund overtook them) that follow a policy of being, typically, 95-100% invested in common stocks, and the two largest diversified closed- end investment companies.

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% 1965 10.2% 9.8% 19.0% 10.7% 14.2% 36.9% 1966 -7.7% -10.0% -2.6% -6.9% -15.6% 16.8% 1967 20.0% 22.8% 28.0% 25.4% 19.0% 28.4%

Cumulative Results 162.3% 147.6% 206.2% 181.5% 165.3% 932.6% Annual Compounded Rate 9.2% 8.6% 10.7% 9.9% 9.3% 23.6%

(1) Computed from changes in asset value plus any distributions to holders of record during year. (2) From 1967 Moody's Bank & Finance Manual for 1957-1966. Estimated for 1967.

Last year I said:

“A few mutual funds and some private investment operations have compiled records vastly superior to the Dow and, in some cases, substantially superior to Buffett Partnership, Ltd. Their investment techniques are usually very dissimilar to ours and not within my capabilities.”

In 1967 this condition intensified. Many investment organizations performed substantially better than BPL, with gains ranging to over 100%. Because of these spectacular results, money, talent and energy are converging in a maximum effort for the achievement of large and quick stock market profits. It looks to me like greatly intensified speculation with concomitant risks -but many of the advocates insist otherwise.

My mentor, Ben Graham, used to say. “Speculation is neither illegal, immoral nor fattening (financially).” During the past year, it was possible to become fiscally flabby through a steady diet of speculative bonbons. We continue to eat oatmeal but if indigestion should set in generally, it is unrealistic to expect that we won’t have some discomfort.

Analysis of 1967 Results

The overall figures given earlier conceal vast differences in profitability by portfolio category during 1967.

We had our worst performance in history in the “Workout” section. In the 1965 letter, this category was defined as, “...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 does not pertain 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 corporate development does not materialize.”

The streets were filled with upset applecarts - our applecarts - during 1967. Thus, on an average investment of $17,246,879, our overall gain was $153,273. For those of you whose slide rule does not go to such insulting depths, this represents a return of .89 of 1%. While I don't have complete figures. I doubt that we have been below 10% in any past year. As in other categories, we tend to concentrate our investments in the workout category in just a few situations per year. This technique gives more variation in yearly results than would be the case if we used an across-the-board approach. I believe our approach will result in as great (or greater) profitability on a long-term basis, but you can't prove it by 1967.

Our investment in controlled companies was a similar drag on relative performance in 1967, but this is to be expected in strong markets. On an average investment of $20,192,776 we had an overall gain of $2,894,571. I am pleased with this sort of performance, even though this category will continue to underperform if the market continues strong during 1968. Through our two controlled companies (Diversified Retailing and Berkshire Hathaway), we acquired two new enterprises in 1967. Associated Cotton Shops and National Indemnity (along with National Fire & Marine, an affiliated company). These acquisitions couldn't be more gratifying. Everything was as advertised or better. The principal selling executives, Ben Rosner and Jack Ringwalt, have continued to do a superb job (the only kind they know), and in every respect have far more than lived up to their end of the bargain.

The satisfying nature of our activity in controlled companies is a minor reason for the moderated investment objectives discussed in the October 9th letter. When I am dealing with people I like, in businesses I find stimulating (what business isn't ?), and achieving worthwhile overall returns on capital employed (say, 10 - 12%), it seems foolish to rush from situation to situation to earn a few more percentage points. It also does not seem sensible to me to trade known pleasant personal relationships with high grade people, at a decent rate of

return, for possible irritation, aggravation or worse at potentially higher returns. Hence, we will continue to keep a portion of our capital (but not over 40% because of the possible liquidity requirements arising from the nature of our partnership agreement) invested in controlled operating businesses at an expected rate of return below that inherent in an aggressive stock market operation.

With a combined total of $37,439,655 in workouts and controls producing an overall gain of only $3,047,844, the more alert members of the class will have already concluded we had a whale of a year in the "Generals - Relatively Undervalued" category. On a net average investment of $19,487,996, we had an overall gain of $14,096,593, or 72%. Last year I referred to one investment which substantially outperformed the general market in 1964, 1965 and 1966 and because of its size (the largest proportion we have ever had in anything - we hit our 40% limit) had a very material impact on our overall results and, even more so, this category. This excellent performance continued throughout 1967 and a large portion of total gain was again accounted for by this single security. Our holdings of this security have been very substantially reduced and we have nothing in this group remotely approaching the size or potential which formerly existed in this investment.

