1957 Letter

WARREN E. BUFFETT
5202 Underwood Ave. Omaha, Nera!"a
#E$ON% ANNUAL LETTER TO L&'&TE% (ARTNER#
The )enera* #to+" 'ar"et (,+t-re ,n 1957
&n *a!t .ear/! *etter to 0artner!, & !a,d the 1o**ow,n23
'. v,ew o1 the 2enera* mar"et *eve* ,! that ,t ,! 0r,+ed aove ,ntr,n!,+ va*-e. Th,! v,ew re*ate! to *-e4+h,0
!e+-r,t,e!. Th,! v,ew, ,1 a++-rate, +arr,e! w,th ,t the 0o!!,,*,t. o1 a !-!tant,a* de+*,ne ,n a** !to+" 0r,+e!, oth
-nderva*-ed and otherw,!e. &n an. event & th,n" the 0roa,*,t. ,! ver. !*,2ht that +-rrent mar"et *eve*! w,** e
tho-2ht o1 a! +hea0 1,ve .ear! 1rom now. Even a 1-**4!+a*e ear mar"et, however, !ho-*d not h-rt the mar"et
va*-e o1 o-r wor"4o-t! !-!tant,a**..
&1 the 2enera* mar"et were to ret-rn to an -nderva*-ed !tat-! o-r +a0,ta* m,2ht e em0*o.ed e5+*-!,ve*. ,n
2enera* ,!!-e! and 0erha0! !ome orrowed mone. wo-*d e -!ed ,n th,! o0erat,on at that t,me. $onver!e*., ,1
the mar"et !ho-*d 2o +on!,dera*. h,2her o-r 0o*,+. w,** e to red-+e o-r 2enera* ,!!-e! a! 0ro1,t! 0re!ent
them!e*ve! and ,n+rea!e the wor"4o-t 0ort1o*,o.
A** o1 the aove ,! not ,ntended to ,m0*. that mar"et ana*.!,! ,! 1oremo!t ,n m. m,nd. (r,mar. attent,on ,! 2,ven
at a** t,me! to the dete+t,on o1 !-!tant,a**. -nderva*-ed !e+-r,t,e!.
The 0a!t .ear w,tne!!ed a moderate de+*,ne ,n !to+" 0r,+e!. & !tre!! the word 6moderate6 !,n+e +a!-a* read,n2 o1
the 0re!! or +onver!,n2 w,th tho!e who have had on*. re+ent e50er,en+e w,th !to+"! wo-*d tend to +reate an
,m0re!!,on o1 a m-+h 2reater de+*,ne. A+t-a**., ,t a00ear! to me that the de+*,ne ,n !to+" 0r,+e! ha! een
+on!,dera*. *e!! than the de+*,ne ,n +or0orate earn,n2 0ower -nder 0re!ent -!,ne!! +ond,t,on!. Th,! mean! that
the 0-*,+ ,! !t,** ver. -**,!h on *-e +h,0 !to+"! and the 2enera* e+onom,+ 0,+t-re. & ma"e no attem0t to
1ore+a!t e,ther -!,ne!! or the !to+" mar"et7 the aove ,! !,m0*. ,ntended to d,!0e* an. not,on! that !to+"! have
!-11ered an. dra!t,+ de+*,ne or that the 2enera* mar"et, ,! at a *ow *eve*. & !t,** +on!,der the 2enera* mar"et to e
0r,+ed on the h,2h !,de a!ed on *on2 term ,nve!tment va*-e.
O-r A+t,v,t,e! ,n 1957
The mar"et de+*,ne ha! +reated 2reater o00ort-n,t. amon2 -nderva*-ed !,t-at,on! !o that, 2enera**., o-r
0ort1o*,o ,! heav,er ,n -nderva*-ed !,t-at,on! re*at,ve to wor"4o-t! than ,t wa! *a!t .ear. (erha0! an e50*anat,on
o1 the term 6wor"4o-t6 ,! ,n order. A wor"4o-t ,! an ,nve!tment wh,+h ,! de0endent on a !0e+,1,+ +or0orate
a+t,on 1or ,t! 0ro1,t rather than a 2enera* advan+e ,n the 0r,+e o1 the !to+" a! ,n the +a!e o1 -nderva*-ed
!,t-at,on!. Wor"4o-t! +ome ao-t thro-2h3 !a*e!, mer2er!, *,8-,dat,on!, tender!, et+. &n ea+h +a!e, the r,!" ,! that
!ometh,n2 w,** -0!et the a00*e+art and +a-!e the aandonment o1 the 0*anned a+t,on, not that the e+onom,+
0,+t-re w,** deter,orate and !to+"! de+*,ne 2enera**.. At the end o1 1959, we had a rat,o o1 ao-t 704:0 etween
2enera* ,!!-e! and wor"4o-t!. Now ,t ,! ao-t ;5415.
%-r,n2 the 0a!t .ear we have ta"en 0o!,t,on! ,n two !,t-at,on! wh,+h have rea+hed a !,<e where we ma. e50e+t
to ta"e !ome 0art ,n +or0orate de+,!,on!. One o1 the!e 0o!,t,on! a++o-nt! 1or etween 10= and 20= o1 the
0ort1o*,o o1 the var,o-! 0artner!h,0! and the other a++o-nt! 1or ao-t 5=. Both o1 the!e w,** 0roa*. ta"e ,n the
ne,2horhood o1 three to 1,ve .ear! o1 wor" -t the. 0re!ent*. a00ear to have 0otent,a* 1or a h,2h avera2e ann-a*
rate o1 ret-rn w,th a m,n,m-m o1 r,!". Wh,*e not ,n the +*a!!,1,+at,on o1 wor"4o-t!, the. have ver. *,tt*e
1
de0enden+e on the 2enera* a+t,on o1 the !to+" mar"et. #ho-*d the 2enera* mar"et have a !-!tant,a* r,!e, o1
+o-r!e, & wo-*d e50e+t th,! !e+t,on o1 o-r 0ort1o*,o to *a2 eh,nd the a+t,on o1 the mar"et.
Re!-*t! 1or 1957
&n 1957 the three 0artner!h,0! wh,+h we 1ormed ,n 1959 d,d !-!tant,a**. etter than the 2enera* mar"et. At the
e2,nn,n2 o1 the .ear, the %ow4>one! &nd-!tr,a*! !tood at ?99 and at the end o1 the .ear ,t wa! at ?:5 1or a *o!!
o1 9? 0o,nt!. &1 one had owned the Avera2e!, he wo-*d have re+e,ved 22 0o,nt! ,n d,v,dend! red-+,n2 the overa**
*o!! to ?2 0o,nt! or ;.?70= 1or the .ear. Th,! *o!! ,! ro-2h*. e8-,va*ent to what wo-*d have een a+h,eved .
,nve!t,n2 ,n mo!t ,nve!tment 1-nd! and, to m. "now*ed2e, no ,nve!tment 1-nd ,nve!ted ,n !to+"! !howed a 2a,n
1or the .ear.
A** three o1 the 1959 0artner!h,0! !howed a 2a,n d-r,n2 the .ear amo-nt,n2 to ao-t 9.2=, 7.;= and 25% on
.earend 1959 net worth. Nat-ra**. a 8-e!t,on ,! +reated a! to the va!t*. !-0er,or 0er1orman+e o1 the *a!t
0artner!h,0, 0art,+-*ar*. ,n the m,nd o1 the 0artner! o1 the 1,r!t two. Th,! 0er1orman+e em0ha!,<e! the
,m0ortan+e o1 *-+" ,n the !hort r-n, 0art,+-*ar*. ,n re2ard to when 1-nd! are re+e,ved. The th,rd 0artner!h,0 wa!
!tarted the *ate!t ,n 1959 when the mar"et wa! at a *ower *eve* and when !evera* !e+-r,t,e! were 0art,+-*ar*.
attra+t,ve. Be+a-!e o1 the ava,*a,*,t. o1 1-nd!, *ar2e 0o!,t,on! were ta"en ,n the!e ,!!-e!. Wherea! the two
0artner!h,0! 1ormed ear*,er were a*read. !-!tant,a**. ,nve!ted !o that the. +o-*d on*. ta"e re*at,ve*. !ma**
0o!,t,on! ,n the!e ,!!-e!.
Ba!,+a**., a** 0artner!h,0! are ,nve!ted ,n the !ame !e+-r,t,e! and ,n a00ro5,mate*. the !ame 0er+enta2e!.
@owever, 0art,+-*ar*. d-r,n2 the ,n,t,a* !ta2e!, mone. e+ome! ava,*a*e at var.,n2 t,me! and var.,n2 *eve*! o1
the mar"et !o there ,! more var,at,on ,n re!-*t! than ,! *,"e*. to e the +a!e ,n *ater .ear!. Over the .ear!, & w,**
e 8-,te !at,!1,ed w,th a 0er1orman+e that ,! 10= 0er .ear etter than the Avera2e!, !o ,n re!0e+t to the!e three
0artner!h,0!, 1957 wa! a !-++e!!1-* and 0roa*. etter than avera2e, .ear.
Two 0artner!h,0! were !tarted d-r,n2 the m,dd*e o1 1957 and the,r re!-*t! 1or the a*an+e o1 the .ear were
ro-2h*. the !ame a! the 0er1orman+e o1 the Avera2e! wh,+h were down ao-t 12= 1or the 0er,od !,n+e
,n+e0t,on o1 the 1957 0artner!h,0!. The,r 0ort1o*,o! are now !tart,n2 to a00ro5,mate tho!e o1 the 1959
0artner!h,0! and 0er1orman+e o1 the ent,re 2ro-0 !ho-*d e m-+h more +om0ara*e ,n the 1-t-re.
&nter0retat,on o1 re!-*t!
To !ome e5tent o-r etter than avera2e 0er1orman+e ,n 1957 wa! d-e to the 1a+t that ,t wa! a 2enera**. 0oor .ear
1or mo!t !to+"!. O-r 0er1orman+e, re*at,ve*., ,! *,"e*. to e etter ,n a ear mar"et than ,n a -** mar"et !o that
ded-+t,on! made 1rom the aove re!-*t! !ho-*d e tem0ered . the 1a+t that ,t wa! the t.0e o1 .ear when we
!ho-*d have done re*at,ve*. we**. &n a .ear when the 2enera* mar"et had a !-!tant,a* advan+e & wo-*d e we**
!at,!1,ed to mat+h the advan+e o1 the Avera2e!.
& +an de1,n,te*. !a. that o-r 0ort1o*,o re0re!ent! etter va*-e at the end o1 1957 than ,t d,d at the end o1 1959.
Th,! ,! d-e to oth 2enera**. *ower 0r,+e! and the 1a+t that we have had more t,me to a+8-,re the more
!-!tant,a**. -nderva*-ed !e+-r,t,e! wh,+h +an on*. e a+8-,red w,th 0at,en+e. Ear*,er & ment,oned o-r *ar2e!t
0o!,t,on wh,+h +om0r,!ed 10= to 20= o1 the a!!et! o1 the var,o-! 0artner!h,0!. &n t,me & 0*an to have th,!
re0re!ent 20= o1 the a!!et! o1 a** 0artner!h,0! -t th,! +annot e h-rr,ed. Ov,o-!*. d-r,n2 an. a+8-,!,t,on
0er,od, o-r 0r,mar. ,ntere!t ,! to have the !to+" do noth,n2 or de+*,ne rather than advan+e. There1ore, at an.
2,ven t,me, a 1a,r 0ro0ort,on o1 o-r 0ort1o*,o ma. e ,n the !ter,*e !ta2e. Th,! 0o*,+., wh,*e re8-,r,n2 0at,en+e,
!ho-*d ma5,m,<e *on2 term 0ro1,t!.
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& have tr,ed to +over 0o,nt! wh,+h & 1e*t m,2ht e o1 ,ntere!t and d,!+*o!e a! m-+h o1 o-r 0h,*o!o0h. a! ma. e
,m0arted w,tho-t ta*",n2 o1 ,nd,v,d-a* ,!!-e!. &1 there are an. 8-e!t,on! +on+ern,n2 an. 0ha!e o1 the o0erat,on, &
wo-*d we*+ome hear,n2 1rom .o-.
3
195; Letter
Warren E B-11ett
5202 Underwood Ave. Omaha, Nera!"a
T@E )ENERAL #TO$A 'ARAET &N 195;
A 1r,end who r-n! a med,-m4!,<ed ,nve!tment tr-!t re+ent*. wrote3 6The mer+-r,a* tem0erament, +hara+ter,!t,+
o1 the Amer,+an 0eo0*e, 0rod-+ed a maBor tran!1ormat,on ,n 195; and Ce5-erantD wo-*d e the 0ro0er word 1or
the !to+" mar"et, at *ea!t6.
& th,n" th,! !-mmar,<e! the +han2e ,n 0!.+ho*o2. dom,nat,n2 the !to+" mar"et ,n 195; at oth the amate-r and
0ro1e!!,ona* *eve*!. %-r,n2 the 0a!t .ear a*mo!t an. rea!on ha! een !e,<ed -0on to B-!t,1. E&nve!t,n2F ,n the
mar"et. There are -ndo-ted*. more mer+-r,a**.4tem0ered 0eo0*e ,n the !to+" mar"et now than 1or a 2ood man.
.ear! and the d-rat,on o1 the,r !ta. w,** e *,m,ted to how *on2 the. th,n" 0ro1,t! +an e made 8-,+"*. and
e11ort*e!!*.. Wh,*e ,t ,! ,m0o!!,*e to determ,ne how *on2 the. w,** +ont,n-e to add n-mer! to the,r ran"! and
there. !t,m-*ate r,!,n2 0r,+e!, & e*,eve ,t ,! va*,d to !a. that the *on2er the,r v,!,t, the 2reater the rea+t,on 1rom
,t.
& ma"e no attem0t to 1ore+a!t the 2enera* mar"et 4 m. e11ort! are devoted to 1,nd,n2 -nderva*-ed !e+-r,t,e!.
@owever, & do e*,eve that w,de!0read 0-*,+ e*,e1 ,n the ,nev,ta,*,t. o1 0ro1,t! 1rom ,nve!tment ,n !to+"! w,**
*ead to event-a* tro-*e. #ho-*d th,! o++-r, 0r,+e!, -t not ,ntr,n!,+ va*-e! ,n m. o0,n,on, o1 even -nderva*-ed
!e+-r,t,e! +an e e50e+ted to e !-!tant,a**. a11e+ted.
RE#ULT# &N 195;
&n m. *etter o1 *a!t .ear, & wrote3
EO-r 0er1orman+e, re*at,ve*., ,! *,"e*. to e etter ,n a ear mar"et than ,n a -** mar"et !o that
ded-+t,on! made 1rom the aove re!-*t! !ho-*d e tem0ered . the 1a+t that ,t wa! the t.0e o1 .ear when
we !ho-*d have done re*at,ve*. w,**. &n a .ear when the 2enera* mar"et had a !-!tant,a* advan+e, &
wo-*d e we** !at,!1,ed to mat+h the advan+e o1 the avera2e!.F
The *atter !enten+e de!+r,e! the t.0e o1 .ear we had ,n 195; and m. 1ore+a!t wor"ed o-t. The %ow4>one!
&nd-!tr,a* avera2e advan+ed 1rom ?:5 to 5;: wh,+h, a1ter add,n2 a+" d,v,dend! o1 ao-t 20 0o,nt!, 2ave an
overa** 2a,n o1 :;.5= 1rom the %ow4>one! -n,t. The 1,ve 0artner!h,0! that o0erated thro-2ho-t the ent,re .ear
ota,ned re!-*t! avera2,n2 !*,2ht*. etter than th,! :;.5=. Ba!ed on mar"et va*-e! at the end o1 oth .ear!, the,r
2a,n! ran2ed 1rom :9.7= to ?9.2=. $on!,der,n2 the 1a+t that a !-!tant,a* 0ort,on o1 a!!et! ha! een and !t,** ,!
,nve!ted ,n !e+-r,t,e!, wh,+h ene1,t ver. *,tt*e 1rom a 1a!t4r,!,n2 mar"et, & e*,eve the!e re!-*t! are rea!ona*.
2ood. & w,** +ont,n-e to 1ore+a!t that o-r re!-*t! w,** e aove avera2e ,n a de+*,n,n2 or *eve* mar"et, -t ,t w,**
e a** we +an do to "ee0 0a+e w,th a r,!,n2 mar"et.
TG(&$AL #&TUAT&ON
#o that .o- ma. etter -nder!tand o-r method o1 o0erat,on, & th,n" ,t wo-*d e we** to rev,ew a !0e+,1,+ a+t,v,t.
o1 195;. La!t .ear & re1erred to o-r *ar2e!t ho*d,n2 wh,+h +om0r,!ed 10= to 20= o1 the a!!et! o1 the var,o-!
0artner!h,0!. & 0o,nted o-t that ,t wa! to o-r ,ntere!t to have th,! !to+" de+*,ne or rema,n re*at,ve*. !tead., !o that
we +o-*d a+8-,re an even *ar2er 0o!,t,on and that 1or th,! rea!on !-+h a !e+-r,t. wo-*d 0roa*. ho*d a+" o-r
+om0arat,ve 0er1orman+e ,n a -** mar"et.
Th,! !to+" wa! the $ommonwea*th Tr-!t $o. o1 Un,on $,t., New >er!e.. At the t,me we !tarted to 0-r+ha!e the
!to+", ,t had an ,ntr,n!,+ va*-e H125 0er !hare +om0-ted on a +on!ervat,ve a!,!. @owever, 1or 2ood rea!on!, ,t
4
0a,d no +a!h d,v,dend at a** de!0,te earn,n2! o1 ao-t H10 0er !hare wh,+h wa! *ar2e*. re!0on!,*e 1or a
de0re!!ed 0r,+e o1 ao-t H50 0er !hare. #o here we had a ver. we** mana2ed an" w,th !-!tant,a1 earn,n2!
0ower !e**,n2 at a *ar2e d,!+o-nt 1rom ,ntr,n!,+ va*-e. 'ana2ement wa! 1r,end*. to -! a! new !to+"ho*der! and
r,!" o1 an. -*t,mate *o!! !eemed m,n,ma*.
$ommonwea*th wa! 25.5= owned . a *ar2er an" I$ommonwea*th had a!!et! o1 ao-t H50 ',**,on J ao-t
ha*1 the !,<e o1 the F,r!t Nat,ona* ,n OmahaK, wh,+h had de!,red a mer2er 1or man. .ear!. #-+h a mer2er wa!
0revented 1or 0er!ona1 rea!on!, -t there wa! ev,den+e that th,! !,t-at,on wo-*d not +ont,n-e ,nde1,n,te*.. Th-!
we had a +om,nat,on o13
1. Ler. !tron2 de1en!,ve +hara+ter,!t,+!7
2. )ood !o*,d va*-e -,*d,n2 -0 at a !at,!1a+tor. 0a+e and7
:. Ev,den+e to the e11e+t that event-a**. th,! va*-e wo-*d e -n*o+"ed a*tho-2h ,t m,2ht e one .ear or ten
.ear!. &1 the *atter were tr-e, the va*-e wo-*d 0re!-ma*. have een -,*t -0 to a +on!,dera*. *ar2er
1,2-re, !a., H250 0er !hare.
Over a 0er,od o1 a .ear or !o, we were !-++e!!1-* ,n ota,n,n2 ao-t 12= o1 the an" at a 0r,+e avera2,n2 ao-t
H51 0er !hare. Ov,o-!*. ,t wa! de1,n,te*. to o-r advanta2e to have the !to+" rema,n dormant ,n 0r,+e. O-r *o+"
o1 !to+" ,n+rea!ed ,n va*-e a! ,t! !,<e 2rew, 0art,+-*ar*. a1ter we e+ame the !e+ond *ar2e!t !to+"ho*der w,th
!-11,+,ent vot,n2 0ower to warrant +on!-*tat,on on an. mer2er 0ro0o!a1.
$ommonwea*th on*. had ao-t :00 !to+"ho*der! and 0roa*. avera2ed two trade! or !o 0er month, !o .o- +an
-nder!tand wh. & !a. that the a+t,v,t. o1 the !to+" mar"et 2enera**. had ver. *,tt*e e11e+t on the 0r,+e movement
o1 !ome o1 o-r ho*d,n2!.
Un1ort-nate*. we d,d r-n ,nto !ome +om0et,t,on on -.,n2, wh,+h ra,*ed the 0r,+e to ao-t H95 where we were
ne,ther -.er nor !e**er. Ler. !ma** -.,n2 order! +an +reate 0r,+e +han2e! o1 th,! ma2n,t-de ,n an ,na+t,ve
!to+", wh,+h e50*a,n! the ,m0ortan+e o1 not hav,n2 an. 6Lea"a2e6 re2ard,n2 o-r 0ort1o*,o ho*d,n2!.
Late ,n the .ear we were !-++e!!1-* ,n 1,nd,n2 a !0e+,a* !,t-at,on where we +o-*d e+ome the *ar2e!t ho*der at an
attra+t,ve 0r,+e, !o we !o*d o-r *o+" o1 $ommonwea*th ota,n,n2 H;0 0er !hare a*tho-2h the 8-oted mar"et wa!
ao-t 20= *ower at the t,me.
&t ,! ov,o-! that we +o-*d !t,** e !,tt,n2 w,th H50 !to+" 0at,ent*. -.,n2 ,n dr,! and dra!, and & wo-*d e
8-,te ha00. w,th !-+h a 0ro2ram a*tho-2h o-r 0er1orman+e re*at,ve to the mar"et *a!t .ear wo-*d have *oo"ed
0oor. The .ear when a !,t-at,on !-+h at $ommonwea*th re!-*t! ,n a rea*,<ed 0ro1,t ,!, to a 2reat e5tent,
1ort-,to-!. Th-!, o-r 0er1orman+e 1or an. !,n2*e .ear ha! !er,o-! *,m,tat,on! a! a a!,! 1or e!t,mat,n2 *on2 term
re!-*t!. @owever, & e*,eve that a 0ro2ram o1 ,nve!t,n2 ,n !-+h -nderva*-ed we** 0rote+ted !e+-r,t,e! o11er! the
!-re!t mean! o1 *on2 term 0ro1,t! ,n !e+-r,t,e!.
& m,2ht ment,on that the -.er o1 the !to+" at H;0 +an e50e+t to do 8-,te we** over the .ear!. @owever, the
re*at,ve -nderva*-at,on at H;0 w,th an ,ntr,n!,+ va*-e H1:5 ,! 8-,te d,11erent 1rom a 0r,+e H50 w,th an ,ntr,n!,+
va*-e o1 H125, and ,t !eemed to me that o-r +a0,ta* +o-*d etter e em0*o.ed ,n the !,t-at,on wh,+h re0*a+ed ,t.
Th,! new !,t-at,on ,! !omewhat *ar2er than $ommonwea*th and re0re!ent! ao-t 25= o1 the a!!et! o1 the
var,o-! 0artner!h,0!. Wh,*e the de2ree o1 -nderva*-at,on ,! no 2reater than ,n man. other !e+-r,t,e! we own Ior
even than !omeK we are the *ar2e!t !to+"ho*der and th,! ha! !-!tant,a* advanta2e! man. t,me! ,n determ,n,n2
the *en2th o1 t,me re8-,red to +orre+t the -nderva*-at,on. &n th,! 0art,+-*ar ho*d,n2 we are v,rt-a**. a!!-red o1 a
0er1orman+e etter than that o1 the %ow4>one! 1or the 0er,od we ho*d ,t.
T@E $URRENT #&TUAT&ON
The h,2her the *eve* o1 the mar"et, the 1ewer the -nderva*-ed !e+-r,t,e! and & am 1,nd,n2 !ome d,11,+-*t. ,n
5
!e+-r,n2 an ade8-ate n-mer o1 attra+t,ve ,nve!tment!. & wo-*d 0re1er to ,n+rea!e the 0er+enta2e o1 o-r a!!et! ,n
wor"4o-t!, -t the!e are ver. d,11,+-*t to 1,nd on the r,2ht term!.
To the e5tent 0o!!,*e, there1ore, & am attem0t,n2 to +reate m. own wor"4o-t! . a+8-,r,n2 *ar2e 0o!,t,on! ,n
!evera* -nderva*-ed !e+-r,t,e!. #-+h a 0o*,+. !ho-*d *ead to the 1-*1,**ment o1 m. ear*,er 1ore+a!t J an aove
avera2e 0er1orman+e ,n a ear mar"et. &t ,! on th,! a!,! that & ho0e to e B-d2ed. &1 .o- have an. 8-e!t,on!, 1ee*
1ree to a!" them.
WARREN E. BUFFETT 2411459
6
1959 Letter
WARREN E. BUFFETT
5202 Underwood Ave. Omaha, Nera!"a
The )enera* #to+" 'ar"et ,n 19593
The %ow4>one! &nd-!tr,a* Avera2e, -ndo-ted*. the mo!t w,de*. -!ed ,nde5 o1 !to+" mar"et ehav,or,
0re!ented a !omewhat 1a-*t. 0,+t-re ,n 1959. Th,! ,nde5 re+orded an advan+e 1rom 5;: to 979, or 19.?= 1or the
.ear. When the d,v,dend! wh,+h wo-*d have een re+e,ved thro-2h owner!h,0 o1 the avera2e are added, an
overa** 2a,n o1 19.9= ,nd,+ated 1or 1959.
%e!0,te th,! ,nd,+at,on o1 a ro-!t mar"et, more !to+"! de+*,ned than advan+ed on the New Gor" #to+"
E5+han2e d-r,n2 the .ear . a mar2,n o1 710 to 92;. Both the %ow4>one! Ra,*road Avera2e and Ut,*,t. Avera2e
re2,!tered de+*,ne!.
'o!t ,nve!tment tr-!t! had a d,11,+-*t t,me ,n +om0ar,!on w,th the &nd-!tr,a* Avera2e. Tr,4$ont,nenta* $or0. the
nat,on/! *ar2e!t +*o!ed4end ,nve!tment +om0an. Itota* a!!et H?00 m,**,onK had an overa** 2a,n o1 ao-t 5.7= 1or
the .ear. Fred Brown, ,t! (re!,dent, had th,! to !a. ao-t the 1959 mar"ed ,n a re+ent !0ee+h to the Ana*.!t!
#o+,et.3
6B-t, even tho-2h we *,"e the 0ort1o*,o, the mar"et 0er1orman+e o1 Tr,4$ont,nenta*/! ho*d,n2! ,n 1959
wa! d,!a00o,nt,n2 to -!. 'ar"et! ,n wh,+h ,nve!tor !ent,ment and enth-!,a!m 0*a. !o *ar2e a 0art a!
tho!e o1 1959, are d,11,+-*t 1or ,nve!tment mana2er! tra,ned ,n va*-e! and t-ned to ,nve!t,n2 1or the
*on24term. (erha0! we haven/t had o-r !0a+e oot! adB-!ted 0ro0er*.. @owever, we e*,eve that there ,!
a *,m,t to r,!"! that an ,nve!t,n2 ,n!t,t-t,on !-+h a! Tr,4$ont,nenta* !ho-*d ta"e w,th ,t! !to+"ho*der!/
mone., and we e*,eve that the 0ort1o*,o ,! ,n !ha0e 1or the .ear ahead.6
'a!!a+h-!ett! &nve!tor! Tr-!t, the +o-ntr./! *ar2e!t m-t-a* 1-nd w,th a!!et! o1 H1.5 ,**,on !howed an overa**
2a,n o1 ao-t 9= 1or the .ear.
'o!t o1 .o- "now & have een ver. a00rehen!,ve ao-t 2enera* !to+" mar"et *eve*! 1or !evera* .ear!. To date,
th,! +a-t,on ha! een -nne+e!!ar.. B. 0rev,o-! !tandard!, the 0re!ent *eve* o1 6*-e +h,06 !e+-r,t. 0r,+e!
+onta,n! a !-!tant,a* !0e+-*at,ve +om0onent w,th a +orre!0ond,n2 r,!" o1 *o!!. (erha0! other !tandard! o1
va*-at,on are evo*v,n2 wh,+h w,** 0ermanent*. re0*a+e the o*d !tandard. & don/t th,n" !o. & ma. ver. we** e
wron27 however, & wo-*d rather !-!ta,n the 0ena*t,e! re!-*t,n2 1rom over4+on!ervat,!m than 1a+e the
+on!e8-en+e! o1 error, 0erha0! w,th 0ermanent +a0,ta* *o!!, re!-*t,n2 1rom the ado0t,on o1 a 6New Era6
0h,*o!o0h. where tree! rea**. do 2row to the !"..
Re!-*t! ,n 19593
There ha! een em0ha!,! ,n 0rev,o-! *etter! on a !-22e!ted !tandard o1 0er1orman+e ,nvo*v,n2 re*at,ve*. 2ood
re!-*t! I+om0ared to the 2enera* mar"et ,nd,+e! and *ead,n2 ,nve!tment tr-!t!K ,n 0er,od! o1 de+*,n,n2 or *eve*
0r,+e! -t re*at,ve*. -n,m0re!!,ve re!-*t! ,n ra0,d*. r,!,n2 mar"et!.
We were 1ort-nate to a+h,eve rea!ona*. 2ood re!-*t! ,n 1959. The !,5 0artner!h,0! that o0erated thro-2ho-t the
.ear a+h,eved overa** net 2a,n! ran2,n2 1rom 22.:= to :0.0=, and avera2,n2 ao-t 25.9=. (ort1o*,o! o1 the!e
0artner!h,0! are now ao-t ;0=+om0ara*e, -t there ,! !ome d,11eren+e d-e to !e+-r,t,e! and +a!h e+om,n2
ava,*a*e at var.,n2 t,me!, 0a.ment! made to 0artner!, et+. Over the 0a!t 1ew .ear!, there ha!n/t een an.
0artner!h,0 wh,+h ha! +on!,!tent*. een at the to0 or ottom o1 0er1orman+e 1rom .ear to .ear, and the var,an+e
,! narrow,n2 a! the 0ort1o*,o! tend to e+ome +om0ara*e.
7
The overa** net 2a,n ,! determ,ned on the a!,! o1 mar"et va*-e! at the e2,nn,n2 and end o1 the .ear adB-!ted
1or 0a.ment! made to 0artner! or +ontr,-t,on! re+e,ved 1rom them. &t ,! not a!ed on a+t-a* rea*,<ed 0ro1,t!
d-r,n2 the .ear, -t ,! ,ntended to mea!-re the +han2e ,n *,8-,dat,n2 va*-e 1or the .ear. &t ,! e1ore ,ntere!t
a**owed to 0artner! Iwhere that ,! !0e+,1,ed ,n the 0artner!h,0 a2reementK and e1ore an. d,v,!,on o1 0ro1,t to the
2enera* 0artner, -t a1ter o0erat,n2 e50en!e!.
The 0r,n+,0a* o0erat,n2 e50en!e ,! the Nera!"a &ntan2,*e! Ta5 wh,+h amo-nt! to .?= o1 mar"et va*-e on
0ra+t,+a**. a** !e+-r,t,e!. La!t .ear re0re!ented the 1,r!t t,me that th,! ta5 had een e11e+t,ve*. en1or+ed and, o1
+o-r!e 0ena*,<ed o-r re!-*t! to the e5tent o1 .?=.
The 0re!ent 0ort1o*,o3
La!t .ear, & ment,oned a new +omm,tment wh,+h ,nvo*ved ao-t 25= o1 a!!et! o1 the var,o-! 0artner!h,0!.
(re!ent*. th,! ,nve!tment ,! ao-t :5= o1 a!!et!. Th,! ,! an -n-!-a**. *ar2e 0er+enta2e, -t ha! een made 1or
!tron2 rea!on!. &n e11e+t, th,! +om0an. ,! 0art,a**. an ,nve!tment tr-!t ow,n2 !ome th,rt. or 1ort. other !e+-r,t,e!
o1 h,2h 8-a*,t.. O-r ,nve!tment wa! made and ,! +arr,ed at a !-!tant,a* d,!+o-nt 1rom a!!et va*-e a!ed on
mar"et va*-e o1 the,r !e+-r,t,e! and a +on!ervat,ve a00ra,!a* o1 the o0erat,n2 -!,ne!!.
We are the +om0an.D! *ar2e!t !to+"ho*der . a +on!,dera*e mar2,n, and the two other *ar2e ho*der! a2ree w,th
o-r ,dea!. The 0roa,*,t. ,! e5treme*. h,2h that the 0er1orman+e o1 th,! ,nve!tment w,** e !-0er,or to that o1
the 2enera* mar"et -nt,* ,t! d,!0o!,t,on, and & am ho0e1-* that th,! w,** ta"e 0*a+e th,! .ear.
The rema,n,n2 95= o1 the 0ort1o*,o ,! ,n !e+-r,t,e! wh,+h & +on!,der -nderva*-ed and wor"4o-t o0erat,on!. To
the e5tent 0o!!,*e, & +ont,n-e to attem0t to ,nve!t ,n !,t-at,on! at *ea!t 0art,a**. ,n!-*ated 1rom the ehav,or o1
the 2enera* mar"et.
Th,! 0o*,+. !ho-*d *ead to !-0er,or re!-*t! ,n ear mar"et! and avera2e 0er1orman+e ,n -** mar"et!. The 1,r!t
0red,+t,on ma. e !-Be+t to te!t th,! .ear !,n+e, at th,! wr,t,n2, the %ow4>one! &nd-!tr,a*! have retra+ed over
ha*1 o1 the,r 1959 advan+e.
#ho-*d .o- have an. 8-e!t,on! or ,1 & have not een +*ear ,n an. re!0e+t, & wo-*d e ver. ha00. to hear 1rom
.o-.
Warren E. B-11ett
2420490
8
1990 Letter
WARREN E. BUFFETT
5202 Underwood Ave. Omaha, Nera!"a
The )enera* #to+" 'ar"et ,n 19903
A .ear a2o, & +ommented on the !omewhat 1a-*t. 0,+t-re 0re!ented ,n 1959 . the %ow4>one! &nd-!tr,a*
Avera2e wh,+h had advan+ed 1rom 5;: to 979, or 19.?=. A*tho-2h 0ra+t,+a**. a** ,nve!tment +om0an,e!
!howed 2a,n! 1or that .ear, *e!! than 10= o1 them were a*e to mat+h or etter the re+ord o1 the &nd-!tr,a*
Avera2e. The %ow4>one! Ut,*,t. Avera2e had a !ma** de+*,ne and the Ra,*road Avera2e re+orded a !-!tant,a*
one.
&n 1990, the 0,+t-re wa! rever!ed. The &nd-!tr,a* Avera2e de+*,ned 1rom 979 to 919, or 9.:=. Add,n2 a+" the
d,v,dend! wh,+h wo-*d have een re+e,ved thro-2h owner!h,0 o1 the Avera2e !t,** *e1t ,t w,th an overa** *o!! o1
9.:=. On the other hand, the Ut,*,t. Avera2e !howed a 2ood 2a,n and, wh,*e a** the re!-*t! are not now
ava,*a*e, m. 2-e!! ,! that ao-t 90= o1 a** ,nve!tment +om0an,e! o-t0er1ormed the &nd-!tr,a* Avera2e. The
maBor,t. o1 ,nve!tment +om0an,e! a00ear to have ended the .ear w,th overa** re!-*t! ,n the ran2e o1 0*-! or
m,n-! 5=. On the New Gor" #to+" E5+han2e, 95: +ommon !to+"! re2,!tered *o!!e! 1or the .ear wh,*e ?0?
!howed 2a,n!.
Re!-*t! ,n 19903
'. +ont,n-a* oBe+t,ve ,n mana2,n2 0artner!h,0 1-nd! ,! to a+h,eve a *on24term 0er1orman+e re+ord !-0er,or to
that o1 the &nd-!tr,a* Avera2e. & e*,eve th,! Avera2e, over a 0er,od o1 .ear!, w,** more or *e!! 0ara**e* the re!-*t!
o1 *ead,n2 ,nve!tment +om0an,e!. Un*e!! we do a+h,eve th,! !-0er,or 0er1orman+e there ,! no rea!on 1or
e5,!ten+e o1 the 0artner!h,0!.
@owever, & have 0o,nted o-t that an. !-0er,or re+ord wh,+h we m,2ht a++om0*,!h !ho-*d not e e50e+ted to e
ev,den+ed . a re*at,ve*. +on!tant advanta2e ,n 0er1orman+e +om0ared to the Avera2e. Rather ,t ,! *,"e*. that ,1
!-+h an advanta2e ,! a+h,eved, ,t w,** e thro-2h etter4than4avera2e 0er1orman+e ,n !ta*e or de+*,n,n2 mar"et!
and avera2e, or 0erha0! even 0oorer4 than4avera2e 0er1orman+e ,n r,!,n2 mar"et!.
& wo-*d +on!,der a .ear ,n wh,+h we de+*,ned 15= and the Avera2e :0= to e m-+h !-0er,or to a .ear when
oth we and the Avera2e advan+ed 20=. Over a 0er,od o1 t,me there are 2o,n2 to e 2ood and ad .ear!7 there ,!
noth,n2 to e 2a,ned . 2ett,n2 enth-!ed or de0re!!ed ao-t the !e8-en+e ,n wh,+h the. o++-r. The ,m0ortant
th,n2 ,! to e eat,n2 0ar7 a 1o-r on a 0ar three ho*e ,! not a! 2ood a! a 1,ve on a 0ar 1,ve ho*e and ,t ,! -nrea*,!t,+
to a!!-me we are not 2o,n2 to have o-r !hare o1 oth 0ar three/! and 0ar 1,ve/!.
The aove do!e o1 0h,*o!o0h. ,! e,n2 d,!0en!ed !,n+e we have a n-mer o1 new 0artner! th,! .ear and & want to
ma"e !-re the. -nder!tand m. oBe+t,ve!, m. mea!-re o1 atta,nment o1 the!e oBe+t,ve!, and !ome o1 m. "nown
*,m,tat,on!.
W,th th,! a+"2ro-nd ,t ,! not -ne50e+ted that 1990 wa! a etter4than4avera2e .ear 1or -!. A! +ontra!ted w,th an
overa** *o!! o1 9.:= 1or the &nd-!tr,a* Avera2e, we had a 22.;= 2a,n 1or the !even 0artner!h,0! o0erat,n2
thro-2ho-t the .ear. O-r re!-*t! 1or the 1o-r +om0*ete .ear! o1 0artner!h,0 o0erat,on a1ter e50en!e! -t e1ore
,ntere!t to *,m,ted 0artner! or a**o+at,on to the 2enera* 0artner are3
Year Partnerships Operating Entire Year Partnership Gain Dow-Jones Gain
1957 : 10.?= 4;.?=
195; 5 ?0.9= :;.5=
9
1959 9 25.9= 19.9=
1990 7 22.;= 49.:=
&t !ho-*d e em0ha!,<ed a2a,n that the!e are the net re!-*t! to the 0artner!h,07 the net re!-*t! to the *,m,ted
0artner! wo-*d de0end on the 0artner!h,0 a2reement that the. had !e*e+ted.
The overa** 2a,n or *o!! ,! +om0-ted on a mar"et to mar"et a!,!. A1ter a**ow,n2 1or an. mone. added or
w,thdrawn, !-+h a method 2,ve! re!-*t! a!ed -0on what wo-*d have een rea*,<ed -0on *,8-,dat,on o1 the
0artner!h,0 at the e2,nn,n2, o1 the .ear and what wo-*d have een rea*,<ed -0on *,8-,dat,on at .ear end and ,!
d,11erent, o1 +o-r!e, 1rom o-r ta5 re!-*t!, wh,+h va*-e !e+-r,t,e! at +o!t and rea*,<e 2a,n! or *o!!e! on*. when
!e+-r,t,e! are a+t-a**. !o*d.
On a +om0o-nded a!,!, the +-m-*at,ve re!-*t! have een3
Year Partnership Gain Dow-Jones Gain
1957 10.?= 4;.?=
195; 55.9= 29.9=
1959 95.9= 52.2=
1990 1?0.9= ?2.9=
A*tho-2h 1o-r .ear! ,! ent,re*. too !hort a 0er,od 1rom wh,+h to ma"e ded-+t,on!, what ev,den+e there ,! 0o,nt!
toward +on1,rm,n2 the 0ro0o!,t,on that o-r re!-*t! !ho-*d e re*at,ve*. etter ,n moderate*. de+*,n,n2 or !tat,+
mar"et!. To the e5tent that th,! ,! tr-e, ,t ,nd,+ate! that o-r 0ort1o*,o ma. e more +on!ervat,ve*., a*tho-2h
de+,ded*. *e!! +onvent,ona**., ,nve!ted than ,1 we owned 6*-e4+h,06 !e+-r,t,e!. %-r,n2 a !tron2*. r,!,n2 mar"et
1or the *atter, we m,2ht have rea* d,11,+-*t. ,n mat+h,n2 the,r 0er1orman+e.
'-*t,0*,+,t. o1 (artner!h,0!3
A 0re+ed,n2 ta*e !how! that the 1am,*. ,! 2row,n2. There ha! een no 0artner!h,0 wh,+h ha! had a +on!,!tent*.
!-0er,or or ,n1er,or re+ord +om0ared to o-r 2ro-0 avera2e, -t there ha! een !ome var,an+e ea+h .ear de!0,te
m. e11ort! to 6"ee0 a** 0artner!h,0! ,nve!ted ,n the !ame !e+-r,t,e! and ,n ao-t the !ame 0ro0ort,on!. Th,!
var,at,on, o1 +o-r!e, +o-*d e e*,m,nated . +om,n,n2 the 0re!ent 0artner!h,0! ,nto one *ar2e 0artner!h,0. #-+h
a move wo-*d a*!o e*,m,nate m-+h deta,* and a moderate amo-nt o1 e50en!e.
Fran"*., & am ho0e1-* o1 do,n2 !ometh,n2 a*on2 th,! *,ne ,n the ne5t 1ew .ear!. The 0ro*em ,! that var,o-!
0artner! have e50re!!ed 0re1eren+e! 1or var.,n2 0artner!h,0 arran2ement!. Noth,n2 w,** e done w,tho-t
-nan,mo-! +on!ent o1 0artner!.
Advan+e (a.ment!3
#evera* 0artner! have ,n8-,red ao-t add,n2 mone. d-r,n2 the .ear to the,r 0artner!h,0. A*tho-2h an e5+e0t,on
ha! een made, ,t ,! too d,11,+-*t to amend 0artner!h,0 a2reement! d-r,n2 m,d4.ear where we have more than
one 1am,*. re0re!ented amon2 the *,m,ted 0artner!. There1ore, ,n m,5ed 0artner!h,0! an add,t,ona* ,ntere!t +an
on*. e a+8-,red at the end o1 the .ear.
We do a++e0t advan+e 0a.ment! d-r,n2 the .ear toward a 0artner!h,0 ,ntere!t and 0a. ,ntere!t at 9= on th,!
0a.ment 1rom the t,me re+e,ved -nt,* the end o1 the .ear. At that t,me, !-Be+t to amendment o1 the a2reement
. the 0artner!, the 0a.ment 0*-! ,ntere!t ,! added to the 0artner!h,0 +a0,ta* and therea1ter 0art,+,0ate! ,n 0ro1,t!
and *o!!e!.
#anorn 'a03
10
La!t .ear ment,on wa! made o1 an ,nve!tment wh,+h a++o-nted 1or a ver. h,2h and -n-!-a* 0ro0ort,on I:5=K o1
o-r net a!!et! a*on2 w,th the +omment that & had !ome ho0e th,! ,nve!tment wo-*d e +on+*-ded ,n 1990. Th,!
ho0e mater,a*,<ed. The h,!tor. o1 an ,nve!tment o1 th,! ma2n,t-de ma. e o1 ,ntere!t to .o-.
#anorn 'a0 $o. ,! en2a2ed ,n the 0-*,+at,on and +ont,n-o-! rev,!,on o1 e5treme*. deta,*ed ma0! o1 a** +,t,e!
o1 the Un,ted #tate!. For e5am0*e, the vo*-me! ma00,n2 Omaha wo-*d we,2h 0erha0! 1,1t. 0o-nd! and 0rov,de
m,n-te deta,*! on ea+h !tr-+t-re. The ma0 wo-*d e rev,!ed . the 0a!te4over method !how,n2 new
+on!tr-+t,on, +han2ed o++-0an+., new 1,re 0rote+t,on 1a+,*,t,e!, +han2ed !tr-+t-ra* mater,a*!, et+. The!e
rev,!,on! wo-*d e done a00ro5,mate*. ann-a**. and a new ma0 wo-*d e 0-*,!hed ever. twent. or th,rt. .ear!
when 1-rther 0a!teover! e+ame ,m0ra+t,+a*. The +o!t o1 "ee0,n2 the ma0 rev,!ed to an Omaha +-!tomer wo-*d
r-n aro-nd H100 0er .ear.
Th,! deta,*ed ,n1ormat,on !how,n2 d,ameter o1 water ma,n! -nder*.,n2 !treet!, *o+at,on o1 1,re h.drant!,
+om0o!,t,on o1 roo1, et+., wa! 0r,mar,*. o1 -!e to 1,re ,n!-ran+e +om0an,e!. The,r -nderwr,t,n2 de0artment!,
*o+ated ,n a +entra* o11,+e, +o-*d eva*-ate -!,ne!! . a2ent! nat,ona**.. The theor. wa! that a 0,+t-re wa! worth
a tho-!and word! and !-+h eva*-at,on wo-*d de+,de whether the r,!" wa! 0ro0er*. rated, the de2ree o1
+on1*a2rat,on e50o!-re ,n an area, adv,!a*e re,n!-ran+e 0ro+ed-re, et+. The -*" o1 #anorn/! -!,ne!! wa!
done w,th ao-t th,rt. ,n!-ran+e +om0an,e! a*tho-2h ma0! were a*!o !o*d to +-!tomer! o-t!,de the ,n!-ran+e
,nd-!tr. !-+h a! 0-*,+ -t,*,t,e!, mort2a2e +om0an,e!, and ta5,n2 a-thor,t,e!.
For !event.41,ve .ear! the -!,ne!! o0erated ,n a more or *e!! mono0o*,!t,+ manner, w,th 0ro1,t! rea*,<ed ,n
ever. .ear a++om0an,ed . a*mo!t +om0*ete ,mm-n,t. to re+e!!,on and *a+" o1 need 1or an. !a*e! e11ort. &n the
ear*,er .ear! o1 the -!,ne!!, the ,n!-ran+e ,nd-!tr. e+ame 1ear1-* that #anorn/! 0ro1,t! wo-*d e+ome too
2reat and 0*a+ed a n-mer o1 0rom,nent ,n!-ran+e men on #anorn/! oard o1 d,re+tor! to a+t ,n a wat+h4do2
+a0a+,t..
&n the ear*. 1950D! a +om0et,t,ve method o1 -nder4wr,t,n2 "nown a! 6+ard,n26 made ,nroad! on #anornD!
-!,ne!! and a1ter4ta5 0ro1,t! o1 the ma0 -!,ne!! 1e** 1rom an avera2e ann-a* *eve* o1 over H500,000 ,n the *ate
19:0/! to -nder H100,000 ,n 195; and 1959. $on!,der,n2 the -0ward ,a! ,n the e+onom. d-r,n2 th,! 0er,od, th,!
amo-nted to an a*mo!t +om0*ete e*,m,nat,on o1 what had een !,<a*e, !ta*e earn,n2 0ower.
@owever, d-r,n2 the ear*. 19:0/! #anorn had e2-n to a++-m-*ate an ,nve!tment 0ort1o*,o. There were no
+a0,ta* re8-,rement! to the -!,ne!! !o that an. reta,ned earn,n2! +o-*d e devoted to th,! 0roBe+t. Over a 0er,od
o1 t,me, ao-t H2.5 m,**,on wa! ,nve!ted, ro-2h*. ha*1 ,n ond! and ha*1 ,n !to+"!. Th-!, ,n the *a!t de+ade
0art,+-*ar*., the ,nve!tment 0ort1o*,o *o!!omed wh,*e the o0erat,n2 ma0 -!,ne!! w,*ted.
Let me 2,ve .o- !ome ,dea o1 the e5treme d,ver2en+e o1 the!e two 1a+tor!. &n 19:; when the %ow4>one!
&nd-!tr,a* Avera2e wa! ,n the 1004120 ran2e, #anorn !o*d at H110 0er !hare. &n 195; w,th the Avera2e ,n the
550 area, #anorn !o*d at H?5 0er !hare. Get d-r,n2 that !ame 0er,od the va*-e o1 the #anorn ,nve!tment
0ort1o*,o ,n+rea!ed 1rom ao-t H20 0er !hare to H95 0er !hare. Th,! mean!, ,n e11e+t, that the -.er o1 #anorn
!to+" ,n 19:; wa! 0*a+,n2 a 0o!,t,ve va*-at,on o1 H90 0er !hare on the ma0 -!,ne!! IH110 *e!! the H20 va*-e o1
the ,nve!tment! -nre*ated to the ma0 -!,ne!!K ,n a .ear o1 de0re!!ed -!,ne!! and !to+" mar"et +ond,t,on!. &n
the tremendo-!*. more v,2oro-! +*,mate o1 195; the !ame ma0 -!,ne!! wa! eva*-ated at a m,n-! H20 w,th the
-.er o1 the !to+" -nw,**,n2 to 0a. more than 70 +ent! on the do**ar 1or the ,nve!tment 0ort1o*,o w,th the ma0
-!,ne!! thrown ,n 1or noth,n2.
@ow +o-*d th,! +ome ao-tM #anorn ,n 195; a! we** a! 19:; 0o!!e!!ed a wea*th o1 ,n1ormat,on o1 !-!tant,a*
va*-e to the ,n!-ran+e ,nd-!tr.. To re0rod-+e the deta,*ed ,n1ormat,on the. had 2athered over the .ear! wo-*d
have +o!t ten! o1 m,**,on! o1 do**ar!. %e!0,te E+ard,n2F over H500 m,**,on o1 1,re 0rem,-m! were -nderwr,tten
11
. Ema00,n2F +om0an,e!. @owever, the mean! o1 !e**,n2 and 0a+"a2,n2 #anornD! 0rod-+t, ,n1ormat,on had
rema,ned -n+han2ed thro-2ho-t the .ear and 1,na**. th,! ,nert,a wa! re1*e+ted ,n the earn,n2!.
The ver. 1a+t that the ,nve!tment 0ort1o*,o had done !o we** !erved to m,n,m,<e ,n the e.e! o1 mo!t d,re+tor! the
need 1or reB-venat,on o1 the ma0 -!,ne!!. #anorn had a !a*e! vo*-me o1 ao-t H2 m,**,on 0er .ear and owned
ao-t H7 m,**,on worth o1 mar"eta*e !e+-r,t,e!. The ,n+ome 1rom the ,nve!tment 0ort1o*,o wa! !-!tant,a*, the
-!,ne!! had no 0o!!,*e 1,nan+,a* worr,e!, the ,n!-ran+e +om0an,e! were !at,!1,ed w,th the 0r,+e 0a,d 1or ma0!,
and the !to+"ho*der! !t,** re+e,ved d,v,dend!. @owever, the!e d,v,dend! were +-t 1,ve t,me! ,n e,2ht .ear!
a*tho-2h & +o-*d never 1,nd an. re+ord o1 !-22e!t,on! 0erta,n,n2 to +-tt,n2 !a*ar,e! or d,re+tor/! and +omm,ttee
1ee!.
(r,or to m. entr. on the Board, o1 the 1o-rteen d,re+tor!, n,ne were 0rom,nent men 1rom the ,n!-ran+e ,nd-!tr.
who +om,ned he*d ?9 !hare! o1 !to+" o-t o1 105,000 !hare! o-t!tand,n2. %e!0,te the,r to0 0o!,t,on! w,th ver.
*ar2e +om0an,e! wh,+h wo-*d !-22e!t the 1,nan+,a* wherew,tha* to ma"e at *ea!t a mode!t +omm,tment, the
*ar2e!t ho*d,n2 ,n th,! 2ro-0 wa! ten !hare!. &n !evera* +a!e!, the ,n!-ran+e +om0an,e! the!e men ran owned
!ma** *o+"! o1 !to+" -t the!e were to"en ,nve!tment! ,n re*at,on to the 0ort1o*,o! ,n wh,+h the. were he*d. For
the 0a!t de+ade the ,n!-ran+e +om0an,e! had een on*. !e**er! ,n an. tran!a+t,on! ,nvo*v,n2 #anorn !to+".
The tenth d,re+tor wa! the +om0an. attorne., who he*d ten !hare!. The e*eventh wa! a an"er w,th ten !hare!
who re+o2n,<ed the 0ro*em! o1 the +om0an., a+t,ve*. 0o,nted them o-t, and *ater added to h,! ho*d,n2!. The
ne5t two d,re+tor! were the to0 o11,+er! o1 #anorn who owned ao-t :00 !hare! +om,ned. The o11,+er! were
+a0a*e, aware o1 the 0ro*em! o1 the -!,ne!!, -t "e0t ,n a !-!erv,ent ro*e . the Board o1 %,re+tor!. The
1,na* memer o1 o-r +a!t wa! a !on o1 a de+ea!ed 0re!,dent o1 #anorn. The w,dow owned ao-t 15,000 !hare!
o1 !to+".
&n *ate 195;, the !on, -nha00. w,th the trend o1 the -!,ne!!, demanded the to0 0o!,t,on ,n the +om0an., wa!
t-rned down, and !-m,tted h,! re!,2nat,on, wh,+h wa! a++e0ted. #hort*. therea1ter we made a ,d to h,! mother
1or her *o+" o1 !to+", wh,+h wa! a++e0ted. At the t,me there were two other *ar2e ho*d,n2!, one o1 ao-t 10,000
!hare! Id,!0er!ed amon2 +-!tomer! o1 a ro"era2e 1,rmK and one o1 ao-t ;,000. The!e 0eo0*e were 8-,te
-nha00. w,th the !,t-at,on and de!,red a !e0arat,on o1 the ,nve!tment 0ort1o*,o 1rom the ma0 -!,ne!!, a! d,d
we.
#-!e8-ent*. o-r ho*d,n2! I,n+*-d,n2 a!!o+,ate!K were ,n+rea!ed thro-2h o0en mar"et 0-r+ha!e! to ao-t 2?,000
!hare! and the tota* re0re!ented . the three 2ro-0! ,n+rea!ed to ?9,000 !hare!. We ho0ed to !e0arate the two
-!,ne!!e!, rea*,<e the 1a,r va*-e o1 the ,nve!tment 0ort1o*,o and wor" to re4e!ta*,!h the earn,n2 0ower o1 the
ma0 -!,ne!!. There a00eared to e a rea* o00ort-n,t. to m-*t,0*. ma0 0ro1,t! thro-2h -t,*,<at,on o1 #anorn/!
wea*th o1 raw mater,a* ,n +onB-n+t,on w,th e*e+tron,+ mean! o1 +onvert,n2 th,! data to the mo!t -!a*e 1orm 1or
the +-!tomer.
There wa! +on!,dera*e o00o!,t,on on the Board to +han2e o1 an. t.0e, 0art,+-*ar*. when ,n,t,ated . an
o-t!,der, a*tho-2h mana2ement wa! ,n +om0*ete a++ord w,th o-r 0*an and a !,m,*ar 0*an had een re+ommended
. Boo<, A**en N @am,*ton I'ana2ement E50ert!K. To avo,d a 0ro5. 1,2ht Iwh,+h ver. 0roa*. wo-*d not
have een 1orth+om,n2 and wh,+h we wo-*d have een +erta,n o1 w,nn,n2K and to avo,d t,me de*a. w,th a *ar2e
0ort,on o1 #anornD! mone. t,ed -0 ,n *-e4+h,0 !to+"! wh,+h & d,dnDt +are 1or at +-rrent 0r,+e!, a 0*an wa!
evo*ved ta",n2 o-t a** !to+"ho*der! at 1a,r va*-e who wanted o-t. The #E$ r-*ed 1avora*. on the 1a,rne!! o1 the
0*an. Ao-t 72= o1 the #anorn !to+", ,nvo*v,n2 50= o1 the 1,900 !to+"ho*der!, wa! e5+han2ed 1or 0ort1o*,o
!e+-r,t,e! at 1a,r va*-e. The ma0 -!,ne!! wa! *e1t w,th over H*,25 m,**,on ,n 2overnment and m-n,+,0a* ond! a!
a re!erve 1-nd, and a 0otent,a* +or0orate +a0,ta* 2a,n! ta5 o1 over H1 m,**,on wa! e*,m,nated. The rema,n,n2
!to+"ho*der! were *e1t w,th a !*,2ht*. ,m0roved a!!et va*-e, !-!tant,a**. h,2her earn,n2! 0er !hare, and an
,n+rea!ed d,v,dend rate.
12
Ne+e!!ar,*., the aove *,tt*e me*odrama ,! a ver. arev,ated de!+r,0t,on o1 th,! ,nve!tment o0erat,on. @owever,
,t doe! 0o,nt -0 the ne+e!!,t. 1or !e+re+. re2ard,n2 o-r 0ort1o*,o o0erat,on! a! we** a! the 1-t,*,t. o1 mea!-r,n2
o-r re!-*t! over a !hort !0an o1 t,me !-+h a! a .ear. #-+h +ontro* !,t-at,on! ma. o++-r ver. ,n1re8-ent*.. O-r
read4and4-tter -!,ne!! ,! -.,n2 -nderva*-ed !e+-r,t,e! and !e**,n2 when the -nderva*-at,on ,! +orre+ted
a*on2 w,th ,nve!tment ,n !0e+,a* !,t-at,on! where the 0ro1,t ,! de0endent on +or0orate rather than mar"et a+t,on.