The "Generals - Private Owner" section produced good results last year ($1,297,215 on $5,141,710 average investment), and we have some mildly interesting possibilities in this area at present.

Miscellaneous

We begin the new year with net assets of $68,108,088. We had partners with capital of about $1,600,000 withdraw at yearend, primarily because of the reduced objectives announced in the October 9th letter. This makes good sense for them, since most of them have the ability and motivation to surpass our objectives and I am relieved from pushing for results that I probably can't attain under present conditions.

Some of those who withdrew (and many who didn't) asked me, "What do you really mean?" after receiving the October 9th letter. This sort of a question is a little bruising to any author, but I assured them I meant exactly what I had said. I was also asked whether this was an initial stage in the phasing out of the partnership. The answer to this is, “Definitely, no”. As long as partners want to put up their capital alongside of mine and the business is operationally pleasant (and it couldn't be better), I intend to continue to do business with those who have backed me since tennis shoes.

Gladys Kaiser has joined us and is doing the same sort of top-notch job that we have long received from Donna, Bill and John. The office group, spouses and children have over $15 million invested in BPL on January 1, 1968, so we have not had a need for NoDoz during business hours.

Within a few days, you will receive:

1. A tax letter giving you all BPL information needed for your 1967 federal income tax return. This letter is the only item that counts for tax purposes.

2. An audit from Peat, Marwick, Mitchell & Co. (they have again done an excellent job) for 1967, 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 January 1, 1968. 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. My next letter will be about July15th, summarizing the first half of this year.

Cordially,

BUFFETT PARTNERSHIP. LTD. 610 KIEWIT PLAZA OMAHA, NEBRASKA 68131 TELEPHONE 042-4110

July 11th, 1968

First Half Performance

During the first half of 1968, the Dow-Jones Industrial Average declined fractionally from 905 to 898. Ownership of the Dow would also have produced dividends of about $15 during the half, resulting in an overall gain of 0.9% for that Average. The Dow, once again, was an anemic competitor for most investment managers, although it was not surpassed by anything like the margins of 1967.

Our own performance was unusually good during the first half, with an overall gain of 16% excluding any change in valuation for controlled companies (which represented slightly over one-third of net assets at the beginning of the year). However, any release of adrenalin is unwarranted. Our marketable security investments are heavily concentrated in a few situations, making relative performance potentially more volatile than in widely diversified investment vehicles. Our long term performance goals are as stated in the revised "Ground Rules" and I will be quite happy if we achieve those limited objectives over a period of years. The following table summarizes performance to date on the usual basis:

Year Overall Results From Dow (1) Partnership Results (2)

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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% 1966 -15.6% 20.4% 16.8% 1967 19.0% 35.9% 28.4% First Half 1968 0.9% 16.0% 13.5%

Cumulative Results 167.7% 1880.0% 1072.0% Annual Compounded Rate 8.9% 29.6% 23.8%

(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.

Although we revise valuations of our controlled companies only at yearend, it presently appears that our share of their 1968 earnings will be something over $3 million. Those with primary responsibility for their operations, Ken Chace at Berkshire Hathaway, Louis Kohn at Hochschild Kohn, Jack Ringwalt at National Indemnity and Ben Rosner at Associated Cotton Shops, continue to meld effort and ability into results.

This year, Diversified Retailing Company (owner of Hochschild Kohn and Associated Cotton Shops) issued its first published annual report. This was occasioned by the public sale of debentures to approximately 1,000 investors last December. Thus, DRC is in the rather unusual position of being a public company from a creditors' viewpoint, but a private one (there are three stockholders -BPL owns 80%) for ownership purposes. I am enclosing the DRC report with this letter (except where duplicates go to one house hold) and plan to continue to send them along with future mid-year letters.

As I have mentioned before, we cannot make the same sort of money out of permanent ownership of controlled businesses that can be made from buying and reselling such businesses, or from skilled investment in marketable securities. Nevertheless, they offer a pleasant long term form of activity (when conducted in conjunction with high grade, able people) at satisfactory rates of return.

Investment Companies

On the following page is the form sheet on the usual investment companies:

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% 1965 10.2% 9.8% 19.0% 10.7% 14.2% 36.9% 1966 -7.7% -10.0% -2.6% -6.9% -15.6% 16.8% 1967 20.0% 22.8% 28.0% 25.4% 19.0% 28.4% First Half 1968 5.1% 2.8% 4.4% 2.0% 0.9% 13.5%

Cumulative Results 175.7% 154.5% 218.6% 186.7% 167.7% 1072.0% Annual Compounded Rate 9.2% 8.5% 10.6% 9.6% 8.9% 23.8%

(1) Computed from changes in asset value plus any distributions to holders of record during year. (2) From 1968 Moody's Bank & Finance Manual for 1957 -1967. Estimated for first half of 1968.