To the e5tent that 0artner!h,0 1-nd! +ont,n-e to 2row, ,t ,! 0o!!,*e that more o00ort-n,t,e! w,** e ava,*a*e ,n
E+ontro* !,t-at,on!.F
The a-d,tor! !ho-*d e ma,*,n2 .o-r 1,nan+,a* !tatement and ta5 ,n1ormat,on w,th,n ao-t a wee". &1 .o- have
an. 8-e!t,on! at a** re2ard,n2 e,ther the,r re0ort or th,! *etter, e !-re to *et me "now.
Warren E. B-11ett 14:0491
13
1990 Letter
BUFFETT (ARTNER#@&(, LT%.
;10 A&EW&T (LAOA
O'A@A :1, NEBRA#AA
>-*., 1991
TO 'G (ARTNER#3
&n the 0a!t, 0artner! have +ommented that a on+e4a4.ear *etter wa! Ea *on2 t,me etween dr,n"!,F and
that a !em,4ann-a* *etter wo-*d e a 2ood ,dea. &t rea**. !ho-*dnDt e too d,11,+-*t to 1,nd !ometh,n2 to !a. tw,+e
a .ear7 at *ea!t ,t ,!nDt th,! .ear. @en+e, th,! *etter wh,+h w,** e +ont,n-ed ,n 1-t-re .ear!.
%-r,n2 the 1,r!t ha*1 o1 1991, the overa** 2a,n o1 the %ow4>one! &nd-!tr,a* Avera2e wa! ao-t 1:=,
,n+*-d,n2 d,v,dend!. A*tho-2h th,! ,! the t.0e o1 0er,od when we !ho-*d have the mo!t d,11,+-*t. ,n e5+eed,n2
th,! !tandard, a** 0artner!h,0! that o0erated thro-2ho-t the !,5 month! d,d moderate*. etter then the Avera2e.
(artner!h,0! 1ormed d-r,n2 1991 e,ther e8-a*ed or e5+eeded re!-*t! o1 the Avera2e 1rom the t,me o1 1ormat,on,
de0end,n2 0r,mar,*. on how *on2 the. were ,n o0erat,on.
Let me, however, em0ha!,<e two 0o,nt!. F,r!t, one .ear ,! 1ar too !hort a 0er,od to 1orm an. ",nd o1 an
o0,n,on a! to ,nve!tment 0er1orman+e, and mea!-rement! a!ed -0on !,5 month! e+ome even more -nre*,a*e.
One 1a+tor that ha! +a-!ed !ome re*-+tan+e on m. 0art to wr,te !em,4ann-a* *etter! ,! the 1ear that 0artner! ma.
e2,n to th,n" ,n term! o1 !hort4term 0er1orman+e wh,+h +an e mo!t m,!*ead,n2. '. own th,n",n2 ,! m-+h
more 2eared to 1,ve .ear 0er1orman+e, 0re1era*. w,th te!t! o1 re*at,ve re!-*t! ,n oth !tron2 and wea" mar"et!.
The !e+ond 0o,nt & want ever.one to -nder!tand ,! that ,1 we +ont,n-e ,n a mar"et wh,+h advan+e! at the
0a+e o1 the 1,r!t ha*1 o1 1991, not on*. do & do-t that we w,** +ont,n-e to e5+eed the re!-*t! o1 the %>&A, -t ,t ,!
ver. *,"e*. that o-r 0er1orman+e w,** 1a** eh,nd the Avera2e.
O-r ho*d,n2!, wh,+h & a*wa.! e*,eve to e on the +on!ervat,ve !,de +om0ared to 2enera* 0ort1o*,o!, tend
to 2row more +on!ervat,ve a! the 2enera* mar"et *eve* r,!e!. At a** t,me!, & attem0t to have a 0ort,on o1 o-r
0ort1o*,o ,n !e+-r,t,e! a! *ea!t 0art,a**. ,n!-*ated 1rom the ehav,or o1 the mar"et, and th,! 0ort,on !ho-*d
,n+rea!e a! the mar"et r,!e!. @owever a00et,<,n2 re!-*t! 1or even the amate-r +oo" Iand 0erha0! 0art,+-*ar*. the
amate-rK, we 1,nd that more o1 o-r 0ort1o*,o ,! not on the !tove.
We have a*!o e2-n o0en mar"et a+8-,!,t,on o1 a 0otent,a**. maBor +omm,tment wh,+h &, o1 +o-r!e,
ho0e doe! noth,n2 mar"etw,!e 1or at *ea!t a .ear. #-+h a +omm,tment ma. e a deterrent to !hort ran2e
0er1orman+e, -t ,t 2,ve! !tron2 0rom,!e o1 !-0er,or re!-*t! over a !evera* .ear 0er,od +om,ned w,th !-!tant,a*
de1en!,ve +hara+ter,!t,+!.
(ro2re!! ha! een made toward +om,n,n2 a** 0artner! at .earend. & have ta*"ed w,th a** 0artner! Bo,n,n2
d-r,n2 th,! 0a!t .ear or !o ao-t th,! 2oa*, and have a*!o 2one over the 0*an! w,th re0re!entat,ve 0artner! o1 a**
ear*,er 0artner!h,0!
#ome o1 the 0rov,!,on! w,** e3
IAK A mer2er o1 a** 0artner!h,0!, a!ed on mar"et va*-e at .earend, w,th 0rov,!,on! 1or 0ro0er
a**o+at,on amon2 0artner! o1 1-t-re ta5 *,a,*,t. d-e to -nrea*,<ed 2a,n! at .earend. The mer2er ,t!e*1 w,** e ta54
1ree, and w,** re!-*t ,n no a++e*erat,on o1 rea*,<at,on o1 0ro1,t!7
14
IBK A d,v,!,on o1 0ro1,t! etween the *,m,ted 0artner! and 2enera* 0artner, w,th the 1,r!t 9= 0er .ear to
0artner! a!ed -0on e2,nn,n2 +a0,ta* at mar"et, and an. e5+e!! d,v,ded one41o-rth to the 2enera* 0artner and
three41o-rth! to a** 0artner! 0ro0ort,ona* to the,r +a0,ta*. An. de1,+,en+,e! ,n earn,n2! e*ow the 9= wo-*d e
+arr,ed 1orward a2a,n!t 1-t-re earn,n2!, -t wo-*d not e +arr,ed a+". (re!ent*., there are three 0ro1,t
arran2ement! wh,+h have een o0t,ona* to ,n+om,n2 0artner!3
Interest Provision Excess to Gen. Partner Excess to Ltd. Partners
I1K 9= 1P: 2P:
I2K ?= 1P? :P?
I:K None 1P9 5P9
&n the event o1 0ro1,t!, the new d,v,!,on w,** ov,o-!*. have to e etter 1or *,m,ted 0artner! than the 1,r!t two
arran2ement!. Re2ard,n2 the th,rd, the new arran2ement w,** e !-0er,or -0 to 1;= 0er .ear7 -t aove th,! rate
the *,m,ted 0artner! wo-*d do etter -nder the 0re!ent a2reement. Ao-t ;0= o1 tota* 0artner!h,0 a!!et! have
!e*e+ted the 1,r!t two arran2ement!, and & am ho0e1-*, !ho-*d we avera2e etter than 1;= .ear*., 0artner!
0re!ent*. -nder the th,rd arran2ement w,** not 1ee* !hort4+han2ed -nder the new a2reement7
I$K &n the event o1 *o!!e!, there w,** e no +arr. a+" a2a,n!t amo-nt! 0rev,o-!*. +red,ted to me a!
2enera* 0artner. A*tho-2h there w,** e a +arr.41orward a2a,n!t 1-t-re e5+e!! earn,n2!. @owever, m. w,1e and &
w,** have the *ar2e!t !,n2*e ,nve!tment ,n the new 0artner!h,0, 0roa*. ao-t one4!,5th o1 tota* 0artner!h,0
a!!et!, and there. a 2reater do**ar !ta"e ,n *o!!e! than an. other 0artner o1 1am,*. 2ro-0, & am ,n!ert,n2 a
0rov,!,on ,n the 0artner!h,0 a2reement wh,+h w,** 0roh,,t the 0-r+ha!e . me or m. 1am,*. o1 an. mar"eta*e
!e+-r,t,e!. &n other word!, the new 0artner!h,0 w,** re0re!ent m. ent,re ,nve!tment o0erat,on ,n mar"eta*e
!e+-r,t,e!, !o that m. re!-*t! w,** have to e d,re+t*. 0ro0ort,ona* to .o-r!, !-Be+t to the advanta2e & ota,n ,1
we do etter than 9=7
I%K A 0rov,!,on 1or month*. 0a.ment! at the rate o1 9= .ear*., a!ed on e2,nn,n2 o1 the .ear +a0,ta*
va*-ed at mar"et. (artner! not w,!h,n2 to w,thdraw mone. +-rrent*. +an have th,! +red,ted a+" to them
a-tomat,+a**. a! an advan+e 0a.ment, draw,n2 9=, to 0-r+ha!e an add,t,ona* e8-,t. ,ntere!t ,n the 0artner!h,0 at
.earend. Th,! w,** !o*ve one !t-m*,n2 *o+" that ha! hereto1ore e5,!ted ,n the 0ath o1 +on!o*,dat,on, !,n+e man.
0artner! de!,re re2-*ar w,thdrawa*! and other! w,!h to 0*ow ever.th,n2 a+"7
IEK The r,2ht to orrow d-r,n2 the .ear, -0 to 20= o1 the va*-e o1 .o-r 0artner!h,0 ,ntere!t, at 9=, !-+h
*oan! to e *,8-,dated at .earend or ear*,er. Th,! w,** add a de2ree o1 *,8-,d,t. to an ,nve!tment wh,+h +an now
on*. e d,!0o!ed o1 at .earend. &t ,! not ,ntended that an.th,n2 -t re*at,ve*. 0ermanent 1-nd! e ,nve!ted ,n the
0artner!h,0, and we have no de!,re to t-rn ,t ,nto a an". Rather, & e50e+t th,! to e a re*at,ve*. -n-!ed 0rov,!,on,
wh,+h ,! ava,*a*e when !ometh,n2 -ne50e+ted t-rn! -0 and a wa,t -nt,* .earend to *,8-,date 0art o1 a** o1 a
0artnerD! ,ntere!t wo-*d +a-!e hard!h,07
IFK An arran2ement where. an. re*at,ve*. !ma** ta5 adB-!tment, made ,n *ater .ear! on the
0artner!h,0D! ret-rn w,** e a!!e!!ed d,re+t*. to me. Th,! wa., we w,** not e 1a+ed w,th the 0ro*em o1 a!",n2
e,2ht. 0eo0*e, or more, to amend the,r ear*,er ret-rn over !ome !ma** matter. A! ,t !tand! now, a !ma** +han2e,
!-+h a! a de+,!,on that a d,v,dend re+e,ved . the 0artner!h,0 ha! 9:= a ret-rn o1 +a0,ta* ,n!tead o1 9;=, +o-*d
+a-!e a m-*t,t-de o1 0a0er wor". To 0revent th,!, an. +han2e amo-nt,n2 to *e!! than H1,000 o1 ta5 w,** e
+har2ed d,re+t*. to me.
We have !-m,tted the 0ro0o!ed a2reement to Wa!h,n2ton 1or a r-*,n2 that the mer2er wo-*d e ta54
1ree, and that the 0artner!h,0 wo-*d e treated a! a 0artner!h,0 -nder the ta5 *aw!. Wh,*e a** o1 th,! ,! a *ot o1
wor", ,t w,** ma"e th,n2! enormo-!*. ea!,er ,n the 1-t-re. Go- m,2ht !ave th,! *etter a! a re1eren+e to read ,n
+onB-n+t,on w,th the a2reement wh,+h .o- w,** re+e,ve *ater ,n the .ear.
15
The m,n,m-m ,nve!tment 1or new 0artner! ,! +-rrent*. H25,000, -t, o1 +o-r!e, th,! doe! not a00*. to
0re!ent 0artner!. O-r method o1 o0erat,on w,** ena*e the 0artner! to add or w,thdraw amo-nt! o1 an. !,<e I,n
ro-nd H100K at .earend. E!t,mated tota* a!!et! o1 the 0artner!h,0 w,** e ,n the ne,2horhood o1 H? m,**,on,
wh,+h ena*e! -! to +on!,der ,nve!tment! !-+h a! the one ment,oned ear*,er ,n th,! *etter, wh,+h we wo-*d have
had to 0a!! !evera* .ear! a2o.
Th,! ha! t-rned o-t to e more o1 a 0rod-+t,on than m. ann-a* *etter. &1 .o- have an. 8-e!t,on!,
0art,+-*ar*. re2ard,n2 an.th,n2 that ,!nDt +*ear ,n m. d,!+-!!,on o1 the new 0artner!h,0 a2reement, e !-re to *et
me "now. &1 there are a *ar2e n-mer o1 8-e!t,on!, & w,** wr,te a !-00*ementa* *etter to a** 0artner! 2,v,n2 the
8-e!t,on! that ar,!e and the an!wer! to them.
Warren E. B-11ett
L*
>-*. 22, 1991
16
1991 Letter
BUFFETT (ARTNER#@&(, LT%.
;10 A&EW&T (LAOA
O'A@A :1, NEBRA#AA
>an-ar. 2?, 1992
O-r (er1orman+e ,n 1991
& have +on!,!tent*. to*d 0artner! that ,t ,! m. e50e+tat,on and ho0e I,t/! a*wa.! hard to te** wh,+h ,! wh,+hK that
we w,** do re*at,ve*. we** +om0ared to the 2enera* mar"et ,n down or !tat,+ mar"et!, -t that we ma. not *oo" !o
2ood ,n advan+,n2 mar"et!. &n !tron2*. advan+,n2 mar"et! & e50e+t to have rea* d,11,+-*t. "ee0,n2 -0 w,th the
2enera* mar"et.
A*tho-2h 1991 wa! +erta,n*. a 2ood .ear 1or the 2enera* mar"et, and ,n add,t,on, a ver. 2ood .ear 1or -! on oth
an a!o*-te and re*at,ve a!,!, the e50e+tat,on! ,n the 0rev,o-! 0ara2ra0h rema,n -n+han2ed.
%-r,n2 1991, the 2enera* mar"et a! mea!-red . the %ow4>one! &nd-!tr,a* Avera2e Ihere,na1ter +a**ed the
E%owFK !howed an over4a** 2a,n o1 22.2= ,n+*-d,n2 d,v,dend! re+e,ved thro-2h owner!h,0 o1 the %ow. The
2a,n 1or a** 0artner!h,0! o0erat,n2 thro-2ho-t the ent,re .ear, a1ter a** e50en!e! o1 o0erat,on, -t e1ore
0a.ment! to *,m,ted 0artner! or a++r-a* to the 2enera* 0artner, avera2ed ?5.9=. The deta,*! o1 th,! 2a,n .
0artner!h,0 are !hown ,n the a00end,5 a*on2 w,th re!-*t! 1or the 0artner!h,0! !tarted d-r,n2 the .ear.
We have now +om0*eted 1,ve 1-** .ear! o1 0artner!h,0 o0erat,on, and the re!-*t! o1 the!e 1,ve .ear! are !hown
e*ow on a .ear4.4.ear a!,! and a*!o on a +-m-*at,ve or +om0o-nded a!,!. The!e re!-*t! are !tated on the
a!,! de!+r,ed ,n the 0re+ed,n2 0ara2ra0h7 a1ter e50en!e!, -t e1ore d,v,!,on o1 2a,n! amon2 0artner! or
0a.ment! to 0artner!.
Year Partnerships Operating Entire
Year
Partnership Gain Dow-Jones Industrials
Gain*
1957 : 10.?= 4;.?=
195; 5 ?0.9= :;.5=
1959 9 25.9= 19.9=
1990 7 22.;= 49.:=
1991 7 ?5.9= 22.2=
Q &n+*-d,n2 d,v,dend! re+e,ved thro-2h owner!h,0 o1 the %ow.
On a +om0o-nded a!,!, the +-m-*at,ve re!-*t! have een3
Year Partnership Gain Dow-Jones Industrials Gain
1957 10.?= 4;.?=
195745; 55.9= 29.9=
1057459 95.9= 52.2=
1957490 1?0.9= ?2.9=
1957491 251.0= 7?.:=
The!e re!-*t! do not mea!-re the 2a,n to the *,m,ted 0artner, wh,+h o1 +o-r!e, ,! the 1,2-re ,n wh,+h .o- are mo!t
,ntere!ted. Be+a-!e o1 the var.,n2 0artner!h,0 arran2ement! that have e5,!ted ,n the 0a!t, & have -!ed the over4
a** net 2a,n Ia!ed on mar"et va*-e! at the e2,nn,n2 and end o1 the .earK to the 0artner!h,0 a! e,n2 the 1a,re!t
mea!-re o1 over4a** 0er1orman+e.
17
On a 0ro41orma a!,! adB-!ted to the d,v,!,on o1 2a,n! enta,*ed ,n o-r 0re!ent B-11ett (artner!h,0, Ltd.
a2reement, the re!-*t! wo-*d have een3
Year Liited Partners! Gain Dow Gain
1957 9.:= 4;.?=
195; :2.2= :;.5=
1959 20.9= 19.9=
1990 1;.9= 49.:=
1991 :5.9= 22.2=
"O#PO$%DED
1957 9.:= 4;.?=
195745; ??.5= 29.9=
1957459 7?.7= 52.2=
1957490 107.2= ?2.9=
1957491 1;1.9= 7?.:=
A Word Ao-t (ar
The o-t!tand,n2 ,tem o1 ,m0ortan+e ,n m. !e*e+t,on o1 0artner!, a! we** a! ,n m. !-!e8-ent re*at,on! w,th them,
ha! een the determ,nat,on that we -!e the !ame .ard!t,+". &1 m. 0er1orman+e ,! 0oor, & e50e+t 0artner! to
w,thdraw, and ,ndeed, & !ho-*d *oo" 1or a new !o-r+e o1 ,nve!tment 1or m. own 1-nd!. &1 0er1orman+e ,! 2ood, &
am a!!-red o1 do,n2 !0*end,d*., a !tate o1 a11a,r! to wh,+h & am !-re & +an adB-!t.
The r-, then, ,! ,n e,n2 !-re that we a** have the !ame ,dea! o1 what ,! 2ood and what ,! 0oor. & e*,eve ,n
e!ta*,!h,n2 .ard!t,+"! 0r,or to the a+t7 retro!0e+t,ve*., a*mo!t an.th,n2 +an e made to *oo" 2ood ,n re*at,on to
!ometh,n2 or other.
& have +ont,n-o-!*. -!ed the %ow4>one! &nd-!tr,a* Avera2e a! o-r mea!-re o1 0ar. &t ,! m. 1ee*,n2 that three
.ear! ,! a ver. m,n,ma* te!t o1 0er1orman+e, and the e!t te!t +on!,!t! o1 a 0er,od at *ea!t that *on2 where the
term,na* *eve* o1 the %ow ,! rea!ona*. +*o!e to the ,n,t,a* *eve*.
Wh,*e the %ow ,! not 0er1e+t Inor ,! an.th,n2 e*!eK a! a mea!-re o1 0er1orman+e, ,t ha! the advanta2e o1 e,n2
w,de*. "nown, ha! a *on2 0er,od o1 +ont,n-,t., and re1*e+t! w,th rea!ona*e a++-ra+. the e50er,en+e o1 ,nve!tor!
2enera**. w,th the mar"et. & have no oBe+t,on to an. other method o1 mea!-rement o1 2enera* mar"et
0er1orman+e e,n2 -!ed, !-+h a! other !to+" mar"et avera2e!, *ead,n2 d,ver!,1,ed m-t-a* !to+" 1-nd!, an"
+ommon tr-!t 1-nd!, et+.
Go- ma. 1ee* & have e!ta*,!hed an -nd-*. !hort .ard!t,+" ,n that ,t 0erha0! a00ear! 8-,te !,m0*e to do etter
than an -nmana2ed ,nde5 o1 :0 *ead,n2 +ommon !to+"!. A+t-a**., th,! ,nde5 ha! 2enera**. 0roven to e a
rea!ona*. to-2h +om0et,tor. Arth-r W,e!ener2erD! +*a!!,+ oo" on ,nve!tment +om0an,e! *,!t! 0er1orman+e
1or the 15 .ear! 19?9490, 1or a** *ead,n2 m-t-a* 1-nd!. There ,! 0re!ent*. over H20 ,**,on ,nve!ted ,n m-t-a*
1-nd!, !o the e50er,en+e o1 the!e 1-nd! re0re!ent!, +o**e+t,ve*., the e50er,en+e o1 man. m,**,on ,nve!tor!. '.
own e*,e1, tho-2h the 1,2-re! are not ota,na*e, ,! that 0ort1o*,o! o1 mo!t *ead,n2 ,nve!tment +o-n!e*
or2an,<at,on! and an" tr-!t de0artment! have a+h,eved re!-*t! !,m,*ar to the!e m-t-a* 1-nd!.
W,e!ener2er *,!t! 70 1-nd! ,n h,! E$hart! N #tat,!t,+!F w,th +ont,n-o-! re+ord! !,n+e 19?9. & have e5+*-ded :2
o1 the!e 1-nd! 1or var,o-! rea!on! !,n+e the. were a*an+ed 1-nd! Ithere1ore not 0art,+,0at,n2 1-**. ,n the 2enera*
mar"et r,!eK, !0e+,a*,<ed ,nd-!tr. 1-nd!, et+. O1 the :2 e5+*-ded e+a-!e & 1e*t a +om0ar,!on wo-*d not e 1a,r,
18
:1 d,d 0oorer than the %ow, !o the. were +erta,n*. not e5+*-ded to !*ant the +on+*-!,on! e*ow.
O1 the rema,n,n2 :; m-t-a* 1-nd! who!e method o1 o0erat,on & 1e*t wa! !-+h a! to ma"e a +om0ar,!on w,th the
%ow rea!ona*e, :2 d,d 0oorer than the %ow, and 9 d,d etter. The 9 do,n2 etter at the end o1 1990 had a!!et!
o1 ao-t H1 ,**,on, and the :2 do,n2 0oorer had a!!et! o1 ao-t H941P2 ,**,on. None o1 the !,5 that were !-0er,or
eat the %ow . more than a 1ew 0er+enta2e 0o,nt! a .ear.
Be*ow & 0re!ent the .ear4.4.ear re!-*t! 1or o-r 0er,od o1 o0erat,on Ie5+*-d,n2 1991 1or wh,+h & don/t have e5a+t
data, a*tho-2h ro-2h 1,2-re! ,nd,+ate no var,an+e 1rom the 1957490 1,2-re!K 1or the two *ar2e!t +ommon !to+"
o0en4end ,nve!tment +om0an,e! Im-t-a* 1-nd!K and the two *ar2e!t +*o!ed4end ,nve!tment +om0an,e!3
Year #ass. Inv.
&rust
Investors
'toc(
Lehan &ri-"ont. Dow Liited
Partners
1957 412.0= 412.?= 411.?= 42.?= 4;.?= 9.:=
195; ??.1= ?7.9= ?0.;= ::.2= :;.5= :2.2=
1959 ;.2= 10.:= ;.1= ;.?= 19.9= 20.9=
1990 40.9= 40.1= 2.9= 2.;= 49.:= 1;.9=
IFrom 'ood.D! Ban"! N F,nan+e 'an-a*, 1991K
"O#PO$%DED
Year #ass. Inv.
&rust
Investors
'toc(
Lehan &ri-"ont. Dow Liited
Partners
1957 412.0= 412.?= 411.?= 42.?= 4;.?= 9.:=
195745; 29.;= 29.:= 2?.7= :0.0= 29.9= ??.5=
1957459 :7.2= ?2.9= :?.;= ?0.9= 52.2= 7?.7=
1957490 :9.0= ?2.5= :;.:= ??.;= ?2.9= 107.2=
'a!!a+h-!ett! &nve!tor! Tr-!t ha! net a!!et! o1 ao-t H1.; ,**,on7 &nve!tor! #to+" F-nd ao-t H1 ,**,on7 Tr,
4$ont,nenta* $or0orat,on ao-t H .5 ,**,on7 and Lehman $or0orat,on ao-t H:50 m,**,on7 or a tota* o1 over H:.5
,**,on.
& do not 0re!ent the aove ta-*at,on! and ,n1ormat,on w,th the ,dea o1 ,nd,+t,n2 ,nve!tment +om0an,e!. '. own
re+ord o1 ,nve!t,n2 !-+h h-2e !-m! o1 mone., w,th re!tr,+t,on! on the de2ree o1 a+t,v,t. & m,2ht ta"e ,n
+om0an,e! where we had ,nve!tment!, wo-*d e no etter, ,1 a! 2ood. & 0re!ent th,! data to ,nd,+ate the %ow a!
an ,nve!tment +om0et,tor ,! no 0-!hover, and the 2reat -*" o1 ,nve!tment 1-nd! ,n the +o-ntr. are 2o,n2 to have
d,11,+-*t. ,n etter,n2, or 0erha0! even mat+h,n2, ,t! 0er1orman+e.
O-r 0ort1o*,o ,! ver. d,11erent 1rom that o1 the %ow. O-r method o1 o0erat,on ,! !-!tant,a**. d,11erent 1rom that
o1 m-t-a* 1-nd!.
@owever, mo!t 0artner!, a! a** a*ternat,ve to the,r ,nve!tment ,n the 0artner!h,0, wo-*d 0roa*. have the,r 1-nd!
,nve!ted ,n a med,a 0rod-+,n2 re!-*t! +om0ara*e to the %ow, there1ore, & 1ee* ,t ,! a 1a,r te!t o1 0er1orman+e.
O-r 'ethod o1 O0erat,on
O-r aven-e! o1 ,nve!tment rea" down ,nto three +ate2or,e!. The!e +ate2or,e! have d,11erent ehav,or
+hara+ter,!t,+!, and the wa. o-r mone. ,! d,v,ded amon2 them w,** have an ,m0ortant e11e+t on o-r re!-*t!,
re*at,ve to the %ow ,n an. 2,ven .ear. The a+t-a* 0er+enta2e d,v,!,on amon2 +ate2or,e! ,! to !ome de2ree
0*anned, -t to a 2reat e5tent, a++,denta*, a!ed -0on ava,*a,*,t. 1a+tor!.
19
The 1,r!t !e+t,on +on!,!t! o1 2enera**. -nderva*-ed !e+-r,t,e! Ihere,na1ter +a**ed 62enera*!6K where we have
noth,n2 to !a. ao-t +or0orate 0o*,+,e! and no t,meta*e a! to when the -nderva*-at,on ma. +orre+t ,t!e*1. Over
the .ear!, th,! ha! een o-r *ar2e!t +ate2or. o1 ,nve!tment, and more mone. ha! een made here than ,n e,ther o1
the other +ate2or,e!. We -!-a**. have 1a,r*. *ar2e 0o!,t,on! I5= to 10= o1 o-r tota* a!!et!K ,n ea+h o1 1,ve or !,5
2enera*!, w,th !ma**er 0o!,t,on! ,n another ten or 1,1teen.
#omet,me! the!e wor" o-t ver. 1a!t7 man. t,me! the. ta"e .ear!. &t ,! d,11,+-*t at the t,me o1 0-r+ha!e to "now
an. !0e+,1,+ rea!on wh. the. !ho-*d a00re+,ate ,n 0r,+e. @owever, e+a-!e o1 th,! *a+" o1 2*amo-r or an.th,n2
0end,n2 wh,+h m,2ht +reate ,mmed,ate 1avora*e mar"et a+t,on, the. are ava,*a*e at ver. +hea0 0r,+e!. A *ot o1
va*-e +an e ota,ned 1or the 0r,+e 0a,d. Th,! !-!tant,a* e5+e!! o1 va*-e +reate! a +om1orta*e mar2,n o1 !a1et.
,n ea+h tran!a+t,on. Th,! ,nd,v,d-a* mar2,n o1 !a1et., +o-0*ed w,th a d,ver!,t. o1 +omm,tment! +reate! a mo!t
attra+t,ve 0a+"a2e o1 !a1et. and a00re+,at,on 0otent,a*. Over the .ear! o-r t,m,n2 o1 0-r+ha!e! ha! een
+on!,dera*. etter than o-r t,m,n2 o1 !a*e!. We do not 2o ,nto the!e 2enera*! w,th the ,dea o1 2ett,n2 the *a!t
n,+"e*, -t are -!-a**. 8-,te +ontent !e**,n2 o-t at !ome ,ntermed,ate *eve* etween o-r 0-r+ha!e 0r,+e and what
we re2ard a! 1a,r va*-e to a 0r,vate owner.
The 2enera*! tend to ehave mar"et4w,!e ver. m-+h ,n !.m0ath. w,th the %ow. >-!t e+a-!e !ometh,n2 ,! +hea0
doe! not mean ,t ,! not 2o,n2 to 2o down. %-r,n2 ar-0t downward movement! ,n the mar"et, th,! !e2ment ma.
ver. we** 2o down 0er+enta2e4w,!e B-!t a! m-+h a! the %ow. Over a 0er,od o1 .ear!, & e*,eve the 2enera*! w,**
o-t0er1orm the %ow, and d-r,n2 !har0*. advan+,n2 .ear! *,"e 1991, th,! ,! the !e+t,on o1 o-r 0ort1o*,o that t-rn!