Due to a sluggish performance by the Dow in the last few years, the four big funds now have, on average, about a one-half point per annum advantage over the Dow for the full period.

The Present Environment

I make no effort to predict the course of general business or the stock market. Period. However, currently there are practices snowballing in the security markets and business world which, while devoid of short term predictive value, bother me as to possible long term consequences.

I know that some of you are not particularly interested (and shouldn't be) in what is taking place on the financial stage. For those who are, I am enclosing a reprint of an unusually clear and simple article which lays bare just what is occurring on a mushrooming scale. Spectacular amounts of money are being made by those participating (whether as originators, top employees. professional advisors, investment bankers, stock speculators, etc… ) in the chain-letter type stock-promotion vogue. The game is being played by the gullible, the self-hypnotized, and the cynical. To create the proper illusions, it frequently requires accounting distortions (one particularly progressive entrepreneur told me he believed in "bold, imaginative accounting"), tricks of capitalization and camouflage of the true nature of the operating businesses involved. The end product is popular, respectable and immensely profitable (I'll let the philosophers figure in which order those adjectives should be placed).

Quite candidly, our own performance has been substantially improved on an indirect basis because of the fall- out from such activities. To create an ever widening circle of chain letters requires increasing amounts of corporate raw material and this has caused many intrinsically cheap (and not so cheap) stocks to come to life. When we have been the owners of such stocks, we have reaped market rewards much more promptly than might otherwise have been the case. The appetite for such companies, however, tends to substantially diminish the number of fundamentally attractive investments which remain.

I believe the odds are good that, when the stock market and business history of this period is being written, the phenomenon described in Mr. May's article will be regarded as of major importance, and perhaps characterized as a mania. You should realize, however, that his "The Emperor Has No Clothes" approach is at odds (or dismissed with a “SO What?” or an "Enjoy, Enjoy”) with the views of most investment banking houses and currently successful investment managers. We live in an investment world, populated not by those who must be logically persuaded to believe, but by the hopeful, credulous and greedy, grasping for an excuse to believe.

Finally, for a magnificent account of the current financial scene, you should hurry out and get a copy of “The Money Game” by Adam Smith. It is loaded with insights and supreme wit. (Note: Despite my current “Support Your Local Postmaster” drive, I am not enclosing the book with this letter - it retails for $6.95.)

Taxes

Several unusual factors make the tax figure even more difficult than usual to estimate this year. We will undoubtedly have an above average amount of ordinary income. The picture on short term and long term capital gain is subject to unusually substantial variance. At the beginning of the year, I suggested that you use an 8% ordinary income factor (it won't come in this manner but this figure embodies an adjustment for long term capital gain) applied to your BPL capital account on an interim basis to compute quarterly tax estimates. If a figure different from 8% seems more appropriate for your September 15th quarterly estimate. I will let you know by September 5th. If no change is necessary, you will next hear from me on November 1st with the Commitment Letter for 1969.

Cordially,

WEB/glk

BUFFETT PARTNERSHIP. LTD. 610 KIEWIT PLAZA OMAHA, NEBRASKA 68131 TELEPHONE 042-4110

January 22nd, 1969

Our Performance in 1968

Everyone makes mistakes.

At the beginning of 1968, I felt prospects for BPL performance looked poorer than at any time in our history. However, due in considerable measure to one simple but sound idea whose time had come (investment ideas, like women are often more exciting than punctual), we recorded an overall gain of $40,032,691.

Naturally, you all possess sufficient intellectual purity to dismiss the dollar result and demand an accounting of performance relative to the Dow-Jones Industrial Average. We established a new mark at plus 58.8% versus an overall plus 7.7 % for the Dow, including dividends which would have been received through ownership of the Average throughout the year. This result should be treated as a freak like picking up thirteen spades in a bridge game. You bid the slam, make it look modest, pocket the money and then get back to work on the part scores. We will also have our share of hands when we go set.

The following summarizes the year-by-year performance of the Dow, 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)

         ’

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% 1966 -15.6% 20.4% 16.8% 1967 19.0% 35.9% 28.4% 1968 7.7% 58.8% 45.6%

(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

         ’

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% 1957 – 66 122.9% 1156.0% 704.2% 1957 – 67 165.3% 1606.9% 932.6% 1957 – 68 185.7% 2610.6% 1403.5% Annual Compounded Rate 9.1% 31.6% 25.3%

Investment Companies

On the following page is the usual tabulation showing the results of what were the two largest mutual funds (they stood at the top in size from 1957 through 1966 - they are still number two and three) that follow a policy of being, typically, 95 -100% invested in common stocks, and the two largest diversified closed-end investment companies.