,n the e!t re!-*t!. &t ,!, o1 +o-r!e, a*!o the mo!t v-*nera*e ,n a de+*,n,n2 mar"et.
O-r !e+ond +ate2or. +on!,!t! o1 Ewor"4o-t!.F The!e are !e+-r,t,e! who!e 1,nan+,a* re!-*t! de0end on +or0orate
a+t,on rather than !-00*. and demand 1a+tor! +reated . -.er! and !e**er! o1 !e+-r,t,e!. &n other word!, the. are
!e+-r,t,e! w,th a t,meta*e where we +an 0red,+t, w,th,n rea!ona*e error *,m,t!, when we w,** 2et how m-+h and
what m,2ht -0!et the a00*e+art. $or0orate event! !-+h a! mer2er!, *,8-,dat,on!, reor2an,<at,on!, !0,n4o11!, et+.,
*ead to wor"4o-t!. An ,m0ortant !o-r+e ,n re+ent .ear! ha! een !e**4o-t! . o,* 0rod-+er! to maBor ,nte2rated o,*
+om0an,e!.
Th,! +ate2or. w,** 0rod-+e rea!ona*. !ta*e earn,n2! 1rom .ear to .ear, to a *ar2e e5tent ,rre!0e+t,ve o1 the
+o-r!e o1 the %ow. Ov,o-!*., ,1 we o0erate thro-2ho-t a .ear w,th a *ar2e 0ort,on o1 o-r 0ort1o*,o ,n wor"4
o-t!, we w,** *oo" e5treme*. 2ood ,1 ,t t-rn! o-t to e a de+*,n,n2 .ear 1or the %ow or 8-,te ad ,1 ,t ,! a !tron2*.
advan+,n2 .ear. Over the .ear!, wor"4o-t! have 0rov,ded o-r !e+ond *ar2e!t +ate2or.. At an. 2,ven t,me, we
ma. e ,n ten to 1,1teen o1 the!e7 !ome B-!t e2,nn,n2 and other! ,n the *ate !ta2e o1 the,r deve*o0ment. & e*,eve
,n -!,n2 orrowed mone. to o11!et a 0ort,on o1 o-r wor"4o-t 0ort1o*,o !,n+e there ,! a h,2h de2ree o1 !a1et. ,n
th,! +ate2or. ,n term! o1 oth event-a* re!-*t! and ,ntermed,ate mar"et ehav,or. Re!-*t!, e5+*-d,n2 the ene1,t!
der,ved 1rom the -!e o1 orrowed mone., -!-a**. 1a** ,n the 10= to 20= ran2e. '. !e*14,m0o!ed *,m,t re2ard,n2
orrow,n2 ,! 25= o1 0artner!h,0 net worth. O1tent,me! we owe no mone. and when we do orrow, ,t ,! on*. a!
an o11!et a2a,n!t wor"4o-t!.
The 1,na* +ate2or. ,! 6+ontro*6 !,t-at,on! where we e,ther +ontro* the +om0an. or ta"e a ver. *ar2e 0o!,t,on and
attem0t to ,n1*-en+e 0o*,+,e! o1 the +om0an.. #-+h o0erat,on! !ho-*d de1,n,te*. e mea!-red on the a!,! o1
!evera* .ear!. &n a 2,ven .ear, the. ma. 0rod-+e noth,n2 a! ,t ,! -!-a**. to o-r advanta2e to have the !to+" e
!ta2nant mar"et4w,!e 1or a *on2 0er,od wh,*e we are a+8-,r,n2 ,t. The!e !,t-at,on!, too, have re*at,ve*. *,tt*e ,n
+ommon w,th the ehav,or o1 the %ow. #omet,me!, o1 +o-r!e, we -. ,nto a 2enera* w,th the tho-2ht ,n m,nd
that ,t m,2ht deve*o0 ,nto a +ontro* !,t-at,on. &1 the 0r,+e rema,n! *ow eno-2h 1or a *on2 0er,od, th,! m,2ht ver.
we** ha00en. &1 ,t move! -0 e1ore we have a !-!tant,a* 0er+enta2e o1 the +om0an./! !to+", we !e** at h,2her
*eve*! and +om0*ete a !-++e!!1-* 2enera* o0erat,on. We are 0re!ent*. a+8-,r,n2 !to+" ,n what ma. t-rn o-t to e
+ontro* !,t-at,on! !evera* .ear! hen+e.
20
%em0!ter ',** 'an-1a+t-r,n2 $om0an.
We are 0re!ent*. ,nvo*ved ,n the +ontro* o1 %em0!ter ',** 'an-1a+t-r,n2 $om0an. o1 Beatr,+e, Nera!"a. O-r
1,r!t !to+" wa! 0-r+ha!ed a! a 2enera**. -nderva*-ed !e+-r,t. 1,ve .ear! a2o. A *o+" *ater e+ame ava,*a*e, and
& went on the Board ao-t 1o-r .ear! a2o. &n A-2-!t 1991, we ota,ned maBor,t. +ontro*, wh,+h ,! ,nd,+at,ve o1
the 1a+t that man. o1 o-r o0erat,on! are not e5a+t*. o1 the 6overn,2ht6 var,et..
(re!ent*. we own 70= o1 the !to+" o1 %em0!ter w,th another 10= he*d . a 1ew a!!o+,ate!. W,th on*. 150 or !o
other !to+"ho*der!, a mar"et on the !to+" ,! v,rt-a**. non4e5,!tent, and ,n an. +a!e, wo-*d have no mean,n2 1or a
+ontro**,n2 *o+". O-r own a+t,on! ,n !-+h a mar"et +o-*d dra!t,+a**. a11e+t the 8-oted 0r,+e.
There1ore, ,t ,! ne+e!!ar. 1or me to e!t,mate the va*-e at .earend o1 o-r +ontro**,n2 ,ntere!t. Th,! ,! o1 0art,+-*ar
,m0ortan+e !,n+e, ,n e11e+t, new 0artner! are -.,n2 ,n a!ed -0on th,! 0r,+e, and o*d 0artner! are !e**,n2 a
0ort,on o1 the,r ,ntere!t a!ed -0on the !ame 0r,+e. The e!t,mated va*-e !ho-*d not e what we ho0e ,t wo-*d e
worth, or what ,t m,2ht e worth to an ea2er -.er, et+., -t what & wo-*d e!t,mate o-r ,ntere!t wo-*d r,n2 ,1
!o*d -nder +-rrent +ond,t,on! ,n a rea!ona*. !hort 0er,od o1 t,me. O-r e11ort! w,** e devoted toward ,n+rea!,n2
th,! va*-e, and we 1ee* there are de+ent 0ro!0e+t! o1 do,n2 th,!.
%em0!ter ,! a man-1a+t-rer o1 1arm ,m0*ement! and water !.!tem! w,th !a*e! ,n 1991 o1 ao-t H9 m,**,on.
O0erat,on! have 0rod-+ed on*. nom,na* 0ro1,t! ,n re*at,on to ,nve!ted +a0,ta* d-r,n2 re+ent .ear!. Th,! re1*e+ted
a 0oor mana2ement !,t-at,on, a*on2 w,th a 1a,r*. to-2h ,nd-!tr. !,t-at,on. (re!ent*., +on!o*,dated net worth
Ioo" va*-eK ,! ao-t H?.5 m,**,on, or H75 0er !hare, +on!o*,dated wor",n2 +a0,ta* ao-t H50 0er !hare, and at
.earend we va*-ed o-r ,ntere!t at H:5 0er !hare. Wh,*e & +*a,m no ora+-*ar v,!,on ,n a matter !-+h a! th,!, & 1ee*
th,! ,! a 1a,r va*-at,on to oth new and o*d 0artner!. $erta,n*., ,1 even moderate earn,n2 0ower +an e re!tored, a
h,2her va*-at,on w,** e B-!t,1,ed, and even ,1 ,t +annot, %em0!ter !ho-*d wor" o-t at a h,2her 1,2-re. O-r
+ontro**,n2 ,ntere!t wa! a+8-,red at an avera2e 0r,+e o1 ao-t H2;, and th,! ho*d,n2 +-rrent*. re0re!ent! 21= o1
0artner!h,0 net a!!et! a!ed on the H:5 va*-e.
O1 +o-r!e, th,! !e+t,on o1 o-r 0ort1o*,o ,! not 2o,n2 to e worth more mone. mere*. e+a-!e )enera* 'otor!,
U.#. #tee*, et+., !e** h,2her. &n a ra2,n2 -** mar"et, o0erat,on! ,n +ontro* !,t-at,on! w,** !eem *,"e a ver.
d,11,+-*t wa. to ma"e mone., +om0ared to B-!t -.,n2 the 2enera* mar"et. @owever, & am more +on!+,o-! o1 the
dan2er! 0re!ented at +-rrent mar"et *eve*! than the o00ort-n,t,e!. $ontro* !,t-at,on!, a*on2 w,th wor"4o-t!,
0rov,de a mean! o1 ,n!-*at,n2 a 0ort,on o1 o-r 0ort1o*,o 1rom the!e dan2er!.
The R-e!t,on o1 $on!ervat,!m
The aove de!+r,0t,on o1 o-r var,o-! area! o1 o0erat,on ma. 0rov,de !ome +*-e! a! to how +on!ervat,ve*. o-r
0ort1o*,o ,! ,nve!ted. 'an. 0eo0*e !ome .ear! a+" tho-2ht the. were ehav,n2 ,n the mo!t +on!ervat,ve
manner . 0-r+ha!,n2 med,-m or *on24term m-n,+,0a* or 2overnment ond!. Th,! 0o*,+. ha! 0rod-+ed
!-!tant,a* mar"et de0re+,at,on ,n man. +a!e!, and mo!t +erta,n*. ha! 1a,*ed to ma,nta,n or ,n+rea!e rea* -.,n2
0ower.
$on!+,o-!, 0erha0! over*. +on!+,o-!, o1 ,n1*at,on, man. 0eo0*e now 1ee* that the. are ehav,n2 ,n a
+on!ervat,ve manner . -.,n2 *-e +h,0 !e+-r,t,e! a*mo!t re2ard*e!! o1 0r,+e4earn,n2! rat,o!, d,v,dend .,e*d!,
et+. W,tho-t the ene1,t o1 h,nd!,2ht a! ,** the ond e5am0*e, & 1ee* th,! +o-r!e o1 a+t,on ,! 1ra-2ht w,th dan2er.
There ,! noth,n2 at a** +on!ervat,ve, ,n m. o0,n,on, ao-t !0e+-*at,n2 a! to B-!t how h,2h a m-*t,0*,er a 2reed.
and +a0r,+,o-! 0-*,+ w,** 0-t on earn,n2!.
Go- w,** not e r,2ht !,m0*. e+a-!e a *ar2e n-mer o1 0eo0*e momentar,*. a2ree w,th .o-. Go- w,** not e
r,2ht !,m0*. e+a-!e ,m0ortant 0eo0*e a2ree w,th .o-. &n man. 8-arter! the !,m-*taneo-! o++-rren+e o1 the two
aove 1a+tor! ,! eno-2h to ma"e a +o-r!e o1 a+t,on meet the te!t o1 +on!ervat,!m.
21
Go- w,** e r,2ht, over the +o-r!e o1 man. tran!a+t,on!, ,1 .o-r h.0othe!e! are +orre+t, .o-r 1a+t! are +orre+t,
and .o-r rea!on,n2 ,! +orre+t. Tr-e +on!ervat,!m ,! on*. 0o!!,*e thro-2h "now*ed2e and rea!on.
& m,2ht add that ,n no wa. doe! the 1a+t that o-r 0ort1o*,o ,! not +onvent,ona* 0rove that we are more
+on!ervat,ve or *e!! +on!ervat,ve than !tandard method! o1 ,nve!t,n2. Th,! +an on*. e determ,ned . e5am,n,n2
the method! or e5am,n,n2 the re!-*t!.
& 1ee* the mo!t oBe+t,ve te!t a! to B-!t how +on!ervat,ve o-r manner o1 ,nve!t,n2 ,! ar,!e! thro-2h eva*-at,on o1
0er1orman+e ,n down mar"et!. (re1era*. the!e !ho-*d ,nvo*ve a !-!tant,a* de+*,ne ,n the %ow. O-r
0er1orman+e ,n the rather m,*d de+*,ne! o1 1957 and 1990 wo-*d +on1,rm m. h.0othe!,! that we ,nve!t ,n an
e5treme*. +on!ervat,ve manner. & wo-*d we*+ome an. 0artnerD! !-22e!t,n2 oBe+t,ve te!t! a! to +on!ervat,!m to
!ee how we !ta+" -0. We have never !-11ered a rea*,<ed *o!! o1 more than 0.5= o1 1= o1 tota* net a!!et!, and
o-r rat,o o1 tota* do**ar! o1 rea*,<ed 2a,n! to tota* rea*,<ed *o!!e! ,! !ometh,n2 *,"e 100 to 1. O1 +o-r!e7 th,!
re1*e+t! the 1a+t that on a*an+e we have een o0erat,n2 ,n an -0 mar"et. @owever, there have een man.
o00ort-n,t,e! 1or *o!! tran!a+t,on! even ,n mar"et! !-+h a! the!e I.o- ma. have 1o-nd o-t ao-t a 1ew o1 the!e
.o-r!e*ve!K !o & th,n" the aove 1a+t! have !ome !,2n,1,+an+e.
The R-e!t,on o1 #,<e
A!,de 1rom the 8-e!t,on a! to what ha00en! -0on m. death Iwh,+h w,th a meta0h.!,+a* tw,!t, ,! a !-Be+t o1
"een ,ntere!t to meK, & am 0roa*. a!"ed mo!t o1ten3 6What a11e+t ,! the ra0,d 2rowth o1 0artner!h,0 1-nd!
2o,n2 to have -0on 0er1orman+eMF
Lar2er 1-nd! t-2 ,n two d,re+t,on!. From the !tand0o,nt o1 60a!!,ve6 ,nve!tment!, where we do not attem0t .
the !,<e o1 o-r ,nve!tment to ,n1*-en+e +or0orate 0o*,+,e!, *ar2er !-m! h-rt re!-*t!. For the m-t-a* 1-nd or tr-!t
de0artment ,nve!t,n2 ,n !e+-r,t,e! w,th ver. road mar"et!, the e11e+t o1 *ar2e !-m! !ho-*d e to 0ena*,<e re!-*t!
on*. ver. !*,2ht*.. B-.,n2 10,000 !hare! o1 )enera* 'otor! ,! on*. !*,2ht*. more +o!t*. Ion the a!,! o1
mathemat,+a* e50e+tan+.K than -.,n2 1,000 or 100 !hare!.
&n !ome o1 the !e+-r,t,e! ,n wh,+h we dea* I-t not a** . an. mean!K -.,n2 10,000 !hare! ,! m-+h more
d,11,+-*t than -.,n2 100 and ,! !omet,me! ,m0o!!,*e. There1ore, 1or a 0ort,on o1 o-r 0ort1o*,o, *ar2er !-m! are
de1,n,te*. d,!advanta2eo-!. For a *ar2er 0ort,on o1 the 0ort1o*,o, & wo-*d !a. ,n+rea!ed !-m! are on*. !*,2ht*.
d,!advanta2eo-!. Th,! +ate2or. ,n+*-de! mo!t o1 o-r wor"4o-t! and !ome 2enera*!.
@owever, ,n the +a!e o1 +ontro* !,t-at,on! ,n+rea!ed 1-nd! are a de1,n,te advanta2e. A 6#anorn 'a06 +annot e
a++om0*,!hed w,tho-t the wherew,tha*. '. de1,n,te e*,e1 ,! that the o00ort-n,t,e! ,n+rea!e ,n th,! 1,e*d a! the
1-nd! ,n+rea!e. Th,! ,! d-e to the !har0 1a**4o11 ,n +om0et,t,on a! the ante mo-nt! 0*-! the ,m0ortant 0o!,t,ve
+orre*at,on that e5,!t! etween ,n+rea!ed !,<e o1 +om0an. and *a+" o1 +on+entrated owner!h,0 o1 that +om0an./!
!to+".
Wh,+h ,! more ,m0ortant 44 the de+rea!,n2 0ro!0e+t! o1 0ro1,ta,*,t. ,n 0a!!,ve ,nve!tment! or the ,n+rea!,n2
0ro!0e+t! ,n +ontro* ,nve!tment!M & +an/t 2,ve a de1,n,te an!wer to th,! !,n+e to a 2reat e5tent ,t de0end! on the
t.0e o1 mar"et ,n wh,+h we are o0erat,n2. '. 0re!ent o0,n,on ,! that there ,! no rea!on to th,n" the!e !ho-*d not
e o11!ett,n2 1a+tor!7 ,1 m. o0,n,on !ho-*d +han2e, .o- w,** e to*d. & +an !a., mo!t a!!-red*., that o-r re!-*t! ,n
1990 and 1991 wo-*d not have een etter ,1 we had een o0erat,n2 w,th the m-+h !ma**er !-m! o1 1959 and
1957.
And a (red,+t,on
22
Re2-*ar reader! I& ma. e 1*atter,n2 m.!e*1K w,** 1ee* & have *e1t the tra+"! when & !tart ta*",n2 ao-t 0red,+t,on!.
Th,! ,! one th,n2 1rom wh,+h & have a*wa.! !h,ed awa. and & !t,** do ,n the norma* !en!e.
& am +erta,n*. not 2o,n2 to 0red,+t what 2enera* -!,ne!! or the !to+" mar"et are 2o,n2 to do ,n the ne5t .ear or
two !,n+e & don/t have the 1a,nte!t ,dea.
& th,n" .o- +an e 8-,te !-re that over the ne5t ten .ear! there are 2o,n2 to e a 1ew .ear! when the 2enera*
mar"et ,! 0*-! 20= or 25=, a 1ew when ,t ,! m,n-! on the !ame order, and a maBor,t. when ,t ,! ,n etween. &
haven/t an. not,on a! to the !e8-en+e ,n wh,+h the!e w,** o++-r, nor do & th,n" ,t ,! o1 an. 2reat ,m0ortan+e 1or
the *on24term ,nve!tor.
Over an. *on2 0er,od o1 .ear!, & th,n" ,t *,"e*. that the %ow w,** 0roa*. 0rod-+e !ometh,n2 *,"e 5= to 7= 0er
.ear +om0o-nded 1rom a +om,nat,on o1 d,v,dend! and mar"et va*-e 2a,n. %e!0,te the e50er,en+e o1 re+ent
.ear!, an.one e50e+t,n2 !-!tant,a**. etter than that 1rom the 2enera* mar"et 0roa*. 1a+e! d,!a00o,ntment.
O-r Bo ,! to 0,*e -0 .ear*. advanta2e! over the 0er1orman+e o1 the %ow w,tho-t worr.,n2 too m-+h ao-t
whether the a!o*-te re!-*t! ,n a 2,ven .ear are a 0*-! or a m,n-!. & wo-*d +on!,der a .ear ,n wh,+h we were
down 15= and the %ow de+*,ned 25= to e m-+h !-0er,or to a .ear when oth the 0artner!h,0 and the %ow
advan+ed 20=. & have !tre!!ed th,! 0o,nt ,n ta*",n2 w,th 0artner! and have wat+hed them nod the,r head! w,th
var.,n2 de2ree! o1 enth-!,a!m. &t ,! mo!t ,m0ortant to me that .o- 1-**. -nder!tand m. rea!on,n2 ,n th,! re2ard
and a2ree w,th me not on*. ,n .o-r +erera* re2,on!, -t a*!o down ,n the 0,t o1 .o-r !toma+h.
For the rea!on! o-t*,ned ,n m. method o1 o0erat,on, o-r e!t .ear! re*at,ve to the %ow are *,"e*. to e ,n
de+*,n,n2 or !tat,+ mar"et!. There1ore, the advanta2e we !ee" w,** 0roa*. +ome ,n !har0*. var.,n2 amo-nt!.
There are o-nd to e .ear! when we are !-r0a!!ed . the %ow, -t ,1 over a *on2 0er,od we +an avera2e ten
0er+enta2e 0o,nt! 0er .ear etter than ,t, & w,** 1ee* the re!-*t! have een !at,!1a+tor..
#0e+,1,+a**., ,1 the mar"et !ho-*d e down :5= or ?0= ,n a .ear Iand & 1ee* th,! ha! a h,2h 0roa,*,t. o1
o++-rr,n2 one .ear ,n the ne5t ten44no one "now! wh,+h oneK, we !ho-*d e down on*. 15= or 20=. &1 ,t ,! more
or *e!! -n+han2ed d-r,n2 the .ear, we wo-*d ho0e to e -0 ao-t ten 0er+enta2e 0o,nt!. &1 ,t ,! -0 20= or more,
we wo-*d !tr-22*e to e -0 a! m-+h. The +on!e8-en+e o1 0er1orman+e !-+h a! th,! over a 0er,od o1 .ear! wo-*d
mean that ,1 the %ow 0rod-+e! a 5= to 7= 0er .ear overa** 2a,n +om0o-nded, & wo-*d ho0e o-r re!-*t! m,2ht e
15= to 17= 0er .ear.
The aove e50e+tat,on! ma. !o-nd !omewhat ra!h, and there ,! no 8-e!t,on -t that the. ma. a00ear ver. m-+h
!o when v,ewed 1rom the vanta2e 0o,nt o1 1995 or 1970. &t ma. t-rn o-t that & am +om0*ete*. wron2. @owever,
& 1ee* the 0artner! are +erta,n*. ent,t*ed to "now what & am th,n",n2 ,n th,! re2ard even tho-2h the nat-re o1 the
-!,ne!! ,! !-+h a! to ,ntrod-+e a h,2h 0roa,*,t. o1 error ,n !-+h e50e+tat,on!. &n an.one .ear, the var,at,on!
ma. e 8-,te !-!tant,a*. Th,! ha00ened ,n 1991, -t 1ort-nate*. the var,at,on wa! on the 0*ea!ant !,de. The.
won/t a** eS
',!+e**aneo-!
We are now ,n!ta**ed ,n an o11,+e at ;10 A,ew,t (*a<a w,th a 1,r!t4+*a!! !e+retar., Beth @en*e., and an a!!o+,ate
w,th +on!,dera*e e50er,en+e ,n m. t.0e o1 !e+-r,t,e!, B,** #+ott. '. 1ather ,! !har,n2 o11,+e !0a+e w,th -! Ihe
a*!o !hare! the e50en!e!K and do,n2 a ro"era2e -!,ne!! ,n !e+-r,t,e!. None o1 o-r ro"era2e ,! done thro-2h
h,m !o we have no 6v,+-na +oat6 !,t-at,on.
Overa**, & e50e+t o-r overhead, e5+*-d,n2 ,ntere!t on orrow,n2! and Nera!"a &ntan2,*e! Ta5, to r-n *e!! than
0.5 o1 1= o1 net a!!et!. We !ho-*d 2et o-r mone./! worth 1rom th,! e50end,t-re, and .o- are mo!t +ord,a**.
,nv,ted to dro0 ,n and !ee how the mone. ,! e,n2 !0ent.
23
W,th over 90 0artner! and 0roa*. ?0 or !o !e+-r,t,e!, .o- +an -nder!tand that ,t ,! 8-,te a we*+ome re*,e1 to
me to !ha"e *oo!e 1rom !ome o1 the deta,*!.
We 0re!ent*. have 0artner! re!,d,n2 ,n *o+at,on! 1rom $a*,1orn,a to Lermont, and net a!!et! at the e2,nn,n2 o1
1992 amo-nted to H 7,17;,500.00. #-!,e and & have an ,ntere!t ,n the 0artner!h,0 amo-nt,n2 to H1,025,000.00,
and other re*at,ve! o1 m,ne have a +om,ned ,ntere!t tota*,n2 H7;2,900.00. The m,n,m-m 1or new 0artner! *a!t
.ear wa! H25,000, -t & am 2,v,n2 !ome tho-2ht to ,n+rea!,n2 ,t th,! .ear.
(eat, 'arw,+", ',t+he** N $om0an. d,d an e5+e**ent Bo o1 e50ed,t,n2 the a-d,t, 0rov,d,n2 ta5 1,2-re! m-+h
ear*,er than ,n the 0a!t. The. a!!-re me th,! 0er1orman+e +an e +ont,n-ed.
Let me hear 1rom .o- re2ard,n2 8-e!t,on! .o- ma. have on an. a!0e+t! o1 th,! *etter, .o-r a-d,t, !tat-! o1 .o-r
0artner!h,0 ,ntere!t, et+. that ma. 0-<<*e .o-.
$ord,a**. Warren E. B-11ett.
24
A((EN%&T
(artner!h,0! O0erat,n2 Thro-2ho-t 1991
Partnership )*)*+) "apital at
#ar(et
Overall Gain in ),+)* Percentage Gain
B-11ett A!!o+,ate! ?;9,;7?.27 225,:;7.;0 ?9.:=
B-11ett F-nd :51,;:9.29 159,999.9: ?5.?=
%a+ee 2:5,?;0.:1 119,50?.?7 ?9.5=
Emdee 1?0,005.2? 97,:;7.2; ?;.1=
)*eno11 7;,?;2.70 :9,99:.;0 50.5=
'o4B-11 :25,;??.71 1?9,19:.71 ?5.;=
Underwood 5;2,259.;2 251,951.29 ?:.:=
2,200,7;:.:? 1,009,7;5.25 ?5.9=
(artner!h,0! #tarted ,n 1991
Partnership Paid-in Overall Gain in ),+) Percentage Gain
Ann &nve!tment! 100,100 I14:0491K :5,:97.9: :5.:=
B-11ett4T% 250,100 IH200,100 on :4;4
91, H50,000 on 54:1491K
70,29?.0; 2;.1=
B-11ett4@o**and 125,100 I5417491K 19,70:.79 1:.:=
Q )a,n ,n net a!!et! at mar"et va*-e! 0*-! 0a.ment! to *,m,ted 0artner! d-r,n2 .ear.
25
BUFFETT (ARTNER#@&(, LT%.
;10 A&EW&T (LAOA
O'A@A :1, NEBRA#AA
>-*. 9, 1992
A Rem,nder3
&n m. *etter o1 >an-ar. 2?, 1992 re0ort,n2 on 1991, & ,n!erted a !e+t,on ent,t*ed. 6And a (red,+t,on.6 Wh,*e &
have no de!,re to ,n1*,+t +r-e* and -n-!-a* 0-n,!hment -0on m. reader!, neverthe*e!!, a re0r,nt,n2 o1 that
!e+t,on, ,n ,t! ent,ret., ma. e worthwh,*e3
And a (red,+t,on
Re2-*ar reader! I& ma. e 1*atter,n2 m.!e*1K w,** 1ee* & have *e1t the tra+"! when & !tart ta*",n2 ao-t
0red,+t,on!. Th,! ,! one th,n2 1rom wh,+h & have a*wa.! !h,ed awa. and & !t,** do ,n the norma* !en!e.
& am +erta,n*. not 2o,n2 to 0red,+t what 2enera* -!,ne!! or the !to+" mar"et are 2o,n2 to do ,n the ne5t
.ear or two !,n+e & don/t have the 1a,nte!t ,dea.
& th,n" .o- +an e 8-,te !-re that over the ne5t ten .ear! there are 2o,n2 to e a 1ew .ear! when the
2enera* mar"et ,! 0*-! 20= or 25=, a 1ew when ,t ,! m,n-! on the !ame order, and a maBor,t. when ,t ,!
,n etween. & haven/t an. not,on a! to the !e8-en+e ,n wh,+h the!e w,** o++-r, nor do & th,n" ,t ,! o1 an.
2reat ,m0ortan+e 1or the *on24term ,nve!tor.
Over an. *on2 0er,od o1 .ear!, & th,n" ,t *,"e*. that the %ow w,** 0roa*. 0rod-+e !ometh,n2 *,"e 5= to
7= 0er .ear +om0o-nded 1rom a +om,nat,on o1 d,v,dend! and mar"et va*-e 2a,n. %e!0,te the
e50er,en+e o1 re+ent .ear!, an.one e50e+t,n2 !-!tant,a**. etter than that 1rom the 2enera* mar"et
0roa*. 1a+e! d,!a00o,ntment.
O-r Bo ,! to 0,*e -0 .ear*. advanta2e! over the 0er1orman+e o1 the %ow w,tho-t worr.,n2 too m-+h
ao-t whether the a!o*-te re!-*t! ,n a 2,ven .ear are a 0*-! or a m,n-!. & wo-*d +on!,der a .ear ,n
wh,+h we were down 15= and the %ow de+*,ned 25= to e m-+h !-0er,or to a .ear when oth the
0artner!h,0 and the %ow advan+ed 20=. & have !tre!!ed th,! 0o,nt ,n ta*",n2 w,th 0artner! and have
wat+hed them nod the,r head! w,th var.,n2 de2ree! o1 enth-!,a!m.
&t ,! mo!t ,m0ortant to me that .o- 1-**. -nder!tand m. rea!on,n2 ,n th,! re2ard and a2ree w,th me not
on*. ,n .o-r +erera* re2,on!, -t a*!o down ,n the 0,t o1 .o-r !toma+h.
For the rea!on! o-t*,ned ,n m. method o1 o0erat,on, o-r e!t .ear! re*at,ve to the %ow are *,"e*. to e ,n
de+*,n,n2 or !tat,+ mar"et!. There1ore, the advanta2e we !ee" w,** 0roa*. +ome ,n !har0*. var.,n2
amo-nt!. There are o-nd to e .ear! when we are !-r0a!!ed . the %ow, -t ,1 over a *on2 0er,od we
+an avera2e ten 0er+enta2e 0o,nt! 0er .ear etter than ,t, & w,** 1ee* the re!-*t! have een !at,!1a+tor..
#0e+,1,+a**., ,1 the mar"et !ho-*d e down :5= or ?0= ,n a .ear Iand & 1ee* th,! ha! a h,2h 0roa,*,t.
o1 o++-rr,n2 one .ear ,n the ne5t ten44no one "now! wh,+h oneK, we !ho-*d e down on*. 15= or 20=.
&1 ,t ,! more or *e!! -n+han2ed d-r,n2 the .ear, we wo-*d ho0e to e -0 ao-t ten 0er+enta2e 0o,nt!. &1 ,t
,! -0 20= or more, we wo-*d !tr-22*e to e -0 a! m-+h. The +on!e8-en+e o1 0er1orman+e !-+h a! th,!
over a 0er,od o1 .ear! wo-*d mean that ,1 the %ow 0rod-+e! a 5= to 7= 0er .ear over4a** 2a,n
+om0o-nded, & wo-*d ho0e o-r re!-*t! m,2ht e 15= to 17= 0er .ear.
26
The aove e50e+tat,on! ma. !o-nd !omewhat ra!h, and there ,! no 8-e!t,on -t that the. ma. a00ear
ver. m-+h !o when v,ewed 1rom the vanta2e 0o,nt o1 1995 or 1970. &t ma. t-rn o-t that & am
+om0*ete*. wron2. @owever, & 1ee* the 0artner! are +erta,n*. ent,t*ed to "now what & am th,n",n2 ,n th,!
re2ard even tho-2h the nat-re o1 the -!,ne!! ,! !-+h a! to ,ntrod-+e a h,2h 0roa,*,t. o1 error ,n !-+h
e50e+tat,on!. &n an.one .ear, the var,at,on! ma. e 8-,te !-!tant,a*. Th,! ha00ened ,n 1991, -t
1ort-nate*. the var,at,on wa! on the 0*ea!ant !,de. The. won/t a** eS
The F,r!t @a*1 o1 19923
Between .earend 1991 and >-ne :0, 1992 the %ow de+*,ned 1rom 7:1.1? to 591.2;. &1 one had owned the %ow
d-r,n2 th,! 0er,od, d,v,dend! o1 a00ro5,mate*. H11.00 wo-*d have een re+e,ved !o that overa** a *o!! o1 21.7=
wo-*d have een the re!-*t o1 ,nve!t,n2 ,n the %ow. For the !tat,!t,+a* m,nded, A00end,5 A 2,ve! the re!-*t! o1
the %ow . .ear! !,n+e 1ormat,on o1 the 0rede+e!!or 0artner!h,0!.
A! !tated aove, a de+*,n,n2 %ow 2,ve! -! o-r +han+e to !h,ne and 0,*e -0 the 0er+enta2e advanta2e! wh,+h,
+o-0*ed w,th on*. an avera2e 0er1orman+e d-r,n2 advan+,n2 mar"et!, w,** 2,ve -! 8-,te !at,!1a+tor. *on24term
re!-*t!. O-r tar2et ,! an a00ro5,mate*. 1P2= de+*,ne 1or ea+h 1= de+*,ne ,n the %ow and ,1 a+h,eved, mean! we
have a +on!,dera*. more +on!ervat,ve veh,+*e 1or ,nve!tment ,n !to+"! than 0ra+t,+a**. an. a*ternat,ve.
A! o-t*,ned ,n A00end,5 B, !how,n2 +om,ned 0rede+e!!or 0artner!h,0 re!-*t!, d-r,n2 the 1,r!t ha*1 o1 1992 we
had one o1 the e!t 0er,od! ,n o-r h,!tor., a+h,ev,n2 a m,n-! 7.5= re!-*t e1ore 0a.ment! to 0artner!, +om0ared
to the m,n-! 21.7= overa** re!-*t on the %ow. Th,! 1?.2 0er+enta2e 0o,nt! advanta2e +an e e50e+ted to w,den
d-r,n2 the !e+ond ha*1 ,1 the de+*,ne ,n the 2enera* mar"et +ont,n-e!, -t w,** 0roa*. narrow !ho-*d the mar"et
t-rn -0ward. (*ea!e "ee0 ,n m,nd m. +ont,n-,n2 admon,t,on that !,54month!/ or even one4.ear/! re!-*t! are not
to e ta"en too !er,o-!*.. #hort 0er,od! o1 mea!-rement e5a22erate +han+e 1*-+t-at,on! ,n 0er1orman+e. Wh,*e
+,r+-m!tan+e! +ontr,-ted to an -n-!-a**. 2ood 1,r!t ha*1, there are o-nd to e 0er,od! when we do re*at,ve*.
0oor*.. The 1,2-re! 1or o-r 0er1orman+e ,nvo*ve no +han2e ,n the va*-at,on o1 o-r +ontro**,n2 ,ntere!t ,n
%em0!ter ',** 'an-1a+t-r,n2 $om0an., a*tho-2h deve*o0ment! ,n re+ent month! 0o,nt toward a 0roa*e
h,2her rea*,<at,on.
&nve!tment $om0an,e! d-r,n2 the F,r!t @a*13
(a!t *etter! have !tre!!ed o-r e*,e1 that the %ow ,! no 0-!hover a! a .ard!t,+" 1or ,nve!tment 0er1orman+e. To
the e5tent that 1-nd! are ,nve!ted ,n +ommon !to+"!, whether the manner o1 ,nve!tment e thro-2h ,nve!tment
+om0an,e!, ,nve!tment +o-n!e*or!, an" tr-!t de0artment!, or do4,t4.o-r!e*1, o-r e*,e1 ,! that the overwhe*m,n2
maBor,t. w,** a+h,eve re!-*t! ro-2h*. +om0ara*e to the %ow. O-r o0,n,on ,! that the dev,at,on! 1rom the %ow
are m-+h more *,"e*. to e toward a 0oorer 0er1orman+e than a !-0er,or one.
To ,**-!trate th,! 0o,nt, we have +ont,n-a**. mea!-red the %ow and *,m,ted 0artner!/ re!-*t! a2a,n!t the two
*ar2e!t o0en4end ,nve!tment +om0an,e! Im-t-a* 1-nd!K 1o**ow,n2 a 0ro2ram o1 +ommon !to+" ,nve!tment and
the two *ar2e!t +*o!ed4end ,nve!tment +om0an,e!. The ta-*at,on ,n A00end,5 $ !how! the 1,ve 4.ear!/ re!-*t!,
and .o- w,** note the 1,2-re! are e5traord,nar,*. +*o!e to tho!e o1 the %ow. The!e +om0an,e! have tota* a!!et! o1
ao-t H:.5 ,**,on.
&n the ,ntere!t o1 2ett,n2 th,! *etter o-t 0rom0t*., we are ma,*,n2 ,t e1ore re!-*t! are ava,*a*e 1or the +*o!ed4end
+om0an,e!. @owever, the two m-t-a* 1-nd! oth d,d 0oorer than the %ow, w,th 'a!!a+h-!ett! &nve!tor! Tr-!t
hav,n2 a m,n-! 2:= overa** 0er1orman+e, and &nve!tor! #to+" F-nd rea*,<,n2 a m,n-! 25.?=. Th,! ,! not
-n-!-a* a! w,tne!! the *ead art,+*e ,n the WALL #TREET >OURNAL o1 >-ne 1:, 1992 headed 6F-nd! v!.
'ar"et.F O1 the 17 *ar2e +ommon !to+" 1-nd! !t-d,ed, ever.one had a re+ord 0oorer than the %ow 1rom the
0ea" on the %ow o1 7:?, to the date o1 the art,+*e, a*tho-2h ,n !ome +a!e! the mar2,n o1 ,n1er,or,t. wa! m,nor.
27
(art,+-*ar*. hard h,t ,n the 1,r!t ha*1 were the !o4+a**ed E2rowthF 1-nd! wh,+h, a*mo!t w,tho-t e5+e0t,on, were
down +on!,dera*. more than the %ow. The three *ar2e 62rowth6 Ithe 8-otat,on mar"! are more a00*,+a*e nowK
1-nd! w,th the e!t re+ord ,n the 0re+ed,n2 1ew .ear!, F,de*,t. $a0,ta* F-nd, (-tnam )rowth F-nd, and
We**,n2ton E8-,t. F-nd avera2ed an overa** m,n-! :2.:= 1or the 1,r!t ha*1. &t ,! on*. 1a,r to 0o,nt o-t that
e+a-!e o1 the,r e5+e**ent re+ord! ,n 1959491, the,r overa** 0er1orman+e to date ,! !t,** etter than avera2e, a! ,t
ma. we** e ,n the 1-t-re. &ron,+a**., however, th,! ear*,er !-0er,or 0er1orman+e had +a-!ed !-+h a r-!h o1 new
,nve!tor! to +ome to them that the 0oor 0er1orman+e th,! .ear wa! e50er,en+ed . ver. man. more ho*der! than
enBo.ed the e5+e**ent 0er1orman+e o1 ear*,er .ear!. Th,! e50er,en+e tend! to +on1,rm m. h.0othe!,! that
,nve!tment 0er1orman+e m-!t e B-d2ed over a 0er,od o1 t,me w,th !-+h a 0er,od ,n+*-d,n2 oth advan+,n2 and
de+*,n,n2 mar"et!. There w,** +ont,n-e to e oth7 a 0o,nt 0erha0! etter -nder!tood now than !,5 month! a2o.
&n o-t*,n,n2 the re!-*t! o1 ,nve!tment +om0an,e!, & do !o not e+a-!e we o0erate ,n a manner +om0ara*e to
them or e+a-!e o-r ,nve!tment! are !,m,*ar to the,r!. &t ,! done e+a-!e !-+h 1-nd! re0re!ent a 0-*,+ att,n2
avera2e o1 0ro1e!!,ona*, h,2h*.40a,d ,nve!tment mana2ement hand*,n2 a ver. !,2n,1,+ant H20 ,**,on o1
!e+-r,t,e!. #-+h mana2ement, & e*,eve, ,! t.0,+a* o1 mana2ement hand*,n2 even *ar2er !-m!. A! an a*ternat,ve
to an ,ntere!t ,n the 0artner!h,0, & e*,eve ,t rea!ona*e to a!!-me that man. 0artner! wo-*d have ,nve!tment!
mana2ed !,m,*ar*..
A!!et La*-e!3
The aove +a*+-*at,on! o1 re!-*t! are e1ore a**o+at,on to the )enera* (artner and month*. 0a.ment! to 0artner!.
O1 +o-r!e, whenever the overa** re!-*t! 1or the .ear are not 0*-! 9= on a mar"et va*-e a!,! Iw,th de1,+,en+,e!
+arr,ed 1orwardK there ,! no a**o+at,on to the )enera* (artner. There1ore, non4w,thdraw,n2 0artner! have had a
de+rea!e ,n the,r mar"et va*-e e8-,t. d-r,n2 the 1,r!t !,5 month! o1 7.5= and 0artner! who have w,thdrawn at
the rate o1 9= 0er ann-m have had a de+rea!e ,n the,r mar"et va*-e e8-,t. d-r,n2 the 1,r!t ha*1 o1 10.5=. #ho-*d
o-r re!-*t! 1or the .ear e *e!! than 0*-! 9= Iand -n*e!! there !ho-*d e a mater,a* advan+e ,n the %ow, th,! ,!
ver. 0roa*eK 0artner! re+e,v,n2 month*. 0a.ment! w,** have a de+rea!e ,n the,r mar"et va*-e e8-,t. at
%e+emer :1, 1992. Th,! mean! that month*. 0a.ment! at 9= on th,! new mar"et e8-,t. ne5t .ear w,** e on a
0ro0ort,onate*. red-+ed a!,!. For e5am0*e, ,1 o-r re!-*t! were an overa** m,n-! 7= 1or the .ear, a 0artner
re+e,v,n2 month*. 0a.ment! who had a mar"et va*-e ,ntere!t o1 H100,000 on >an-ar. 1, 1992 wo-*d have an
e8-,t. at %e+emer :1, 1992 o1 H;7,000. Th,! red-+t,on wo-*d ar,!e 1rom the m,n-! 7= re!-*t, or H7, 000 0*-!
month*. 0a.ment! o1 H500 1or an add,t,ona* H9,000. Th-!, w,th H;7,000 o1 mar"et e8-,t. on >an-ar. 1, 199:,
month*. 0a.ment! ne5t .ear wo-*d e H?:5.00.
None o1 the aove, o1 +o-r!e, ha! an. a00*,+a,*,t. to advan+e 0a.ment! re+e,ved d-r,n2 1992 wh,+h do not
0art,+,0ate ,n 0ro1,t! or *o!!e!, -t earn a !tra,2ht 9=.
A((EN%&T A
%OW4>ONE# &N%U#TR&AL ALERA)E
Year "losing Dow "hange -or
Year
Dow Dividend Overall
.esult -ro
Dow
Percentage
.esult
1959 ?99.?7 44 44 44 44
1957 ?:5.99 49:.7; 21.91 4?2.17 4;.?=
195; 5;:.95 1?7.99 20.00 197.99 :;.5=
1959 979.:9 95.71 20.7? 119.?5 20.0=
1990 915.;9 9:.?7 21.:9 ?2.11 49.2=
1991 7:1.1? 115.25 22.91 1:7.;9 22.?=
9P:0P92 591.2; 199.;9 11.00 E!t. 415;.;9 421.7=
28
A((EN%&T B
(ARTNER#@&( (ERFOR'AN$E
Year Partnership .esult /)0 Liited Partners! .esults /10
1957 10.?= 9.:=
195; ?0.9= :2.2=
1959 25.9= 20.9=
1990 22.;= 1;.9=
1991 ?5.9= :5.9=
9P:0P92 47.5= 47.5=
I1K For 1957491 +on!,!t! o1 +om,ned re!-*t! o1 a** 0rede+e!!or *,m,ted 0artner!h,0! o0erat,n2 thro-2ho-t ent,re
.ear a1ter a** e50en!e! -t e1ore d,!tr,-t,on! to 0artner! or a**o+at,on! to the 2enera* 0artner!.
I2K For 1957491 +om0-ted on a!,! o1 0re+ed,n2 +o*-mn o1 0artner!h,0 re!-*t! a**ow,n2 1or a**o+at,on to 2enera*
0artner a!ed -0on 0re!ent 0artner!h,0 a2reement.
A((EN%&T $
GEARLG RE#ULT#
Year #ass. Inv. &rust
/)0
Investors 'toc(
/)0
Lehan /10 &ri-"ont. /10
1957 411.?= 412.?= 411.?= 42.?=
195; ?2.7= ?7.5= ?0.;= ::.2=
1959 9.0= 10.:= ;.1= ;.?=
1990 41.0= 40.9= 2.5= 2.;=
1991 25.9= 2?.9= 2:.9= 22.5=
9P:0P92 2:.0= 425.?= N.A. N.A.
I1K $om0-ted 1rom +han2e! ,n a!!et va*-e 0*-! an. d,!tr,-t,on! to ho*der! o1 re+ord d-r,n2 .ear.
I2K From 'ood./! Ban" N F,nan+e 'an-a* 4 1992.
$U'ULAT&LE RE#ULT#
Years #ass.
Inv.
&rust
Investors
'toc(
Lehan &ri-"ont. Dow Liited
Partners
1957 411.?= 412.?= 411.?= 42.?= 4;.?= 9.:=
195745; 29.?= 29.2= 2?.7= :0.0= 29.9= ??.5=
1957459 :7.;= ?2.5= :?.;= ?0.9= 52.:= 7?.7=
1957490 :9.?= ?1.9= :;.2= ??.;= ?2.9= 107.2
1957491 71.?= 79.9= 70.;= 77.?= 7?.9= 1;1.9
195749P:0P92 :1.9= :2.0= N.A. N.A. :7.0= 190.5=
29
BUFFETT (ARTNER#@&(, LT%.
;10 A&EW&T (LAOA
O'A@A :1, NEBRA#AA
Novemer 1, 1992
TO 'G (ARTNER# FOR 199:3
@ere we 2o on the ann-a* 0a0er 1*-rr.. Two +o0,e! o1 an amended 0artner!h,0 a2reement 1or 199: are en+*o!ed.
The one w,th the )enera* (rov,!,on! atta+hed ,! to e "e0t . .o- and the other !,n2*e40a2e a2reement !ho-*d
e ret-rned. There are no !-!tant,ve +han2e! o1 an. !ort 1rom *a!t .ear/! a2reement. Th,! amendment ,! mere*.
to a**ow 1or a 1ew new 0artner! and ,n !evera* 0*a+e! to reword ,n +*earer Iwe ho0eK *an2-a2e 0rov,!,on! o1 the
0re!ent a2reement. (ra+t,+a**. a** o1 the reword,n2 ,! ,n )enera* (rov,!,on 5 I0ara2ra0h 7 ,n *a!t .ear/!
a2reementK. Rather than have a !e0arate amend,n2 do+-ment, we have ,n+or0orated the +han2e! ,nto one
+om0*ete do+-ment emod.,n2 the ent,re a2reement.
We are a*!o en+*o!,n2 two +omm,tment *etter! Ione 1or .o-44one to e ret-rnedK on wh,+h .o- are to ,nd,+ate
.o-r w,!he! re2ard,n2 add,t,on! or w,thdrawa*! at >an-ar. 1!t. We wo-*d *,"e to have the a2reement and the
+omm,tment *etter a+" . %e+emer 1!t. @owever, the +omm,tment *etter +an e amended r,2ht -0 -nt,* the
end o1 the .ear Inot a1terK !o ,1 .o- !ho-*d have a +han2e o1 0*an! and .o- have a*read. ma,*ed -! .o-r
+omm,tment *etter, a** .o- have to do ,! 2et ,n to-+h w,th me, and & w,** ma"e whatever +han2e! .o- de!,re.
An. w,thdrawa*! w,** e 0a,d ,mmed,ate*. a1ter >an-ar. 1!t. An. add,t,on! m-!t rea+h -! . >an-ar. 10
th
, and
!ho-*d the. e 0a,d ,n d-r,n2 Novemer, the. w,** ta"e on the !tat-! o1 advan+e 0a.ment! and draw ,ntere!t at
the rate o1 9= -nt,* .earend.
(*ea!e e !-re the !,2nat-re on .o-r 0artner!h,0 a2reement ,! notar,<ed. (artner! ,n Omaha ma. ota,n the
notar,<at,on at o-r o11,+e ,1 the. w,!h. A*!o, e !-re to *et -! "now . an a00ro0r,ate +,r+*e on the +omm,tment
*etter whether .o- w,!h to re+e,ve month*. 0a.ment! ,n 199:. &n order to e !-re ever.one -nder!tand! th,!, *et
me a2a,n !tate that the!e month*. 0a.ment! are ,n no !en!e 2-aranteed earn,n2! or an.th,n2 o1 the !ort. The.
re0re!ent a +onven,ent 1orm o1 re2-*ar w,thdrawa*, wh,+h to the e5tent we earn etter than 9= are 0a.ment!
1rom earn,n2!, and to the e5tent we don/t, are 0a.ment! 1rom +a0,ta*.
$om0*ete ta5 ,n1ormat,on 1or .o-r 1992 ret-rn w,** e ,n .o-r hand! . >an-ar. 20th. &1 .o- !ho-*d need an
e!t,mate o1 .o-r ta5 0o!,t,on e1ore that t,me, *et me "now and & w,** 2,ve .o- a ro-2h ,dea. We w,** a*!o !end
o-t a !hort *etter on ta5e! ,n *ate %e+emer.
@av,n2 read th,! 1ar, .o- are ent,t*ed to a re0ort on how we have done to date ,n 1992. For the 0er,od end,n2
O+toer :1!t, the %ow4>one! &nd-!tr,a*! !howed an overa** *o!!, ,n+*-d,n2 d,v,dend! re+e,ved, o1 a00ro5,mate*.
19.;=. We ,ntend to -!e the !ame method or va*-,n2 o-r +ontro**,n2 ,ntere!t ,n %em0!ter ',** 'an-1a+t-r,n2 at
th,! .earend that we d,d at the end o1 *a!t .ear. Th,! ,nvo*ved a00*.,n2 var,o-! d,!+o-nt! to the a*an+e !heet
,tem! to re1*e+t m. o0,n,on a! to what +o-*d e rea*,<ed on a ver. 0rom0t !a*e. La!t .ear th,! ,nvo*ved a ?0=
d,!+o-nt on ,nventor,e!, a 15= d,!+o-nt on re+e,va*e!, e!t,mated a-+t,on va*-e o1 1,5ed a!!et!, et+., wh,+h *ed
to an a00ro5,mate va*-e or H:5.00 0er !hare.
The !-++e!!1-* +onver!,on o1 !-!tant,a* 0ort,on! o1 the a!!et! o1 %em0!ter to +a!h, at v,rt-a**. 100 +ent! on the
do**ar, ha! een the h,2h 0o,nt o1 1992. For e5am0*e, ,nventor. o1 H?.2 m,**,on at *a!t .earend w,** 0roa*. e
ao-t H1.9 m,**,on th,! .earend, red-+,n2 the d,!+o-nt on th,! ,tem . ao-t H920,000 I?0= o1 H2.: m,**,on
red-+t,onK. & w,** 2,ve th,! !tor. m. 1-** Bo-rna*,!t,+ treatment ,n m. ann-a* *etter. #-11,+e to !a. at th,! 0o,nt that
a00*.,n2 the !ame d,!+o-nt! de!+r,ed aove w,** 0roa*. re!-*t ,n a .earend va*-e o1 at *ea!t H50.00 0er !hare.
The e5tent o1 the a!!et +onver!,on Bo +an 0erha0! e!t e ,**-!trated ,n a !enten+e . 0o,nt,n2 o-t that wherea!
30
we had H199,000 o1 +a!h and H2,:15,000 o1 *,a,*,t,e! at Novemer :0, 1991 I%em0!ter 1,!+a* .earendK, we
e50e+t th,! .ear to have ao-t H1 m,**,on ,n +a!h and ,nve!tment! Io1 the t.0e the (artner!h,0 -.!K a2a,n!t tota*
*,a,*,t,e! o1 H250,000. (ro!0e+t! 1or 1-rther ,m0rovement ,n th,! !,t-at,on ,n 199: a00ear 2ood, and we e50e+t a
!-!tant,a**. e50anded ,nve!tment 0ort1o*,o ,n %em0!ter ne5t .ear.
La*-,n2 %em0!ter at H50 0er !hare, o-r overa** 2a,n Ie1ore an. 0a.ment! to 0artner!K to O+toer :1!t 1or the
(artner!h,0 ha! een 5.5=. Th,! 22.: 0er+enta2e40o,nt! advanta2e over the %ow, ,1 ma,nta,ned -nt,* the end o1
the .ear, w,** e amon2 the *ar2e!t we have ever had. Ao-t 90= o1 th,! advanta2e wa! a++om0*,!hed . the
0ort1o*,o other than %em0!ter, and ?0= wa! the re!-*t o1 ,n+rea!ed va*-e at %em0!ter.
& want a** 0artner! and 0ro!0e+t,ve 0artner! to rea*,<e the re!-*t! de!+r,ed aove are d,!t,n+t*. anorma* and
w,** re+-r ,n1re8-ent*., ,1 at a**. Th,! 0er1orman+e ,! ma,n*. the re!-*t o1 hav,n2 a *ar2e 0ort,on o1 o-r mone. ,n
+ontro**ed a!!et! and wor"o-t !,t-at,on! rather than 2enera* mar"et !,t-at,on! at a t,me when the %ow de+*,ned
!-!tant,a**.. &1 the %ow had advan+ed mater,a**. ,n 1992, we +o-*d have *oo"ed ver. ad on a re*at,ve a!,!,
and o-r !-++e!! to date ,n 1992 +erta,n*. doe! not re1*e+t an. a,*,t. on m. 0art to 2-e!! the mar"et I& never tr.K,
-t mere*. re1*e+t! the 1a+t that the h,2h 0r,+e! o1 2enera*! 0art,a**. 1or+ed me ,nto other +ate2or,e! or
,nve!tment. &1 the %ow had +ont,n-ed to !oar, we wo-*d have een *ow man on the totem 0o*e. We 1-**. e50e+t
to have .ear! when o-r method o1 o0erat,on w,** not even mat+h the re!-*t! o1 the %ow, a*tho-2h ov,o-!*. &
don/t e50e+t th,! on an. *on24term a!,! or & wo-*d throw ,n the towe* and -. the %ow.
&D** +-t th,! !ermon !hort w,th the +on+*-!,on that & +erta,n*. do not want an.one to th,n" that the 0attern o1 the
*a!t 1ew .ear! ,! *,"e*. to e re0eated7 & e50e+t 1-t-re 0er1orman+e to re1*e+t m-+h !ma**er advanta2e! on
avera2e over the %ow.
Ea+h *etter end! w,th the re8-e!t that .o- *et me "now ao-t an.th,n2 that ,!n/t +*ear. (*ea!e e !-re that .o- do
th,!. We are a** 2eared -0 w,th !e+retar,a* he*0, a new t.0ewr,ter, et+., and we want to e !-re that th,! *etter and
a2reement are -nder!tood . a**.
"ordiall23
4arren E. 5u--ett
WEB31
(P#3 There are no 0r,<e! 1or e,n2 the *a!t one! to 2et ,n the a2reement and +omm,tment *etter, !o 0*ea!e 2et to ,t
a! !oon a! 0o!!,*e. Rememer the +omm,tment *etter +an e amended . a 0o!t+ard or a 0hone +a**44we are B-!t
tr.,n2 to 2et the -*" o1 the wor" o-t o1 the wa. we** e1ore %e+emer :1!t !o we +an +on+entrate on 2ett,n2 the
a-d,t, ta5 ,n1ormat,on, et+., o-t 0ronto at .earend.
31
BUFFETT (ARTNER#@&(, LT%.
;10 A&EW&T (LAOA
O'A@A :1, NEBRA#AA
>an-ar. 1;, 199:
The )ro-nd R-*e!
#ome 0artner! have +on1e!!ed Ithat/! the 0ro0er wordK that the. !omet,me! 1,nd ,t d,11,+-*t to wade thro-2h m.
ent,re ann-a* *etter. #,n+e & !eem to e 2ett,n2 more *on24w,nded ea+h .ear, & have de+,ded to em0ha!,<e +erta,n
a5,om! on the 1,r!t 0a2e!. Ever.one !ho-*d e ent,re*. +*ear on the!e 0o,nt!. To mo!t o1 .o- th,! mater,a* w,**
!eem -nd-*. re0et,t,o-!, -t & wo-*d rather have n,ne 0artner! o-t o1 ten m,*d*. ored than have one o-t o1 ten
w,th an. a!,+ m,!+on+e0t,on!.
1. &n no !en!e ,! an. rate o1 ret-rn 2-aranteed to 0artner!. (artner! who w,thdraw one4ha*1 o1 1= month*.
are do,n2 B-!t that44w,thdraw,n2. &1 we earn more than 9= 0er ann-m over a 0er,od o1 .ear!, the
w,thdrawa*! w,** e +overed . earn,n2! and the 0r,n+,0a* w,** ,n+rea!e. &1 we don/t earn 9=, the
month*. 0a.ment! are 0art,a**. or who**. a ret-rn o1 +a0,ta*.
2. An. .ear ,n wh,+h we 1a,* to a+h,eve at *ea!t a 0*-! 9= 0er1orman+e w,** e 1o**owed . a .ear when
0artner! re+e,v,n2 month*. 0a.ment! w,** 1,nd tho!e 0a.ment! *owered.
3. Whenever we ta*" o1 .ear*. 2a,n! or *o!!e!, we are ta*",n2 ao-t mar"et va*-e!7 that ,!, how we !tand
w,th a!!et! va*-ed at mar"et at .earend a2a,n!t how we !tood on the !ame a!,! at the e2,nn,n2 o1 the
.ear. Th,! ma. ear ver. *,tt*e re*at,on!h,0 to the rea*,<ed re!-*t! 1or ta5 0-r0o!e! ,n a 2,ven .ear.