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% 1965 10.2% 9.8% 19.0% 10.7% 14.2% 36.9% 1966 -7.7% -10.0% -2.6% -6.9% -15.6% 16.8% 1967 20.0% 22.8% 28.0% 25.4% 19.0% 28.4% 1968 10.3% 8.1% 6.7% 6.8% 7.7% 45.6%

Cumulative Results 189.3% 167.7% 225.6% 200.2% 185.7% 1403.5% Annual Compounded Rate 9.3% 8.6% 10.3% 9.6% 9.1% 25.3%

(1) Computed from changes in asset value plus any distributions to holders of record during year. (2) From 1968 Moody's Bank & Finance Manual for 1957-1967. Estimated for 1968.

It is interesting that after twelve years these four funds (which presently aggregate well over $5 billion and account for over 10% of the investment company industry) have averaged only a fraction of one percentage point annually better than the Dow.

Some of the so-called “go-go” funds have recently been re-christened “no-go” funds. For example, Gerald Tsai's Manhattan Fund, perhaps the world's best-known aggressive investment vehicle, came in at minus 6.9% for 1968. Many smaller investment entities continued to substantially outperform the general market in 1968, but in nothing like the quantities of 1966 and 1967.

The investment management business, which I used to severely chastise in this section for excessive lethargy, has now swung in many quarters to acute hypertension. One investment manager, representing an organization (with an old established name you would recognize) handling mutual funds aggregating well over $1 billion, said upon launching a new advisory service in 1968:

“The complexities of national and international economics make money management a full-time job. A good money manager cannot maintain a study of securities on a week-by-week or even a day-by-day basis. Securities must be studied in a minute-by-minute program.”

Wow!

This sort of stuff makes me feel guilty when I go out for a Pepsi. When practiced by large and increasing numbers of highly motivated people with huge amounts of money on a limited quantity of suitable securities, the result becomes highly unpredictable. In some ways it is fascinating to watch and in other ways it is appalling.

Analysis of 1968 Results

All four main categories of our investment operation worked out well in 1968. Our total overall gain of $40,032,691 was divided as follows:

Category Average Investment Overall Gain Controls $24,996,998 $5,886,109 Generals – Private Owner $16,363,100 $21,994,736 Generals – Relatively Undervalued $8,766,878 $4,271,825 Workouts $18,980,602 $7,317,128 Miscellaneous, primarily US Treasury Bills $12,744,973 $839,496 Total Income

$40,309,294 Less – General Expense, including Interest

$276,603 Overall Gain

$40,032,691

A few caveats, as mentioned in my letter two years ago, are again in order (non-doctoral candidates may proceed to next section):

1. An explanation of the various categories listed above was made in the January 18, 1965 letter. If your memory needs refreshing and your favorite newsstand does not have the pocketbook edition. We'll be glad to give you a copy.

2. The classifications are not iron clad. Nothing is changed retroactively, but the initial decision as to category is sometimes arbitrary. Sometimes later classification proves difficult; e.g. a workout that falls

through but that I continue to hold for reasons unrelated or only partially related to the original decision (like stubbornness).

3. Percentage returns calculated on the average investment base by category would be significantly understated relative to Partnership percentage returns which are calculated on a beginning investment base. In the foregoing figures, a security purchased by us at 100 on January 1 which appreciated at an even rate to 200 on December 31 would have an average investment of 150 producing a 66-2/3% result contrasted to a 100% result by the customary approach. In other words, the foregoing figures use a monthly average of market values in calculating the average investment.

4. All results are based on a 100% ownership, non-leverage basis. Interest and other general expenses are deducted from total performance and not segregated by category. Expenses directly related to specific investment operations, such as dividends paid on short stock, are deducted by category. When securities are borrowed directly and sold short, the net investment (longs minus shorts) is shown for the applicable category's average investment.

5. The foregoing table has only limited use. The results applicable to each category are dominated by one or two investments. They do not represent a collection of great quantities of stable data (mortality rates of all American males or something of the sort) from which conclusions can be drawn and projections made. Instead, they represent infrequent, non-homogeneous phenomena leading to very tentative suggestions regarding various courses of action and are so used by us.