4. Whether we do a 2ood Bo or a 0oor Bo ,! not to e mea!-red . whether we are 0*-! or m,n-! 1or the
.ear. &t ,! ,n!tead to e mea!-red a2a,n!t the 2enera* e50er,en+e ,n !e+-r,t,e! a! mea!-red . the %ow4
>one! &nd-!tr,a* Avera2e, *ead,n2 ,nve!tment +om0an,e!, et+. &1 o-r re+ord ,! etter than that o1 the!e
.ard!t,+"!, we +on!,der ,t a 2ood .ear whether we are 0*-! or m,n-!. &1 we do 0oorer, we de!erve the
tomatoe!.
5. Wh,*e & m-+h 0re1er a 1,ve4.ear te!t, & 1ee* three .ear! ,! an a!o*-te m,n,m-m 1or B-d2,n2 0er1orman+e.
&t ,! a +erta,nt. that we w,** have .ear! when the 0artner!h,0 0er1orman+e ,! 0oorer, 0erha0!
!-!tant,a**. !o, than the %ow. &1 an. three4.ear or *on2er 0er,od 0rod-+e! 0oor re!-*t!, we a** !ho-*d
!tart *oo",n2 aro-nd 1or other 0*a+e! to have o-r mone.. An e5+e0t,on to the *atter !tatement wo-*d e
three .ear! +over,n2 a !0e+-*at,ve e50*o!,on ,n a -** mar"et.
9. & am not ,n the -!,ne!! o1 0red,+t,n2 2enera* !to+" mar"et or -!,ne!! 1*-+t-at,on!. &1 .o- th,n" & +an do
th,!, or th,n" ,t ,! e!!ent,a* to an ,nve!tment 0ro2ram, .o- !ho-*d not e ,n the 0artner!h,0.
7. & +annot 0rom,!e re!-*t! to 0artner!. What & +an and do 0rom,!e ,! that3
a. O-r ,nve!tment! w,** e +ho!en on the a!,! o1 va*-e, not 0o0-*ar,t.7
. That we w,** attem0t to r,n2 r,!" o1 0ermanent +a0,ta* *o!! Inot !hort4term 8-otat,ona* *o!!K to
an a!o*-te m,n,m-m . ota,n,n2 a w,de mar2,n o1 !a1et. ,n ea+h +omm,tment and a d,ver!,t. o1
+omm,tment!7 and
+. '. w,1e, +h,*dren and & w,** have v,rt-a**. o-r ent,re net worth ,nve!ted ,n the 0artner!h,0.
32
O-r (er1orman+e ,n 1992
& have +on!,!tent*. to*d 0artner! that we e50e+t to !h,ne on a re*at,ve a!,! d-r,n2 m,n-! .ear! 1or the %ow,
wherea! 0*-! .ear! o1 an. ma2n,t-de ma. 1,nd -! *-!h,n2. Th,! he*d tr-e ,n 1992.
Be+a-!e o1 a !tron2 ra**. ,n the *a!t 1ew month!, the 2enera* mar"et a! mea!-red . the %ow rea**. d,d not have
!-+h a 1r,2hten,n2 de+*,ne a! man. m,2ht th,n". From 7:1 at the e2,nn,n2 o1 the .ear, ,t d,00ed to 5:5 ,n >-ne,
-t +*o!ed at 952. At the end o1 1990, the %ow !tood at 919, !o .o- +an !ee that wh,*e there ha! een a 2ood
dea* o1 a+t,on the 0a!t 1ew .ear!, the ,nve!t,n2 0-*,+ a! a who*e ,! not too 1ar 1rom where ,t wa! ,n 1959 or
1990. &1 one had owned the %ow *a!t .ear Iand & ,ma2,ne there are a 1ew 0eo0*e 0*a.,n2 the h,2h 1*.er! o1 1991
who w,!h the. hadK, the. wo-*d have had a !hr,n"a2e ,n mar"et va*-e o1 79.0? or 10.;=. @owever, d,v,dend! o1
a00ro5,mate*. 2:.:0 wo-*d have een re+e,ved to r,n2 the overa** re!-*t! 1rom the %ow 1or the .ear to m,n-!
7.9=. O-r own overa** re+ord wa! 0*-! 1:.9=. Be*ow we !how the .ear4.4.ear 0er1orman+e o1 the %ow, the
0artner!h,0 e1ore a**o+at,on to the 2enera* 0artner, and the *,m,ted 0artner!/ re!-*t! 1or a** 1-** .ear! o1 B-11ett
(artner!h,0, Ltd./! and 0rede+e!!or 0artner!h,0!/ a+t,v,t,e!3
Year Overall .esults -ro
Dow
Partnership .esults
/)0
Liited Partners
.esults /10
1957 4;.?= 10.?= 9.:=
195; :;.5= ?0.9= :2.2=
1959 20.0= 25.9= 20.9=
1990 49.2= 22.;= 1;.9=
1991 22.?= ?5.9= :5.9=
1992 47.9= 1:.9= 11.9=
I1K For 1957491 +on!,!t! o1 +om,ned re!-*t! o1 a** 0rede+e!!or *,m,ted 0artner!h,0! o0erat,n2 thro-2ho-t ent,re
.ear a1ter a** e50en!e! -t e1ore d,!tr,-t,on! to 0artner! or a**o+at,on! to the 2enera* 0artner.
I2K For 1957491 +om0-ted on a!,! o1 0re+ed,n2 +o*-mn o1 0artner!h,0 re!-*t! a**ow,n2 1or a**o+at,on to 2enera*
0artner a!ed -0on 0re!ent 0artner!h,0 a2reement.
The 1o**ow,n2 ta*e !how! the +-m-*at,ve or +om0o-nded re!-*t! ,n the !ame three +ate2or,e!, a! we** a! the
avera2e ann-a* +om0o-nded rate3
Year Overall .esults
-ro Dow
Partnership .esults Liited Partners
.esults
1957 4;.?= 10.?= 9.:=
195745; 29.9= 55.9= ??.5=
1957459 52.:= 95.9= 7?.7=
1957490 ?2.9= 1?0.9= 107.2=
1957491 7?.9= 251.0= 1;1.9=
1957492 91.9= 299.;= 215.1=
Ann-a* $om0o-nded Rate ;.:= 29.0= 21.1=
'. I-n!+,ent,1,+K o0,n,on ,! that a mar2,n o1 ten 0er+enta2e 0o,nt! 0er ann-m over the %ow ,! the ver.
ma5,m-m that +an e a+h,eved w,th ,nve!ted 1-nd! over an. *on2 0er,od o1 .ear!, !o ,t ma. e we** to menta**.
mod,1. !ome o1 the aove 1,2-re!.
(artner! have !omet,me! e50re!!ed +on+ern a! to the e11e+t o1 !,<e -0on 0er1orman+e. Th,! !-Be+t wa! re1*e+ted
-0on ,n *a!t .earD! ann-a* *etter. The +on+*-!,on rea+hed wa! that there were !ome !,t-at,on! where *ar2er !-m!
33
he*0ed and !ome where the. h,ndered, -t on a*an+e, & d,d not 1ee* the. wo-*d 0ena*,<e 0er1orman+e. &
0rom,!ed to ,n1orm 0artner! ,1 m. +on+*-!,on! on th,! !ho-*d +han2e. At the e2,nn,n2 o1 1957, +om,ned
*,m,ted 0artner!h,0 a!!et! tota*ed H:0:,729 and 2rew to H7,17;,500 at the e2,nn,n2 or 1992. To date, an.wa.,
o-r mar2,n over the %ow ha! ,nd,+ated no tenden+. to narrow a! 1-nd! ,n+rea!e.
&nve!tment $om0an,e!
A*on2 w,th the re!-*t! o1 the %ow, we have re2-*ar*. ,n+*-ded the ta-*at,on! on the two *ar2e!t o0en4end
,nve!tment +om0an,e! Im-t-a* 1-nd!K 1o**ow,n2 a +ommon !to+" 0o*,+., and the two *ar2e!t d,ver!,1,ed +*o!ed4
end ,nve!tment +om0an,e!. The!e 1o-r +om0an,e!, 'a!!a+h-!ett! &nve!tor! Tr-!t, &nve!tor! #to+" F-nd, Tr,4
$ont,nenta* $or0. and Lehman $or0. mana2e over H: ,**,on and are 0roa*. t.0,+a* o1 mo!t o1 the H20 ,**,on
,nve!tment +om0an. ,nd-!tr.. '. o0,n,on ,! that the,r re!-*t! 0ara**e* tho!e o1 mo!t an" tr-!t de0artment! and
,nve!tment +o-n!e*,n2 or2an,<at,on! wh,+h hand*e, ,n a22re2ate, va!t*. 2reater !-m!.
The 0-r0o!e o1 th,! ta-*at,on, wh,+h ,! !hown e*ow, ,! to ,**-!trate that the %ow ,! no 0-!hover a! an ,nde5 o1
,nve!tment a+h,evement. The adv,!or. ta*ent mana2,n2 B-!t the 1o-r +om0an,e! !hown +ommand! ann-a* 1ee! o1
a00ro5,mate*. H7 m,**,on and th,! re0re!ent! a ver. !ma** 1ra+t,on o1 the ,nd-!tr.. Neverthe*e!!, the 0-*,+
att,n2 avera2e o1 th,! h,2h*.40a,d ta*ent ,nd,+ate! re!-*t! !*,2ht*. *e!! 1avora*e than the %ow. &n no !en!e ,!
th,! !tatement ,ntended a! +r,t,+,!m. W,th,n the,r ,n!t,t-t,ona* 1ramewor" and hand*,n2 the man. ,**,on! o1
do**ar! ,nvo*ved, & +on!,der !-+h avera2e re!-*t! v,rt-a**. the on*. 0o!!,*e one!. The,r mer,t! *,e ,n other than
!-0er,or re!-*t!.
Both o-r 0ort1o*,o and method o1 o0erat,on d,11er !-!tant,a**. 1rom the +om0an,e! ment,oned aove. @owever,
mo!t 0artner!, a! an a*ternat,ve to the,r ,ntere!t ,n the 0artner!h,0 wo-*d 0roa*. have the,r 1-nd! ,nve!ted ,n
med,a 0rod-+,n2 re!-*t! +om0ara*e w,th ,nve!tment +om0an,e!, and &, there1ore 1ee* the. o11er a mean,n21-*
te!t o1 0er1orman+e.
Year #ass. Inv.
&rust /)0
Investors
'toc( /)0
Lehan /10 &ri-"ont.
/10
Dow Liited
Partners
1957 411.?= 412.?= 411.?= 42.?= 4;.?= 9.:=
195; ?2.7= ?7.5= ?0.;= ::.2= :;.5= :2.2=
1959 9.0= 10.:= ;.1= ;.?= 20.0= 20.9=
1990 41.0= 40.9= 2.5= 2.;= 49.2= 1;.9=
1991 25.9= 2?.9= 2:.9= 22.5= 22.?= :5.9=
1992 49.;= 41:.?= 41:.0= 410.0= 47.9= 11.9=
I1K $om0-ted 1rom +han2e! ,n a!!et va*-e 0*-! an. d,!tr,-t,on! to ho*der! o1 re+ord d-r,n2 .ear.
I2K From 1992 'ood./! Ban" N F,nan+e 'an-a* 1or 1957491. E!t,mated 1or 1992.
$O'(OUN%E%
Year #ass. Inv.
&rust
Investor
'toc(
Lehan &ri-"ont. Dow Liited
Partners
1957 411.?= 412.?= 411.?= 42.?= 4;.?= 9.:=
195745; 29.?= 29.2= 2?.7= :0.0= 29.9= ??.5=
1957459 :7.;= ?2.5= :?.;= ?0.9= 52.:= 7?.7=
1957490 :9.?= ?1.9= :;.2= ??.;= ?2.9= 107.2=
1957491 71.:= 79.9= 70.;= 77.?= 7?.9= 1;1.9=
1957492 5?.5= 5:.2= ?;.9= 59.7= 91.9= 215.1=
34
Ann-a*
$om0o-nded
Rate
7.5= 7.?= 9.;= ;.1= ;.:= 21.1=
The >o.! o1 $om0o-nd,n2
& have ,t 1rom -nre*,a*e !o-r+e! that the +o!t o1 the vo.a2e &!ae**a or,2,na**. -nderwrote 1or $o*-m-! wa!
a00ro5,mate*. H:0,000. Th,! ha! een +on!,dered at *ea!t a moderate*. !-++e!!1-* -t,*,<at,on o1 vent-re +a0,ta*.
W,tho-t attem0t,n2 to eva*-ate the 0!.+h,+ ,n+ome der,ved 1rom 1,nd,n2 a new hem,!0here, ,t m-!t e 0o,nted
o-t that even had !8-atter/! r,2ht! 0reva,*ed, the who*e dea* wa! not e5a+t*. another &B'. F,2-red ver. ro-2h*.,
the H:0,000 ,nve!ted at ?= +om0o-nded ann-a**. wo-*d have amo-nted to !ometh,n2 *,"e H2,000,000,000,000
Ithat/! H2 tr,**,on 1or tho!e o1 .o- who are not 2overnment !tat,!t,+,an!K . 1992. @,!tor,+a* a0o*o2,!t! 1or the
&nd,an! o1 'anhattan ma. 1,nd re1-2e ,n !,m,*ar +a*+-*at,on!. #-+h 1an+,1-* 2eometr,+ 0ro2re!!,on! ,**-!trate the
va*-e o1 e,ther *,v,n2 a *on2 t,me, or +om0o-nd,n2 .o-r mone. at a de+ent rate. & have noth,n2 0art,+-*ar*.
he*01-* to !a. on the 1ormer 0o,nt.
The 1o**ow,n2 ta*e ,nd,+ate! the +om0o-nded va*-e o1 H100,000 at 5=, 10= and 15= 1or 10, 20 and :0 .ear!.
&t ,! a*wa.! !tart*,n2 to !ee how re*at,ve*. !ma** d,11eren+e! ,n rate! add -0 to ver. !,2n,1,+ant !-m! over a
0er,od o1 .ear!. That ,! wh., even tho-2h we are !hoot,n2 1or more, we 1ee* that a 1ew 0er+enta2e 0o,nt!
advanta2e over the %ow ,! a ver. worthwh,*e a+h,evement. &t +an mean a *ot o1 do**ar! over a de+ade or two.
67 )87 )67
10 Gear! H192,;;9 H259,:7? H?0?,55:
20 Gear! H295,:2; H972,7?; H1,9:9,9?0
:0 Gear! H?:2,191 H1,7??,9:0 H9,921,1?0
O-r 'ethod o1 O0erat,on
O-r aven-e! o1 ,nve!tment rea" down ,nto three +ate2or,e!. The!e +ate2or,e! have d,11erent ehav,or
+hara+ter,!t,+!, and the wa. o-r mone. ,! d,v,ded amon2 them w,** have an ,m0ortant e11e+t on o-r re!-*t!,
re*at,ve to the %ow, ,n an. 2,ven .ear. The a+t-a* 0er+enta2e d,v,!,on amon2 +ate2or,e! ,! to !ome de2ree
0*anned, -t to a 2reat e5tent, a++,denta*, a!ed -0on ava,*a,*,t. 1a+tor!.
The 1,r!t !e+t,on +on!,!t! o1 2enera**. -nderva*-ed !e+-r,t,e! Ihere,na1ter +a**ed E2enera*!FK where we have
noth,n2 to !a. ao-t +or0orate 0o*,+,e! and no t,meta*e a! to when the -nderva*-at,on ma. +orre+t ,t!e*1 .Over
the .ear!, th,! ha! een o-r *ar2e!t +ate2or. o1 ,nve!tment, and more mone. ha! een made here than ,n e,ther o1
the other +ate2or,e!. We -!-a**. have 1a,r*. *ar2e 0o!,t,on! I5= to 10= o1 o-r tota* a!!et!K ,n ea+h o1 1,ve or !,5
2enera*!, w,th !ma**er 0o!,t,on! ,n another ten or 1,1teen.
#omet,me! the!e wor" o-t ver. 1a!t7 man. t,me! the. ta"e .ear!. &t ,! d,11,+-*t at the t,me o1 0-r+ha!e to "now
an. +om0e**,n2 rea!on wh. the. !ho-*d a00re+,ate ,n 0r,+e. @owever, e+a-!e o1 th,! *a+" o1 2*amo-r or
an.th,n2 0end,n2 wh,+h m,2ht +reate ,mmed,ate 1avora*e mar"et a+t,on, the. are ava,*a*e at ver. +hea0 0r,+e!.
A *ot o1 va*-e +an e ota,ned 1or the 0r,+e 0a,d. Th,! !-!tant,a* e5+e!! o1 va*-e +reate! a +om1orta*e mar2,n
o1 !a1et. ,n ea+h tran!a+t,on. $om,n,n2 th,! ,nd,v,d-a* mar2,n o1 !a1et. w,th a d,ver!,t. o1 +omm,tment!
+reate! a mo!t attra+t,ve 0a+"a2e o1 !a1et. and a00re+,at,on 0otent,a*. We do not 2o ,nto the!e 2enera*! w,th the
,dea o1 2ett,n2 the *a!t n,+"e*, -t are -!-a**. 8-,te +ontent !e**,n2 o-t at !ome ,ntermed,ate *eve* etween o-r
0-r+ha!e 0r,+e and what we re2ard a! 1a,r va*-e to a 0r,vate owner.
'an. t,me! 2enera*! re0re!ent a 1orm o1 6+oatta,* r,d,n26 where we 1ee* the dom,nat,n2 !to+"ho*der 2ro-0 ha!
0*an! 1or the +onver!,on o1 -n0ro1,ta*e or -nder4-t,*,<ed a!!et! to a etter -!e. We have done that o-r!e*ve! ,n
35
#anorn and %em0!ter, -t ever.th,n2 e*!e e8-a* we wo-*d rather *et other! do the wor". Ov,o-!*., not on*. do
the va*-e! have to e am0*e ,n a +a!e *,"e th,!, -t we a*!o have to e +are1-* who!e +oat we are ho*d,n2.
The 2enera*! tend to ehave mar"et4w,!e ver. m-+h ,n !.m0ath. w,th the %ow. >-!t e+a-!e !ometh,n2 ,! +hea0
doe! not mean ,t ,! not 2o,n2 to 2o down. %-r,n2 ar-0t downward movement! ,n the mar"et, th,! !e2ment ma.
ver. we** 2o down 0er+enta2e4w,!e B-!t a! m-+h a! the %ow. Over a 0er,od o1 .ear!, & e*,eve the 2enera*! w,**
o-t0er1orm the %ow, and d-r,n2 !har0*. advan+,n2 .ear! *,"e 1991. Th,! ,! the !e+t,on o1 o-r 0ort1o*,o that t-rn!
,n the e!t re!-*t!. &t ,!, o1 +o-r!e, a*!o the mo!t v-*nera*e ,n a de+*,n,n2 mar"et, and ,n 1992, not on*. d,d we
not ma"e an. mone. o-t o1 o-r 2enera* +ate2or., -t & am even do-t1-* ,1 ,t d,d etter than the %ow.
O-r !e+ond +ate2or. +on!,!t! o1 6wor"4o-t!. The!e are !e+-r,t,e! who!e 1,nan+,a* re!-*t! de0end on +or0orate
a+t,on rather than !-00*. and demand 1a+tor! +reated . -.er! and !e**er! o1 !e+-r,t,e!. &n other word!, the. are
!e+-r,t,e! w,th a t,meta*e where we +an 0red,+t, w,th,n rea!ona*e error *,m,t!, when we w,** 2et how m-+h and
what m,2ht -0!et the a00*e+art. $or0orate event! !-+h a! mer2er!, *,8-,dat,on!, reor2an,<at,on!, !0,n4o11!, et+., &
*ead to wor"4o-t!. An ,m0ortant !o-r+e ,n re+ent .ear! ha! een !e**4o-t! . o,* 0rod-+er! to maBor ,nte2rated o,*
+om0an,e!.
Th,! +ate2or. w,** 0rod-+e rea!ona*. !ta*e earn,n2! 1rom .ear to .ear, to a *ar2e e5tent ,rre!0e+t,ve o1 the
+o-r!e o1 the %ow. Ov,o-!*., ,1 we o0erate thro-2ho-t a .ear w,th a *ar2e 0ort,on o1 o-r 0ort1o*,o ,n wor"4
o-t!, we w,** *oo" e5treme*. 2ood ,1 ,t t-rn! o-t to e a de+*,n,n2 .ear 1or the %ow, or 8-,te ad ,1 ,t ,! a !tron2*.
advan+,n2 .ear.
We were 1ort-nate ,n that we had a 2ood 0ort,on o1 o-r 0ort1o*,o ,n wor" o-t! ,n 1992. A! & have !a,d e1ore,
th,! wa! not d-e to an. not,on on m. 0art a! to what the mar"et wo-*d do, -t rather e+a-!e & +o-*d 2et more o1
what & wanted ,n th,! +ate2or. than ,n the 2enera*!. Th,! !ame +on+entrat,on ,n wor"4o-t! h-rt o-r 0er1orman+e
d-r,n2 the mar"et advan+e ,n the !e+ond ha*1 o1 the .ear.
Over the .ear!, wor"4o-t! have 0rov,ded o-r !e+ond *ar2e!t +ate2or.. At an. 2,ven t,me, we ma. e ,n 1,ve to
ten o1 the!e7 !ome B-!t e2,nn,n2 and other! ,n the *ate !ta2e o1 the,r deve*o0ment. & e*,eve ,n -!,n2 orrowed
mone. to o11!et a 0ort,on o1 o-r wor"4o-t 0ort1o*,o, !,n+e there ,! a h,2h de2ree o1 !a1et. ,n th,! +ate2or. ,n
term! o1 oth event-a* re!-*t! and ,ntermed,ate mar"et ehav,or. For ,n!tan+e, .o- w,** note when .o- re+e,ve
o-r a-d,t re0ort, that we 0a,d H75,000 o1 ,ntere!t to an"! and ro"er! d-r,n2 the .ear. #,n+e o-r orrow,n2 wa!
at a00ro5,mate*. 5=, th,! mean! we had an avera2e o1 H1,500,000 orrowed 1rom !-+h !o-r+e!. #,n+e 1992 wa!
a down .ear ,n the mar"et, .o- m,2ht th,n" that !-+h orrow,n2 wo-*d h-rt re!-*t!. @owever, a** o1 o-r *oan!
were to o11!et wor"4o-t!, and th,! +ate2or. t-rned ,n a 2ood 0ro1,t 1or the .ear. Re!-*t!, e5+*-d,n2 the ene1,t!
der,ved 1rom the -!e o1 orrowed mone., -!-a**. 1a** ,n the 10= to 20= 0er ann-m ran2e. '. !e*14,m0o!ed
!tandard *,m,t re2ard,n2 orrow,n2 ,! 25= o1 0artner!h,0 net worth, a*tho-2h !ometh,n2 e5traord,nar. +o-*d
re!-*t ,n mod,1.,n2 th,! 1or a *,m,ted 0er,od o1 t,me.
Go- w,** note on o-r .earend a*an+e !heet I0art o1 the a-d,t .o- w,** re+e,veK !e+-r,t,e! !o*d !hort tota*,n2
!ome H:?0,000. 'o!t o1 th,! o++-rred ,n +onB-n+t,on w,th a wor"4o-t entered ,nto *ate ,n the .ear. &n th,! +a!e,
we had ver. *,tt*e +om0et,t,on 1or a 0er,od o1 t,me and were a*e to +reate a 10= or etter 0ro1,t I2ro!!, not
ann-a*,<edK 1or a 1ew month! t,e4-0 o1 mone.. The !hort !a*e! e*,m,nated the 2enera* mar"et r,!".
The 1,na* +ate2or. ,! & E+ontro*F !,t-at,on!, where we e,ther +ontro* the +om0an. or ta"e a ver. *ar2e 0o!,t,on
and attem0t to ,n1*-en+e 0o*,+,e! o1 the +om0an.. #-+h o0erat,on! !ho-*d de1,n,te*. e mea!-red on the a!,! o1
!evera* .ear!. &n a 2,ven .ear, the. ma. 0rod-+e noth,n2 a! ,t ,! -!-a**. to o-r advanta2e to have the !to+" e
!ta2nant mar"et4w,!e 1or a *on2 0er,od wh,*e we are a+8-,r,n2 ,t. The!e !,t-at,on!, too, have re*at,ve*. *,tt*e ,n
+ommon w,th the ehav,or o1 the %ow. #omet,me!, o1 +o-r!e, we -. ,nto a 2enera* w,th the tho-2ht ,n m,nd
that ,t m,2ht deve*o0 ,nto a +ontro* !,t-at,on. &1 the 0r,+e rema,n! *ow eno-2h 1or a *on2 0er,od, th,! m,2ht ver.
we** ha00en. U!-a**., ,t move! -0 e1ore we have a !-!tant,a* 0er+enta2e o1 the +om0an./! !to+", and we !e**
36
at h,2her *eve*! and +om0*ete a !-++e!!1-* 2enera* o0erat,on.
%em0!ter ',** 'an-1a+t-r,n2 $om0an.
The h,2h 0o,nt o1 1992 1rom a 0er1orman+e !tand0o,nt wa! o-r 0re!ent +ontro* !,t-at,on 447:= owned %em0!ter
',**. %em0!ter ha! een 0r,mar,*. ,n 1arm ,m0*ement! Imo!t*. ,tem! reta,*,n2 1or H1,000 or -nderK, water
!.!tem!, water we** !-00*,e! and Boed 0*-m,n2 *,ne!.
The o0erat,on! 1or the 0a!t de+ade have een +hara+ter,<ed . !tat,+ !a*e!, *ow ,nventor. t-rnover and v,rt-a**.
no 0ro1,t! ,n re*at,on to ,nve!ted +a0,ta*.
We ota,ned +ontro* ,n A-2-!t, 1991 at an avera2e 0r,+e o1 ao-t H2; 0er !hare, hav,n2 o-2ht !ome !to+" a!
*ow a! H19 ,n ear*,er .ear!, -t the va!t maBor,t. ,n an o11er o1 H:0.25 ,n A-2-!t. When +ontro* o1 a +om0an. ,!
ota,ned, ov,o-!*. what then e+ome! a**4,m0ortant ,! the va*-e o1 a!!et!, not the mar"et 8-otat,on 1or a 0,e+e
o1 0a0er I!to+" +ert,1,+ateK.
La!t .ear, o-r %em0!ter ho*d,n2 wa! va*-ed . a00*.,n2 what & 1e*t were a00ro0r,ate d,!+o-nt! to the var,o-!
a!!et!. The!e va*-at,on! were a!ed on the,r !tat-! a! non4earn,n2 a!!et! and were not a!!e!!ed on the a!,! o1
0otent,a*, -t on the a!,! o1 what & tho-2ht a 0rom0t !a*e wo-*d 0rod-+e at that date. O-r Bo wa! to +om0o-nd
the!e va*-e! at a de+ent rate. The +on!o*,dated a*an+e !heet *a!t .ear and the +a*+-*at,on o1 1a,r va*-e are !hown
e*ow.
I000D! om,ttedK
9ssets 5oo(
:igure
;alued < 9d=usted
;aluation
Lia>ilities
$a!h H199 100= H199 Note! (a.a*e H1,2:0
A++t!. Re+. InetK H1,0?0 ;5= H;;? Other L,a,*,t,e! H1,0;;
&nventor. H?,20: 90= H2,522
(0d. E50. Et+. H;2 25= H21
$-rrent A!!et! H5,?91 H:,59: Tota* L,a,*,t,e! H2,:1;
$a!h La*-e L,1e ,n!.,
et+.
H?5 100
E!t. net a-+t,on
va*-e
H?5 Net Wor" 0er Boo"!3 H?,901
Net (*ant E8-,0ment H1:;: H;00 Net Wor" a!
AdB-!ted to R-,+"*.
Rea*,<a*e La*-e!
H2,120
Tota* A!!et! H9,919 H?,?:; #hare! o-t!tand,n2
90,1?9 AdB. La*-e
0er #hare
H:5.25
%em0!ter/! 1,!+a* .ear end! Novemer :0th, and e+a-!e the a-d,t wa! -nava,*a*e ,n +om0*ete 1orm, &
a00ro5,mated !ome o1 the 1,2-re! and ro-nded to H:5 0er !hare *a!t .ear.
&n,t,a**., we wor"ed w,th the o*d mana2ement toward more e11e+t,ve -t,*,<at,on o1 +a0,ta*, etter o0erat,n2
mar2,n!, red-+t,on o1 overhead, et+. The!e e11ort! were +om0*ete*. 1r-,t*e!!. A1ter !0,nn,n2 o-r whee*! 1or ao-t
!,5 month!, ,t e+ame ov,o-! that wh,*e *,0 !erv,+e wa! e,n2 2,ven to o-r oBe+t,ve, e,ther thro-2h ,na,*,t. or
-nw,**,n2ne!!, noth,n2 wa! e,n2 a++om0*,!hed. A +han2e wa! ne+e!!ar..
A 2ood 1r,end, who!e ,n+*,nat,on ,! not toward enth-!,a!t,+ de!+r,0t,on!, h,2h*. re+ommended @arr. Bott*e 1or
37
o-r t.0e o1 0ro*em. On A0r,* 17, 1992 & met @arr. ,n Lo! An2e*e!, 0re!ented a dea* wh,+h 0rov,ded 1or
reward! to h,m a!ed -0on o-r oBe+t,ve! e,n2 met, and on A0r,* 2:rd he wa! !,tt,n2 ,n the 0re!,dent/! +ha,r ,n
Beatr,+e.
@arr. ,! -n8-e!t,ona*. the man o1 the .ear. Ever. 2oa* we have !et 1or @arr. ha! een met, and a** the
!-r0r,!e! have een on the 0*ea!ant !,de. @e ha! a++om0*,!hed one th,n2 a1ter another that ha! een *ae*ed a!
,m0o!!,*e, and ha! a*wa.! ta"en the to-2h th,n2! 1,r!t. O-r rea"even 0o,nt ha! een +-t v,rt-a**. ,n ha*1, !*ow4
mov,n2 or dead mer+hand,!e ha! een !o*d or wr,tten o11, mar"et,n2 0ro+ed-re! have een revam0ed, and
-n0ro1,ta*e 1a+,*,t,e! have een !o*d.
The re!-*t! o1 th,! 0ro2ram are 0art,a**. !hown ,n the a*an+e !heet e*ow, wh,+h, !,n+e ,t !t,** re0re!ent! non4
earn,n2 a!!et!, ,! va*-ed on the !ame a!,! a! *a!t .ear.
I000D! om,ttedK
9ssets 5oo(
:igure
;alued < 9d=usted
;aluation
Lia>ilities
$a!h H90 100= H90 Note! 0a.a*e H0
'ar"eta*e
!e+-r,t,e!
H75; 'r"t. 12P:1P92 H;:? Other *,a,*,t,e! H:?9
A++t!. Re+. InetK H799 ;5= H979 Tota* *,a,*,t,e! H:?9
&nventor. H1,9:? 90= H9;1
$a!h va*-e *,1e ,n!. H?1 100= H?1 Net Worth3
Re+overa*e &n+ome
Ta5
H170 100= H170 (er Boo"! H?,07
7
(0d. E50. Et+. H1? 25= H? A! AdB-!ted to 8-,+"*.
rea*,<a*e va*-e!
H:,12
5
Add3 0ro+eed! 1rom
0otent,a* e5er+,!e o1
o0t,on to @arr. Bott*e
H90
$-rrent A!!et! H:,?7: H2,799
#hare! o-t!tand,n2
90,1?9
',!+. &nve!t. H5 100= H5 Add3 !h!. (otent,a**.
o-t!tand,n2 -nder
o0t,on 2000
Tota* !h!. 92,1?9
Net (*ant E8-,0ment H9?5 E!t. net a-+t,on
va*-e
H700
AdB-!ted va*-e 0er
!hare
H51.2
9
Tota* A!!et! H?,?2: H:,?71
Three 1a+t! !tand o-t3 I1K A*tho-2h net worth ha! een red-+ed !omewhat . the ho-!e+*ean,n2 and wr,tedown!
IH550,000 wa! wr,tten o-t o1 ,nventor.7 1,5ed a!!et! overa** ro-2ht more than oo" va*-eK, we have +onverted
a!!et! to +a!h at a rate 1ar !-0er,or to that ,m0*,ed ,n o-r .ear4ear*,er va*-at,on. I2K To !ome e5tent, we have
+onverted the a!!et! 1rom the man-1a+t-r,n2 -!,ne!! Iwh,+h ha! een a 0oor -!,ne!!K to a -!,ne!! wh,+h we
th,n" ,! a 2ood -!,ne!! 44!e+-r,t,e!. I:K B. -.,n2 a!!et! at a ar2a,n 0r,+e, we don/t need to 0-** an. ra,t! o-t
o1 a hat to 2et e5treme*. 2ood 0er+enta2e 2a,n!. Th,! ,! the +orner!tone o1 o-r ,nve!tment 0h,*o!o0h.3 ENever
+o-nt on ma",n2 a 2ood !a*e. @ave the 0-r+ha!e 0r,+e e !o attra+t,ve that even a med,o+re !a*e 2,ve! 2ood
re!-*t!. The etter !a*e! w,** e the 1ro!t,n2 on the +a"e.F
38
On >an-ar. 2, 199:, %em0!ter re+e,ved an -n!e+-red term *oan o1 H1,250,000. The!e 1-nd!, to2ether w,th the
1-nd! a** read. 61reed4-06 w,** ena*e -! to have a !e+-r,t. 0ort1o*,o o1 ao-t H:5 0er !hare at %em0!ter, or
+on!,dera*. more than we 0a,d 1or the who*e +om0an.. Th-! o-r 0re!ent va*-at,on w,** ,nvo*ve a net o1 ao-t
H19 0er !hare ,n the man-1a+t-r,n2 o0erat,on and H:5 ,n a !e+-r,t. o0erat,on +om0ara*e to that o1 B-11ett
(artner!h,0, Ltd.
We, o1 +o-r!e, are devoted to +om0o-nd,n2 the H19 ,n man-1a+t-r,n2 at an attra+t,ve rate and e*,eve we have
!ome 2ood ,dea! a! to how to a++om0*,!h th,!. Wh,*e th,! w,** e ea!. ,1 the -!,ne!! a! 0re!ent*. +ond-+ted
earn! mone., we have !ome 0rom,!,n2 ,dea! even ,1 ,t !ho-*dn/t.
&t !ho-*d e 0o,nted o-t that %em0!ter *a!t .ear wa! 100= an a!!et +onver!,on 0ro*em and there1ore,
+om0*ete*. -na11e+ted . the !to+" mar"et and tremendo-!*. a11e+ted . o-r !-++e!! w,th the a!!et!. &n 199:,
the man-1a+t-r,n2 a!!et! w,** !t,** e ,m0ortant, -t 1rom a va*-at,on !tand0o,nt ,t w,** ehave +on!,dera*.
more *,"e a 2enera* !,n+e we w,** have a *ar2e 0ort,on o1 ,t! mone. ,nve!ted ,n 2enera*! 0rett. m-+h ,dent,+a*
w,th tho!e ,n B-11ett (artner!h,0, Ltd. For ta5 rea!on!, we w,** 0roa*. not 0-t wor"o-t! ,n %em0!ter.
There1ore, ,1 the %ow !ho-*d dro0 !-!tant,a**., ,t wo-*d have a !,2n,1,+ant e11e+t on the %em0!ter va*-at,on.
L,"ew,!e, %em0!ter wo-*d ene1,t th,! .ear 1rom an advan+,n2 %ow wh,+h wo-*d not have een the +a!e mo!t
o1 *a!t .ear.
There ,! one 1,na* 0o,nt o1 rea* !,2n,1,+an+e 1or B-11ett (artner!h,0, Ltd. We now have a re*at,on!h,0 w,th an
o0erat,n2 man wh,+h +o-*d e o1 2reat ene1,t ,n 1-t-re +ontro* !,t-at,on!. @arr. had never tho-2ht o1 r-nn,n2
an ,m0*ement +om0an. !,5 da.! e1ore he too" over. @e ,! mo,*e, hardwor",n2 and +arr,e! o-t 0o*,+,e! on+e
the. are !et. @e *,"e! to 2et 0a,d we** 1or do,n2 we**, and & *,"e dea*,n2 w,th !omeone who ,! not tr.,n2 to 1,2-re
how to 2et the 1,5t-re! ,n the e5e+-t,ve wa!hroom 2o*d40*ated.
@arr. and & *,"e ea+h other, and h,! re*at,on!h,0 w,th B-11ett (artner!h,0, Ltd. !ho-*d e 0ro1,ta*e 1or a** o1 -!.
The R-e!t,on o1 $on!ervat,!m
Be+a-!e & e*,eve ,t ma. e even more mean,n21-* a1ter the event! o1 1992 & wo-*d *,"e to re0eat th,! !e+t,on
1rom *a!t .earD! *etter3
6The aove de!+r,0t,on o1 o-r var,o-! area! o1 o0erat,on ma. 0rov,de !ome +*-e! a! to how +on!ervat,ve*. o-r
0ort1o*,o ,! ,nve!ted. 'an. 0eo0*e !ome .ear! a+" tho-2ht the. were ehav,n2 ,n the mo!t +on!ervat,ve
manner . 0-r+ha!,n2 med,-m or *on24term m-n,+,0a* or 2overnment ond!. Th,! 0o*,+. ha! 0rod-+ed
!-!tant,a* mar"et de0re+,at,on ,n man. +a!e!, and mo!t +erta,n*. ha! 1a,*ed to ma,nta,n or ,n+rea!e rea* -.,n2
0ower.
6$on!+,o-!, 0erha0! over*. +on!+,o-!, o1 ,n1*at,on, man. 0eo0*e now 1ee* that the. are ehav,n2 ,n a
+on!ervat,ve manner . -.,n2 *-e +h,0 !e+-r,t,e! a*mo!t re2ard*e!! o1 0r,+e4earn,n2! rat,o!, d,v,dend .,e*d!,
et+. W,tho-t the ene1,t o1 h,nd!,2ht a! ,n the ond e5am0*e, & 1ee* th,! +o-r!e o1 a+t,on ,! 1ra-2ht w,th dan2er.
There ,! noth,n2 at a** +on!ervat,ve, ,n m. o0,n,on, ao-t !0e+-*at,n2 a! to B-!t how h,2h a m-*t,0*,er a 2reed.
and +a0r,+,o-! 0-*,+ w,** 0-t on earn,n2!.
Go- w,** not e r,2ht !,m0*. e+a-!e a *ar2e n-mer o1 0eo0*e momentar,*. a2ree w,th .o-. Go- w,** not e
r,2ht !,m0*. e+a-!e ,m0ortant 0eo0*e a2ree w,th .o-. &n man. 8-arter! the !,m-*taneo-! o++-rren+e o1 the two
aove 1a+tor! ,! eno-2h to ma"e a +o-r!e o1 a+t,on meet the te!t o1 +on!ervat,!m.
EGo- w,** e r,2ht, over the +o-r!e o1 man. tran!a+t,on!, ,1 .o-r h.0othe!e! are +orre+t, .o-r 1a+t! are +orre+t,
and .o-r rea!on,n2 ,! +orre+t. Tr-e +on!ervat,!m ,! on*. 0o!!,*e thro-2h "now*ed2e and rea!on.
& m,2ht add that ,n no wa. doe! the 1a+t that o-r 0ort1o*,o ,! not +onvent,ona* 0rove that we are more
39
+on!ervat,ve or *e!! +on!ervat,ve than !tandard method! o1 ,nve!t,n2. Th,! +an on*. e determ,ned . e5am,n,n2
the method! or e5am,n,n2 the re!-*t!.
& 1ee* the mo!t oBe+t,ve te!t a! to B-!t how +on!ervat,ve o-r manner o1 ,nve!t,n2 ,! ar,!e! thro-2h eva*-at,on o1
0er1orman+e ,n down mar"et!. (re1era*. the!e !ho-*d ,nvo*ve a !-!tant,a* de+*,ne ,n the %ow. O-r
0er1orman+e ,n the rather m,*d de+*,ne! o1 1957 and 1990 wo-*d +on1,rm m. h.0othe!,! that we ,nve!t ,n an
e5treme*. +on!ervat,ve manner. & wo-*d we*+ome an. 0artner/! !-22e!t,n2 oBe+t,ve te!t! a! to +on!ervat,!m to
!ee how we !ta+" -0. We have never !-11ered a rea*,<ed *o!! o1 more than U o1 1= o1 tota* net a!!et! and o-r
rat,o o1 tota* do**ar! o1 rea*,<ed 2a,n! to tota* rea*,<ed *o!!e! ,! !ometh,n2 *,"e 100 to 1. O1 +o-r!e, th,! re1*e+t!
the 1a+t that on a*an+e we have een o0erat,n2 ,n an -0 mar"et. @owever there have een man. o00ort-n,t,e!
1or *o!! tran!a+t,on! even ,n mar"et! !-+h a! the!e I.o- ma. have 1o-nd o-t ao-t a 1ew o1 the!e .o-r!e*ve!K !o
& th,n" the aove 1a+t! have !ome !,2n,1,+an+e.
&n 1992, we d,d rea*,<e a *o!! on one +omm,tment or 1.0= and o-r rat,o or rea*,<ed 2a,n! to *o!!e! wa! on*.
!*,2ht*. over : to 1. @owever, +om0ared to more +onvent,ona* Io1ten termed +on!ervat,ve wh,+h ,! not
!.non.mo-!K method! o1 +ommon !to+" ,nve!t,n2, ,t wo-*d a00ear that o-r method ,nvo*ved +on!,dera*. *e!!
r,!". O-r advanta2e over the %ow wa! a** a+h,eved when the mar"et wa! 2o,n2 down7 we *o!t a ,t o1 th,! ed2e
on the wa. -0.
The U!-a* (red,+t,on
& am +erta,n*. not 2o,n2 to 0red,+t what 2enera* -!,ne!! or the !to+" mar"et are 2o,n2 to do ,n the ne5t .ear or
two, !,n+e & don/t have the 1a,nte!t ,dea.
& th,n" .o- +an e 8-,te !-re that over the ne5t ten .ear!, there are 2o,n2 to e a 1ew .ear! when the 2enera*
mar"et ,! 0*-! 20= or 25= a 1ew when ,t ,! m,n-! on the !ame order, and a maBor,t. when ,t ,! ,n etween. &
havenDt an. not,on a! to the !e8-en+e ,n wh,+h the!e w,** o++-r, nor do & th,n" ,t ,! o1 an. 2reat ,m0ortan+e 1or
the *on24term ,nve!tor. &1 .o- w,** ta"e the 1,r!t ta*e on 0a2e : and !h-11*e the .ear! aro-nd, the +om0o-nded
re!-*t w,** !ta. the !ame. &1 the ne5t 1o-r .ear! are 2o,n2 to ,nvo*ve, !a., a V?0=, 4:0=, V10= and J9=, the
order ,n wh,+h the. 1a** ,! +om0*ete*. -n,m0ortant 1or o-r 0-r0o!e! a! *on2 a! we a** are aro-nd at the end o1 the
1o-r .ear!. Over a *on2 0er,od o1 .ear!, & th,n" ,t *,"e*. that the %ow w,** 0roa*. 0rod-+e !ometh,n2 *,"e 5=
0er .ear +om0o-nded 1rom a +om,nat,on o1 d,v,dend! and mar"et va*-e 2a,n. %e!0,te the e50er,en+e o1 the *a!t
de+ade, an.one e50e+t,n2 !-!tant,a**. etter than that 1rom the 2enera* mar"et 0roa*. 1a+e! d,!a00o,ntment.
O-r Bo ,! to 0,*e -0 .ear*. advanta2e! over the 0er1orman+e o1 the %ow w,tho-t worr.,n2 too m-+h ao-t
whether the a!o*-te re!-*t! ,n a 2,ven .ear are a 0*-! or a m,n-!. & wo-*d +on!,der a .ear ,n wh,+h we were
down 15= and the %ow de+*,ned 25= to e m-+h !-0er,or to a .ear when oth the 0artner!h,0 and the %ow
advan+ed 20=.
For the rea!on! o-t*,ned ,n o-r method o1 o0erat,on, o-r e!t .ear! re*at,ve to the %ow are *,"e*. to e ,n
de+*,n,n2 or !tat,+ mar"et!. There1ore, the advanta2e we !ee" w,** 0roa*. +ome ,n !har0*. var.,n2 amo-nt!.
There are o-nd to e .ear! when we are !-r0a!!ed . the %ow, -t ,1 over a *on2 0er,od we +an avera2e ten
0er+enta2e 0o,nt! 0er .ear etter than ,t, & w,** 1ee* the re!-*t! have een !at,!1a+tor..
#0e+,1,+a**., ,1 the mar"et !ho-*d e down :5= or ?0= ,n a .ear Iand & 1ee* th,! ha! a h,2h 0roa,*,t. o1
o++-rr,n2 one .ear ,n the ne5t ten 44no one "now! wh,+h oneK, we !ho-*d e down on*. 15= or 20=. &1 ,t ,!
more or *e!! -n+han2ed d-r,n2 the .ear, we wo-*d ho0e to e -0 ao-t ten 0er+enta2e 0o,nt!. &1 ,t ,! -0 20= or
more, we wo-*d !tr-22*e to e -0 a! m-+h. &t ,! +erta,n*. do-t1-* we +o-*d mat+h a 20= or 25= advan+e 1rom
the %e+emer :1, 1992 *eve*. The +on!e8-en+e o1 0er1orman+e !-+h a! th,! over a 0er,od o1 .ear! wo-*d mean
that ,1 the %ow 0rod-+e! a 5= 0er .ear overa** 2a,n +om0o-nded, & wo-*d ho0e o-r re!-*t! m,2ht e 15= 0er
.ear.
40
The aove e50e+tat,on! ma. !o-nd !omewhat ra!h, and there ,! no 8-e!t,on -t that the. ma. a00ear ver. m-+h
!o when v,ewed 1rom the vanta2e 0o,nt o1 1995 or 1970. Lar,at,on! ,n an. 2,ven .ear 1rom the ehav,or
de!+r,ed aove wo-*d e w,de, even ,1 the *on24term e50e+tat,on wa! +orre+t. $erta,n*., .o- have to re+o2n,<e
the 0o!!,,*,t. o1 !-!tant,a* 0er!ona* ,a! ,n !-+h ho0e!.
',!+e**aneo-!
Th,! .ear mar"ed the tran!,t,on 1rom the o11,+e o11 the edroom to one a ,t I8-,te a ,tK more +onvent,ona*.
#-r0r,!,n2 a! ,t ma. !eem, the ret-rn to a t,me +*o+" *,1e ha! not een -n0*ea!ant. A! a matter o1 1a+t, & enBo. not
"ee0,n2 tra+" o1 ever.th,n2 on the a+"! o1 enve*o0e!.
We are !tart,n2 o11 th,! .ear w,th net a!!et! o1 H9,?05,?00.00. At the !tart o1 1992, #-!,e and & had three Enon4
mar"eta*e !e+-r,t.F ,nve!tment! o1 other than nom,na* !,<e, and two o1 the!e have een !o*d. The th,rd w,** e
+ont,n-ed ,nde1,n,te*.. From the 0ro+eed! o1 the two !a*e!, we have added to o-r 0artner!h,0 ,ntere!t !o that we
now have an ,ntere!t o1 H1,:77,?00.00. A*!o, m. three +h,*dren, mother, 1ather, two !,!ter!, two rother!4,n4*aw,
1ather4,n4*aw, three a-nt!, 1o-r +o-!,n!, 1,ve n,e+e! and ne0hew! have ,ntere!t! d,re+t*. or ,nd,re+t*. tota*,n2
H;9:,900.00.
B,** #+ott who ha! 1,t ,nto o-r o0erat,on !0*end,d*. ha! an ,ntere!t Iw,th h,! w,1eK o1 H197,?00.007 A ver. *ar2e
0ort,on o1 h,! net worth. #o we are a** eat,n2 o-r own +oo",n2.
Go- w,** note 1rom the a-d,tor/! +ert,1,+ate that the. made a !-r0r,!e +he+" d-r,n2 the .ear and th,! w,** e a
+ont,n-,n2 0art o1 the,r 0ro+ed-re. (eat, 'arw,+", ',t+he** N $o. a2a,n d,d an e5+e**ent Bo on the a-d,t,
meet,n2 o-r rather demand,n2 t,me !+hed-*e!.
#-!,e wa! ,n +har2e o1 e8-,00,n2 the o11,+e wh,+h mean! we d,d not 1o**ow m. Eoran2e +rate6 a00roa+h to
,nter,or de+orat,n2. We have an am0*e !-00*. o1 (e0!, on hand and *oo" 1orward to 0artner! dro00,n2 ,n.
Beth Feehan +ont,n-e! to demon!trate wh. !he ,! the h,2h 0r,e!te!! o1 the $(# I+ert,1,ed 0ro1e!!,ona* !e+retar.,
that ,!K 2ro-0.
(artner! d,d a wonder1-* Bo o1 +oo0erat,n2 ,n the ret-rn o1 a2reement! and +omm,tment *etter!, and & am mo!t
a00re+,at,ve o1 th,!. &t ma"e! *,1e a *ot ea!,er. En+*o!ed .o- w,** 1,nd #+hed-*e EAF to .o-r 0artner!h,0
a2reement. Go- w,** e re+e,v,n2 .o-r a-d,t and ta5 1,2-re! ver. !oon, and ,1 .o- have 8-e!t,on! on an. o1 th,!
e !-re to *et me hear 1rom .o-.
"ordiall23
4arren E. 5u--ett
41
BUFFETT (ARTNER#@&(, LT%.
;10 A&EW&T (LAOA
O'A@A :1, NEBRA#AA
>-*. 10, 199:
F,r!t @a*1 (er1orman+e
%-r,n2 the 1,r!t ha*1 o1 199:, the %ow >one! &nd-!tr,a* Avera2e Ihere,na1ter +a**ed the 6%ow6K advan+ed 1rom
952.10 to 709.;;. &1 one had owned the %ow d-r,n2 th,! 0er,od, d,v,dend! o1 H10.99 wo-*d have een re+e,ved,
r,n2,n2 the overa** ret-rn 1rom the %ow d-r,n2 the 1,r!t ha*1 to 0*-! 10.0=.
O-r ,n+antat,on ha! een3 I1K that !hort4term re!-*t! I*e!! than three .ear!K have *,tt*e mean,n2, 0art,+-*ar*. ,n
re1eren+e to an ,nve!tment o0erat,on !-+h a! o-r! that devote! a 0ort,on o1 re!o-r+e! to +ontro* !,t-at,on!, and7
I2K That o-r re!-*t! re*at,ve to the %ow and other +ommon4!to+"41orm med,a, w,** e etter ,n de+*,n,n2 mar"et!
and ma. we** have a d,11,+-*t t,me B-!t mat+h,n2 !-+h med,a ,n -*,n2 mar"et!.
Neverthe*e!!, o-r 1,r!t4ha*1 0er1orman+e, e5+*-d,n2 an. +han2e ,n %em0!ter va*-at,on Iand ,t! va*-at,on d,d
+han2e 44&/m !av,n2 th,! 1or de!!ert *ater ,n the *etterK wa! 0*-! 1?=. Th,! 1?= ,! +om0-ted on tota* net a!!et!
Inot non4%em0!ter a!!et!K and ,! a1ter e50en!e!, -t e1ore month*. 0a.ment! Ito tho!e who ta"e themK to
0artner! and a**o+at,on to the )enera* (artner. #-+h a**o+at,on! are a+adem,+ on an ,nter,m a!,!, -t ,1 we were
a*!o 0*-! 1?= at .earend, the 1,r!t 9= wo-*d e a**o+ated to 0artner! a++ord,n2 to the,r +a0,ta*, 0*-! three4
8-arter! o1 the a*an+e o1 ;= I1?= 49=K, or an add,t,ona* 9=, 2,v,n2 the *,m,ted 0artner! a 0*-! 12=
0er1orman+e.
%e!0,te the re*at,ve*. 0*ea!ant re!-*t! o1 the 1,r!t ha*1 the admon,t,on! !tated two 0ara2ra0h! ear*,er ho*d ,n 1-**
1or+e. At 0*-! 1?= ver!-! 0*-! 10= 1or the %ow, th,! !,5 month! ha! een a *e!! !at,!1a+tor. 0er,od than the 1,r!t
ha*1 o1 1992 when we were m,n-! 7.5= ver!-! m,n-! 21.7= 1or the %ow. Go- !ho-*d +om0*ete*. -nder!tand
o-r th,n",n2 ,n th,! re2ard wh,+h ha! een em0ha!,<ed ,n 0rev,o-! *etter!.
%-r,n2 the 1,r!t ha*1 we had an avera2e net ,nve!tment ,n 62enera*!6 I*on2 0o!,t,on! ,n 2enera*! m,n-! !hort
0o!,t,on! ,n 2enera*!K o1 a00ro5,mate*. H5,275,000. O-r overa** 2a,n 1rom th,! net ,nve!tment ,n 2enera*! I1or a
de!+r,0t,on o1 o-r ,nve!tment +ate2or,e! !ee the *a!t ann-a* *etterK wa! ao-t H1,100,000 1or a 0er+enta2e 2a,n
1rom th,! +ate2or. o1 ro-2h*. 21=. Th,! a2a,n ,**-!trate! the e5tent to wh,+h the a**o+at,on o1 o-r re!o-r+e!
amon2 var,o-! +ate2or,e! a11e+t! !hort4term re!-*t!. &n 1992 the 2enera*! were down 1or the .ear and on*. an
o-t!tand,n2 0er1orman+e . oth o1 the other two +ate2or,e!, 6wor"4o-t!6 and 6+ontro*!,6 2ave -! o-r -n-!-a**.
1avora*e re!-*t! 1or that .ear.
Now th,! .ear, o-r wor"4o-t! have done 0oorer than the %ow and have een a dra2 on 0er1orman+e, a! the. are
e50e+ted to e ,n r,!,n2 mar"et!. Wh,*e ,t wo-*d e ver. n,+e to e 100= ,n 2enera*! ,n advan+,n2 mar"et! and
100= ,n wor"4o-t! ,n de+*,n,n2 mar"et!, & ma"e no attem0t to 2-e!! the +o-r!e o1 the !to+" mar"et ,n !-+h a
manner. We +on!,der a** three o1 o-r +ate2or,e! to e 2ood -!,ne!!e! on a *on24term a!,!, a*tho-2h the,r !hort4
term 0r,+e ehav,or +hara+ter,!t,+! d,11er !-!tant,a**. ,n var,o-! t.0e! o1 mar"et!. We +on!,der attem0t,n2 to
2a-2e !to+" mar"et 1*-+t-at,on! to e a ver. 0oor -!,ne!! on a *on24term a!,! and are not 2o,n2 to e ,n ,t,
e,ther d,re+t*. or ,nd,re+t*. thro-2h the 0ro+e!! o1 tr.,n2 to 2-e!! wh,+h o1 o-r +ate2or,e! ,! *,"e*. to do e!t ,n
the near 1-t-re.
&nve!tment $om0an,e!
#hown e*ow are the -!-a* !tat,!t,+! on a +-m-*at,ve a!,! 1or the %ow and B-11ett (artner!h,0. Ltd. I,n+*-d,n2
0rede+e!!or 0artner!h,0!K a! we** a! 1or the two *ar2e!t o0en4end Im-t-a* 1-nd!K and two *ar2e!t +*o!ed4end
42
,nve!tment +om0an,e! 1o**ow,n2 a d,ver!,1,ed +ommon4!to+" ,nve!tment 0o*,+.3
Year Dow #ass.Inv. &rust
/)0
Investors 'toc(
/)0
&ri-"ont. /10
1957 4;.?= 411.?= 412.?= 42.?=
1957 J 5; 29.9= 29.?= 29.2= :0.0=
1957 J 59 52.:= :7.;= ?2.5= ?0.9=
1957 J 90 ?2.9= :9.?= ?1.9= ??.;=
1957 J 91 7?.9= 71.:= 79.9= 77.?=
1957 J 92 91.9= 5?.5= 5:.2= 59.7=
1957 J 9P:0P9: 77.;= 72.?= 99.:= 75.7=
Ann-a*
$om0o-nded Rate
9.:= ;.7= ;.?= 9.1=
Year Lehan /10 Partnership /?0 Liited Partners
/@0
1957 411.?= 10.?= 9.:=
1957 J 5; 2?.7= 55.9= ??.5=
1957 J 59 :?.;= 95.9= 7?.7=
1957 J 90 :;.2= 1?0.9= 107.2=
1957 J 91 70.;= 251.0= 1;1.9=
1957 J 92 ?9.2= 299.;= 215.1=
1957 J 9P:0P9: 90.;= :55.;= 252.9=
Ann-a*
$om0o-nded Rate
7.9= 29.:= 21.?=
:ootnotes 3
I1K $om0-ted 1rom +han2e! ,n a!!et va*-e 0*-! an. d,!tr,-t,on! to ho*der! o1 re+ord d-r,n2 .ear.
I2K From 199: 'ood./! Ban" N F,nan+e 'an-a* 1or 1957492. E!t,mated 1or 1,r!t ha*1 199:.
(3) For 1957491 +on!,!t! o1 +om,ned re!-*t! o1 a** 0rede+e!!or *,m,ted 0artner!h,0! o0erat,n2 thro-2ho-t
ent,re .ear a1ter a** e50en!e! -t e1ore d,!tr,-t,on! to 0artner! or a**o+at,on! to the 2enera* 0artner.
I?K For 1957491 +om0-ted on a!,! o1 0re+ed,n2 +o*-mn o1 0artner!h,0 re!-*t! a**ow,n2 1or a**o+at,on to
2enera* 0artner a!ed -0on 0re!ent 0artner!h,0 a2reement.