6. Finally, these calculations are not made with the same loving care we apply to counting the money and are subject to possible clerical or mathematical error since they are not entirely se1f-checking.

Controls

Overall, the controlled companies turned in a decent performance during 1968. Diversified Retailing Company Inc. (80% owned) and Berkshire Hathaway Inc. (70% owned) had combined after-tax earnings of over $5 million.

Particularly outstanding performances were turned in by Associated Cotton Shops, a subsidiary of DRC run by Ben Rosner, and National Indemnity Company, a subsidiary of B-H run by Jack Ringwalt. Both of these companies earned about 20% on capital employed in their businesses. Among Fortune's “500” (the largest manufacturing entities in the country, starting with General Motors), only 37 companies achieved this figure in 1967, and our boys outshone such mildly better-known (but not better appreciated) companies as IBM, General Electric, General Motors, Procter & Gamble, DuPont, Control Data, Hewlett-Packard, etc...

I still sometimes get comments from partners like: "Say, Berkshire is up four points - that's great!" or "What's happening to us, Berkshire was down three last week?" Market price is irrelevant to us in the valuation of our controlling interests. We valued B-H at 25 at yearend 1967 when the market was about 20 and 31 at yearend 1968 when the market was about 37. We would have done the same thing if the markets had been 15 and 50 respectively. ("Price is what you pay. value is what you get"). We will prosper or suffer in controlled investments in relation to the operating performances of our businesses - we will not attempt to profit by playing various games in the securities markets.

Generals -Private Owner

Over the years this has been our best category, measured by average return, and has also maintained by far the best percentage of profitable transactions. This approach was the way I was taught the business, and it formerly accounted for a large proportion of all our investment ideas. Our total individual profits in this category during

the twelve year BPL history are probably fifty times or more our total losses. The cash register really rang on one simple industry idea (implemented in several ways) in this area in 1968. We even received a substantial fee (included in Other Income in the audit) for some work in this field.

Our total investment in this category (which is where I feel by far the greatest certainty regarding consistently decent results) is presently under $2 million and I have nothing at all in the hopper to bolster this. What came through like the Johnstown flood in 1968 looks more like a leaky faucet in Altoona for 1969.

Generals - Relatively Undervalued

This category produced about two-thirds of the overall gain in 1966 and 1967 combined. I mentioned last year that the great two-year performance here had largely come from one idea. I also said, "We have nothing in this group remotely approaching the size or potential which formerly existed in this investment.” It gives me great pleasure to announce that this statement was absolutely correct. It gives me somewhat less pleasure to announce that it must be repeated this year.

Workouts

This category, which was a disaster in 1967, did well during 1968. Our relatively heavy concentration in just a few situations per year (some of the large arbitrage houses may become involved in fifty or more workouts per annum) gives more variation in yearly results than an across-the-board approach. I feel the average profitability will be as good with our policy and 1968 makes me feel better about that conclusion than 1967 did.

It should again be stated that our results in the Workout area (as well as in other categories) are somewhat understated compared to the more common method of determining results computed on an initial base figure and utilizing borrowed money (which is often a sensible part of the Workout business).

I can't emphasize too strongly that the quality and quantity of ideas is presently at an all time low - the product of the factors mentioned in my October 9th, 1967 letter, which have largely been intensified since then.

Sometimes I feel we should have a plaque in our office like the one at the headquarters of Texas Instruments in Dallas which reads: “We don't believe in miracles, we rely on them.” It is possible for an old, overweight ball player, whose legs and batting eye are gone, to tag a fast ball on the nose for a pinch-hit home run, but you don't change your line-up because of it.

We have a number of important negatives operating on our future and, while they shouldn't add up to futility, they certainly don't add up to more than an average of quite moderate profitability.

Memorabilia

As one of my older friends says, “Nostalgia just isn't what it used to be.” Let's take a stab at it, anyway.

Buffett Associates, Ltd., the initial predecessor partnership, was formed May 5, 1956 with seven limited partners (four family, three close friends), contributing $105,000, and the General Partner putting his money where his mouth was by investing $100. Two additional single-family limited partnerships were formed during 1956, so that on January 1, 1957 combined net assets were $303,726. During 1957, we had a gain of $31,615.97, leading to the 10.4% figure shown on page one. During 1968 I would guess that the New York Stock Exchange was open around 1,200 hours, giving us a gain of about $33,000 per hour (sort of makes you wish they had stayed with the 5-1/2 hour, 5 day week, doesn't it), or roughly the same as the full year gain in 1957.

General Partner, Buffett Partnership, Ltd.