The re!-*t! +ont,n-e to !how that the mo!t h,2h*. 0a,d and re!0e+ted ,nve!tment adv,+e ha! d,11,+-*t. mat+h,n2
the 0er1orman+e o1 an -nmana2ed ,nde5 o1 *-e4+h,0 !to+"!. Th,! ,n no !en!e +ondemn! the!e ,n!t,t-t,on! or the
,nve!tment adv,!er! and tr-!t de0artment! who!e method!, rea!on,n2, and re!-*t! *ar2e*. 0ara**e* !-+h
,nve!tment +om0an,e!. The!e med,a 0er1orm a !-!tant,a* !erv,+e to m,**,on! o1 ,nve!tor! ,n a+h,ev,n2 ade8-ate
d,ver!,1,+at,on, 0rov,d,n2 +onven,en+e and 0ea+e o1 m,nd, avo,d,n2 ,!!-e! o1 ,n1er,or 8-a*,t., et+. @owever,
the,r !erv,+e! do not ,n+*-de Iand ,n the 2reat maBor,t. o1 +a!e!, are not re0re!ented to ,n+*-deK the +om0o-nd,n2
o1 mone. at a rate 2reater than that a+h,eved . the 2enera* mar"et.
O-r 0artner!h,0/! 1-ndamenta* rea!on 1or e5,!ten+e ,! to +om0o-nd 1-nd! at a etter4than4avera2e rate w,th *e!!
e50o!-re to *on24term *o!! o1 +a0,ta* than the aove ,nve!tment med,a. We +erta,n*. +annot re0re!ent that we
w,** a+h,eve th,! 2oa*. We +an and do !a. that ,1 we don/t a+h,eve th,! 2oa* over an. rea!ona*e 0er,od e5+*-d,n2
43
an e5ten!,ve !0e+-*at,ve oom, we w,** +ea!e o0erat,on.
%em0!ter ',** 'an-1a+t-r,n2 $om0an.
&n o-r mo!t re+ent ann-a* *etter, & de!+r,ed @arr. Bott*e a! the Eman o1 the .earF. &1 th,! wa! an -nder!tatement.
La!t .ear @arr. d,d an e5traord,nar. Bo o1 +onvert,n2 -n0rod-+t,ve a!!et! ,nto +a!h wh,+h we then, o1 +o-r!e,
e2an to ,nve!t ,n -nderva*-ed !e+-r,t,e!. @arr. ha! +ont,n-ed th,! .ear to t-rn -nder4-t,*,<ed a!!et! ,nto +a!h,
-t ,n add,t,on, he ha! made the rema,n,n2 needed a!!et! 0rod-+t,ve. Th-! we have had the 1o**ow,n2
tran!1ormat,on ,n a*an+e !heet! d-r,n2 the *a!t n,neteen month!3
Novemer :0, 1991 I000D! om,ttedK
9ssets 5oo( :igure ;alued < 9d=usted
;aluation
Lia>ilities
$a!h H199 100= H199 Note! (a.a*e H1,2:0
A++t!. Re+.
InetK
H1,0?0 ;5= H;;? Other
L,a,*,t,e!
H1,0;;
&nventor. H?,20: 90= H2,522
(0d. E50. Et+. H;2 25= H21 Tota*
L,a,*,t,e!
H2,:1;
$-rrent A!!et! H5,?91 H:,59: Net Worth3
(er Boo"! H?,901
$a!h La*-e
L,1e ,n!., et+.
H?5 100= H?5 A! adB-!ted to
8-,+"*.
rea*,<a*e
va*-e!
H2,120
Net (*ant N
e8-,0ment
H1,:;: E!t. Net
A-+t,on La*-e
H;00
Tota* A!!et! H9,919 H?,?:; #hare
o-t!tand,n2
90,1?9. AdB.
La*-e 0er
#hare
H:5.25
44
Novemer :0, 1992 I000D! om,ttedK
9ssets 5oo( :igure ;alued < 9d=usted
;aluation
Lia>ilities
$a!h H90 100= H90 Note! 0a.a*e H0
'ar"eta*e
#e+-r,t,e!
H75; '"t. 12P:1P92 H;:? Other
*,a,*,t,e!
H:?9
A++t!. Re+.
InetK
H799 ;5= H979 Tota* *,a,*,t,e! H:?9
&nventor. H1,9:? 90= H9;1
$a!h va*-e *,1e
,n!.
H?1 100= H?1 Net Worth3
Re+overa*e
,n+ome ta5
H170 100= H170 (er oo"! H?,077
(0d. E50. Et+ H1? 25= H? A! adB-!ted to
8-,+"*.
rea*,<a*e
va*-e!
H:,125
Add3 0ro+eed!
1rom 0otent,a*
e5er+,!e o1
o0t,on to
@arr. Bott*e
H90
$-rrent A!!et! H:,?7: H2,799 H:,1;5
#hare!
O-t!tand,n2
90,1?9
',!+. &nve!t. H5 100= H5 Add3 !h!.
(otent,a**.
o-t!tand,n2
-nder o0t,on3
2,000
Tota* !h!.
92,1?9
Net 0*ant N
e8-,0ment
H9?5 E!t. net
a-+t,on va*-e
H700 AdB. La*-e 0er
#hare
H51.29
Tota* A!!et! H?,?2: H:,?71
45
Novemer :0, 199: I000D! om,ttedK
9ssets 5oo( :igure ;alued < 9d=usted
;aluation
Lia>ilities
$a!h H1?? 100= H1?? Note! 0a.a*e
I0a,d 7P:P9:K
H125
'ar"eta*e
#e+-r,t,e!
H1,772 '"t. 9P:0P9: H2,029 Other
*,a,*,t,e!
H:9?
A++t!. Re+.
InetK
H1,292 ;5= H1,07: Tota*
L,a,*,t,e!
H519
&nventor. H977 90= H5;9
(0d. E50. Et+ H12 25= H: Net Worth3
(er oo"! H?,5;2
$-rrent A!!et! H?,197 H:,;:5 A! adB-!ted to
8-,+"*.
rea*,<a*e
va*-e!
H?,02;
',!+. &nve!t H92 100= H92 #hare!
o-t!tand,n2
92,1?9
Net 0*ant N
e8-,0.
H;72 E!t. net
a-+t,on va*-e
H950 AdB. La*-e 0er
!hare
H9?.;1
Tota* a!!et! H5,101 H?,5?7
& have ,n+*-ded aove the +onver!,on 1a+tor! we have 0rev,o-!*. -!ed ,n va*-,n2 %em0!ter 1or B.(.L. 0-r0o!e!
to re1*e+t e!t,mated ,mmed,ate !a*e va*-e! o1 non4earn,n2 a!!et!.
A! +an e !een, @arr. ha! +onverted the a!!et! at a m-+h more 1avora*e a!,! than wa! ,m0*,ed . m.
va*-at,on!. Th,! *ar2e*. re1*e+t! @arr./! e50ert,!e and, 0erha0!, to a m,nor de2ree m. own +on!ervat,!m ,n
va*-at,on.
A! +an a*!o e !een, %em0!ter earned a ver. !at,!1a+tor. o0erat,n2 0ro1,t ,n the 1,r!t ha*1 Ia! we** a! a !-!tant,a*
-nrea*,<ed 2a,n ,n !e+-r,t,e!K and there ,! *,tt*e 8-e!t,on that the o0erat,n2 -!,ne!!, a! now +ond-+ted, ha! at
*ea!t moderate earn,n2 0ower on the va!t*. red-+ed a!!et! needed to +ond-+t ,t. Be+a-!e o1 a ver. ,m0ortant4
!ea!ona* 1a+tor and a*!o the 0re!en+e o1 a ta5 +arr. 1orward, however, the earn,n2 0ower ,! not near*. what
m,2ht e ,n1erred !,m0*. . a +om0ar,!on o1 the 11P:0P92 and 9P:0P9: a*an+e !heet!. (art*. e+a-!e o1 th,!
!ea!ona*,t., -t more ,m0ortant*., e+a-!e o1 0o!!,*e deve*o0ment! ,n %em0!ter e1ore 199: .earend, we have
*e1t o-r %em0!ter ho*d,n2! at the !ame H51.29 va*-at,on -!ed at .earend 1992 ,n o-r 1,2-re! 1or B.(.LD! 1,r!t
ha*1. @owever, & wo-*d e ver. !-r0r,!ed ,1 ,t doe! not wor" o-t h,2her than th,! 1,2-re at .earend.
One !,de*,2ht 1or the 1-ndamenta*,!t! ,n o-r 2ro-03 B.(.L. own! 71.7= o1 %em0!ter a+8-,red at a +o!t o1
H1,292,577.27. On >-ne :0, 199: %em0!ter had a !ma** !a1e de0o!,t o5 at the Omaha Nat,ona* Ban" +onta,n,n2
!e+-r,t,e! worth H2,02;,?15.25. O-r 71.7= !hare o1 H2,02;,?15.25 amo-nt! to H1,?5?,:7:.70. Th-!, ever.th,n2
aove 2ro-nd Iand 0art o1 ,t -nder2ro-ndK ,! 0ro1,t. '. !e+-r,t. ana*.!t 1r,end! ma. 1,nd th,! a rather 0r,m,t,ve
method o1 a++o-nt,n2, -t & m-!t +on1e!! that & 1,nd a ,t more !-!tan+e ,n th,! 1,n2er! and toe! method than ,n
an. 0ra.er1-* re*,an+e that !omeone w,** 0a. me :5 t,me! ne5t .ear/! earn,n2!.
46
Advan+e (a.ment! and Advan+e W,thdrawa*!
We a++e0t advan+e 0a.ment! 1rom 0artner! and 0ro!0e+t,ve 0artner! at 9= ,ntere!t 1rom date o1 re+e,0t -nt,* the
end o1 the .ear. Wh,*e there ,! no o*,2at,on to +onvert the 0a.ment to a 0artner!h,0 ,ntere!t at the end o1 the
.ear, th,! !ho-*d e the ,ntent at the t,me o1 0a.ment.
#,m,*ar*., we a**ow 0artner! to w,thdraw -0 to 20= o1 the,r 0artner!h,0 a++o-nt 0r,or to .earend and +har2e
them 9= 1rom date o1 w,thdrawa* -nt,* .earend when ,t ,! +har2ed a2a,n!t the,r +a0,ta* a++o-nt. A2a,n, ,t ,! not
,ntended that 0artner! -!e U# *,"e a an", -t that the. -!e the w,thdrawa* r,2ht 1or -nant,+,0ated need 1or
1-nd!.
The w,**,n2ne!! to oth orrow and *end at 9= ma. !eem 6-n4B-11ett4*,"e.F We *oo" at the w,thdrawa* r,2ht a!
a mean! o1 2,v,n2 !ome *,8-,d,t. 1or -ne50e+ted need! and, a! a 0ra+t,+a* matter, are rea!ona*. !-re ,t w,** e
1ar more than +overed . advan+e 0a.ment!.
Wh. then the w,**,n2ne!! to 0a. 9= 1or advan+e 0a.ment mone. when we +an orrow 1rom +ommer+,a* an"!
at !-!tant,a**. *ower rate!M For e5am0*e, ,n the 1,r!t ha*1 we ota,ned a !-!tant,a* !,54month an" *oan at ?=.
The an!wer ,! that we e50e+t on a *on24term a!,! to earn etter than 9= Ithe 2enera* 0artner/! a**o+at,on ,! <ero
-n*e!! we do a*tho-2h ,t ,! *ar2e*. a matter o1 +han+e whether we a+h,eve the 9= 1,2-re ,n an. !hort 0er,od.
'oreover, & +an ado0t a d,11erent att,t-de ,n the ,nve!tment o1 mone. that +an e e50e+ted to !oon e a 0art o1
o-r e8-,t. +a0,ta* than & +an on !hort4term orrowed mone.. The advan+e 0a.ment! have the added advanta2e to
-! o1 !0read,n2 the ,nve!tment o1 new mone. over the .ear, rather than hav,n2 ,t h,t -! a** at on+e ,n >an-ar.. On
the other hand, 9= ,! more than +an e ota,ned ,n !hort4term do**ar !e+-re ,nve!tment! . o-r 0artner!, !o &
+on!,der ,t m-t-a**. 0ro1,ta*e. On >-ne :0, 199: we had advan+e w,thdrawa*! o1 H21,;:2.00 and advan+e
0a.ment! o1 H592,?:7.11.
Ta5e!
There ,! !ome 0o!!,,*,t. that we ma. have 1a,r*. !-!tant,a* rea*,<ed 2a,n! th,! .ear. O1 +o-r!e, th,! ma. not
mater,a*,<e at a** and a+t-a**. doe! not have an.th,n2 to do w,th o-r ,nve!tment 0er1orman+e th,! .ear. & am an
o-t!0o"en advo+ate o1 0a.,n2 *ar2e amo-nt! o1 ,n+ome ta5e! 44 at *ow rate!. A tremendo-! n-mer o1 1-<<.,
+on1-!ed ,nve!tment de+,!,on! are rat,ona*,<ed thro-2h !o4+a**ed 6ta5 +on!,derat,on!.F
'. net worth ,! the mar"et va*-e o1 ho*d,n2! *e!! the ta5 0a.a*e -0on !a*e. The *,a,*,t. ,! B-!t a! rea* a! the
a!!et -n*e!! the va*-e o1 the a!!et de+*,ne! Io-+hK, the a!!et ,! 2,ven awa. Ino +ommentK, or & d,e w,th ,t. The
*atter +o-r!e o1 a+t,on wo-*d a00ear to at *ea!t order on a (.rrh,+ v,+tor..
&nve!tment de+,!,on! !ho-*d e made on the a!,! o1 the mo!t 0roa*e +om0o-nd,n2 o1 a1ter4ta5 net worth w,th
m,n,m-m r,!". An. ,!o*at,on o1 *ow4a!,! !e+-r,t,e! mere*. 1ree<e! a 0ort,on o1 net worth at a +om0o-nd,n2
1a+tor ,dent,+a* w,th the a!!et! ,!o*ated. Wh,*e th,! ma. wor" o-t e,ther we** or ad*. ,n ,nd,v,d-a* +a!e!, ,t ,! a
n-**,1,+at,on o1 ,nve!tment mana2ement. The 2ro-0 e50er,en+e ho*d,n2 var,o-! *ow a!,! !e+-r,t,e! w,**
-ndo-ted*. a00ro5,mate 2ro-0 e50er,en+e on !e+-r,t,e! a! a who*e, name*. +om0o-nd,n2 at the +om0o-nd,n2
rate o1 the %ow. We do not +on!,der th,! the o0t,m-m ,n a1ter4ta5 +om0o-nd,n2 rate!.
& have !a,d e1ore that ,1 earn,n2! 1rom the 0artner!h,0 +an 0otent,a**. amo-nt to a !,<a*e 0ort,on o1 .o-r tota*
ta5a*e ,n+ome, the !a1e th,n2 to do ,! to e!t,mate th,! .ear the !ame ta5 .o- ,n+-rred *a!t .ear. &1 .o- do th,!,
.o- +annot r-n ,nto 0ena*t,e!. &n an. event, ta5 *,a,*,t,e! 1or tho!e who entered the 0artner!h,0 on 1P1P9: w,** e
m,n,ma* e+a-!e o1 the term! o1 o-r 0artner!h,0 a2reement 1,r!t a**o+at,n2 +a0,ta* 2a,n! to tho!e hav,n2 an
,ntere!t ,n -nrea*,<ed a00re+,at,on.
47
A! ,n 0a!t .ear!, we w,** have a *etter o-t ao-t Novemer 1!t Ito 0artner! and tho!e who have ,nd,+ated an
,ntere!t to me . that t,me ,n e+om,n2 0artner!K w,th the amendment to the 0artner!h,0 a2reement, +omm,tment
*etter 1or 199?, e!t,mate o1 the 199: ta5 !,t-at,on, et+.
'. +*o!,n2 0*ea 1or 8-e!t,on! re2ard,n2 an.th,n2 not +*ear a*wa.! draw! a *an". 'a.e no one read! th,! 1ar.
An.wa., the o11er ,! !t,** o0en.
$ord,a**.,
Warren E. B-11ett
48
BUFFETT (ARTNER#@&(, LT%.
;10 A&EW&T (LAOA
OMAHA 31, NEBRASKA
Novemer 9, 199:
To '. (artner! 1or 199?3
En+*o!ed ,! the -!-a* a!!ortment o1 Than"!2,v,n2 read,n2 mater,a*3
I1K Two +o0,e! o1 an amended 0artner!h,0 a2reement 1or 199?. The one w,th the )enera* (rov,!,on!
atta+hed ,! to e "e0t . .o- Ie5a+t*. the !ame a! *a!t .earK and the other !,n2*e 0a2e a2reement ,! to e
!,2ned, notar,<ed and ret-rned to -!. (artner! ,n Omaha ma. +ome ,n and ota,n the notar,<at,on at o-r
o11,+e.
(2) A +o0. o1 that 0r,+e*e!! treat,!e, 6The )ro-nd R-*e!,F & wo-*d *,"e ever. 0artner to read th,! at *ea!t
on+e a .ear, and ,t ,! 2o,n2 to e a re2-*ar ,tem ,n m. Novemer 0a+"a2e. %on/t !,2n the 0artner!h,0
a2reement -n*e!! .o- 1-**. -nder!tand the +on+e0t! !et 1orth and are ,n a++ord w,th them 44 menta**.
and v,!+era**..
I:K Two +o0,e! o1 the +omm,tment *etter 1or 199?, one to e "e0t . .o- and one ret-rned to -!. Go- ma.
amend th,! +omm,tment *etter r,2ht -0 to m,dn,2ht, %e+emer :1!t, !o 2et ,t a+" to -! ear*., and ,1 ,t
need! to e +han2ed, B-!t *et -! "now . *etter or 0hone.
An. w,thdrawa*! w,** e 0a,d ,mmed,ate*. a1ter >an-ar. 1!t. Go- ma. w,thdraw an. amo-nt .o- de!,re 1rom
H100 -0 to .o-r ent,re e8-,t.. #,m,*ar*., add,t,on! +an e 1or an. amo-nt and !ho-*d rea+h -! . >an-ar. 10th.
&n the event .o- are d,!0o!,n2 o1 an.th,n2, th,! w,** 2,ve .o- a +han+e to have the tran!a+t,on ,n 199? ,1 that
a00ear! to e advanta2eo-! 1or ta5 rea!on!. &1 add,t,on! rea+h -! ,n Novemer, the. ta"e on the !tat-! o1
advan+e 0a.ment! and draw ,ntere!t at the rate o1 9= -nt,* .earend. Th,! ,! not tr-e o1 add,t,on! rea+h,n2 -! ,n
%e+emer.
$om0*ete ta5 ,n1ormat,on 1or .o-r 199: ret-rn w,** e ,n .o-r hand! . >an-ar. 25th. &1 .o- !ho-*d need an
e!t,mate o1 .o-r ta5 0o!,t,on e1ore that t,me, *et me "now and & w,** 2,ve .o- a ro-2h ,dea. We w,** a*!o !end
o-t a !hort *etter on ta5e! ,n *ate %e+emer.
At the end o1 O+toer, the overa** re!-*t 1rom the %ow 1or 199: wa! 0*-! 1;.;=. We have had a 2ood .ear ,n a**
three +ate2or,e!, 2enera*!, wor"4o-t! and +ontro*!. A !at,!1a+tor. !a*e on a 2o,n2 +on+ern a!,! o1 %em0!ter ',**
'an-1a+t-r,n2 o0erat,n2 a!!et! wa! made ao-t a month a2o. & w,** 2,ve the 1-** treatment to the %em0!ter !tor.
,n the ann-a* *etter, 0erha0! +*,ma5ed . !ome *.r,+a* -r!t !-+h a! EOde to @arr. Bott*e.F Wh,*e we a*wa.! had
a -,*t4,n 0ro1,t ,n %em0!ter e+a-!e o1 o-r ar2a,n 0-r+ha!e 0r,+e, @arr. a++o-nted 1or !evera* e5tra !erv,n2!
o1 de!!ert . h,! e5traord,nar. Bo. @arr., ,n+,denta**., ha! made an advan+e 0a.ment toward e+om,n2 a
*,m,ted 0artner ,n 199?44 we +on!,der th,! the e2,nn,n2, not the end.
@owever, 199: ha! not een a** %em0!ter. Wh,*e a 2reat dea* +an ha00en the *a!t two month! and there1ore
,nter,m re!-*t! !ho-*d not e ta"en too !er,o-!*., at the end o1 O+toer the overa** 2a,n 1or the 0artner!h,0 wa!
ao-t :2=. Ba!ed on the a**o+at,on emod,ed ,n o-r a2reement, th,! wor"! o-t to 0*-! 25 1P2= 1or the *,m,ted
0artner! e1ore month*. 0a.ment! to tho!e who ta"e them. O1 o-r a00ro5,mate H: m,**,on 2a,n, !ometh,n2 over
H2 m,**,on +ame 1rom mar"eta*e !e+-r,t,e! and a *,tt*e *e!! than H1 m,**,on 1rom %em0!ter o0erat,n2 a!!et!. The
+om,ned 2a,n 1rom o-r !,n2*e e!t 2enera* and e!t wor"4o-t !,t-at,on a00ro5,mated the 2a,n on the %em0!ter
o0erat,n2 a!!et!.
49
Go- !ho-*d e aware that ,1 o-r 1,na* re!-*t! re*at,ve to the %ow 1or 199: are a! 1avora*e a! on O+toer :1
!t
, &
w,** re2ard ,t a! an anorma* .ear. & do not +on!,der a 1:.2 0er+enta2e 0o,nt mar2,n to e ,n the +ard! on a *on2
term a!,!. A +on!,dera*. more moderate ann-a* ed2e over the %ow w,** e 8-,te !at,!1a+tor..
$ord,a**.
Warren E. B-11ett
(P#. La!t .ear we anno-n+ed there wo-*d e no 0r,<e! 1or the *a!t one! to 2et the mater,a* a+" to -!. Th,!
+ont,n-e! to e o-r 0o*,+.. #ave -! !ome *a!t m,n-te !+-rr.,n2 . 2ett,n2 .o-r a2reement and +omm,tment *etter
a+" 0ronto. ),ve B,** or me a +a** ,1 we +an e o1 an. he*0. Than"!S
50
BUFFETT (ARTNER#@&(, LT%.
;10 A&EW&T (LAOA
OMAHA 31, NEBRASKA
>an-ar. 1;, 199?
O-r (er1orman+e ,n 199:
199: wa! a 2ood .ear. &t wa! not a 2ood .ear e+a-!e we had an overa** 2a,n o1 H:,9:7,197 or :;.7= on o-r
e2,nn,n2 net a!!et!, 0*ea!ant a! that e50er,en+e ma. e to the 0ra2mat,!t! ,n o-r 2ro-0. Rather ,t wa! a 2ood
.ear e+a-!e o-r 0er1orman+e wa! !-!tant,a**. etter than that o1 o-r 1-ndamenta* .ard!t,+" 44the %ow4>one!
&nd-!tr,a* Avera2e Ihere,na1ter +a**ed the E%owFK. &1 we had een down 20= and the %ow had een down :0=,
th,! *etter wo-*d !t,** have e2-n E199: wa! a 2ood .ear.F Re2ard*e!! o1 whether we are 0*-! or m,n-! ,n a
0art,+-*ar .ear, ,1 we +an ma,nta,n a !at,!1a+tor. ed2e on the %ow over an e5tended 0er,od o1 t,me, o-r *on2
term re!-*t! w,** e !at,!1a+tor. 44 1,nan+,a**. a! we** a! 0h,*o!o0h,+a**..
To r,n2 the re+ord -0 to date, the 1o**ow,n2 !-mmar,<e! the .ear4.4.ear 0er1orman+e o1 the %ow, the
0er1orman+e o1 the (artner!h,0 e1ore a**o+at,on to the 2enera* 0artner, and the *,m,ted 0artner!/ re!-*t! 1or a**
1-** .ear! o1 B(L/! and 0rede+e!!or 0artner!h,0!/ a+t,v,t,e!3
Year Overall .esults :ro
Dow /)0
Partnership .esults
/10
Liited Partners!
.esults /?0
1957 4;.?= 10.?= 9.:=
195; :;.5= ?0.9= :2.2=
1959 20.0= 25.9= 20.9=
1990 49.2= 22.;= 1;.9=
1991 22.?= ?5.9= :5.9=
1992 47.9= 1:.9= 11.9=
199: 20.7= :;.7= :0.5=
I1K Ba!ed on .ear*. +han2e! ,n the va*-e o1 the %ow 0*-! d,v,dend! that wo-*d have een re+e,ved
thro-2h owner!h,0 o1 the %ow d-r,n2 that .ear.
I2K For 1957491 +on!,!t! o1 +om,ned re!-*t! o1 a** 0rede+e!!or *,m,ted 0artner!h,0! o0erat,n2
thro-2ho-t the ent,re .ear a1ter a** e50en!e! -t e1ore d,!tr,-t,on! to 0artner! or a**o+at,on! to the
2enera* 0artner.
I:K For 1957491 +om0-ted on the a!,! o1 the 0re+ed,n2 +o*-mn o1 0artner!h,0 re!-*t! a**ow,n2 1or
a**o+at,on to the 2enera* 0artner a!ed -0on the 0re!ent 0artner!h,0 a2reement.
One wa2 amon2 the *,m,ted 0artner! ha! !-22e!ted & add a 1o-rth +o*-mn !how,n2 the re!-*t! o1 the 2enera*
0artner 44*et/! B-!t !a. he, too, ha! an ed2e on the %ow.
The 1o**ow,n2 ta*e !how! the +-m-*at,ve or +om0o-nded re!-*t! a!ed on the 0re+ed,n2 ta*e3
Year Overall .esults :ro
Dow
Partnership .esults Liited Partners!
.esults
1957 4;.?= 10.?= 9.:=
1957 J 5; 29.9= 55.9= ??.5=
1957 J 59 52.:= 95.9= 7?.7=
51
1957 J 90 ?2.9= 1?0.9= 107.2=
1957 J 91 7?.9= 251.0= 1;1.9=
1957 J 92 91.9= 299.;= 215.1=
1957 J 9: 95.1= ?5?.5= :11.2=
Ann-a* $om0o-nded
Rate
10.0= 27.7= 22.:=
&t a00ear! that we have +om0*eted !even 1at .ear!. W,th a0o*o2,e! to >o!e0h we !ha** attem0t to ,2nore the
,*,+a* !+r,0t. I&/ve never 2one overoard 1or Noah/! ,dea! on d,ver!,1,+at,on e,ther.K
&n a more !er,o-! ve,n, & wo-*d *,"e to em0ha!,<e that, ,n m. B-d2ment7 o-r 17.7 mar2,n over the %ow !hown
aove ,! -natta,na*e over an. *on2 0er,od o1 t,me. A ten 0er+enta2e 0o,nt advanta2e wo-*d e a ver.
!at,!1a+tor. a++om0*,!hment and even a m-+h more mode!t ed2e wo-*d 0rod-+e ,m0re!!,ve 2a,n! a! w,** e
to-+hed -0on *ater. Th,! v,ew Iand ,t ha! to e 2-e!!wor" 44 ,n1ormed or otherw,!eK +arr,e! w,th ,t the +oro**ar.
that we m-!t e50e+t 0ro*on2ed 0er,od! o1 m-+h narrower mar2,n! over the %ow a! we** a! at *ea!t o++a!,ona*
.ear! when o-r re+ord w,** e ,n1er,or I0erha0! !-!tant,a**. !oK to the %ow.
'-+h o1 the aove !ermon ,! re1*e+ted ,n 6The )ro-nd R-*e!6 !ent to ever.one ,n Novemer, -t ,t +an !tand
re0et,t,on.
&nve!tment $om0an,e!
We re2-*ar*. +om0are o-r re!-*t! w,th the two *ar2e!t o0en4end ,nve!tment +om0an,e! Im-t-a* 1-nd!K that
1o**ow a 0o*,+. o1 e,n2, t.0,+a**., 95 4100= ,nve!ted ,n +ommon !to+"!, and the two *ar2e!t d,ver!,1,ed +*o!ed4
end ,nve!tment +om0an,e!. The!e 1o-r +om0an,e!, 'a!!a+h-!ett! &nve!tor! Tr-!t, &nve!tor! #to+" F-nd, Tr,4
$ont,nenta* $or0. and Lehman $or0. mana2e ao-t H? ,**,on and are 0roa*. t.0,+a* o1 mo!t o1 the H25
,**,on ,nve!tment +om0an. ,nd-!tr.. '. o0,n,on ,! that the,r re!-*t! ro-2h*. 0ara**e* tho!e o1 the va!t maBor,t.
or other ,nve!tment adv,!or. or2an,<at,on! wh,+h hand*e, ,n a22re2ate, va!t*. 2reater !-m!.
The 0-r0o!e or th,! ta-*at,on, wh,+h ,! !hown e*ow, ,! to ,**-!trate that the %ow ,! no 0-!hover a! an ,nde5 or
,nve!tment a+h,evement. The adv,!or. ta*ent mana2,n2 B-!t the 1o-r +om0an,e! !hown +ommand!/ ann-a* 1ee!
o1 over H7 m,**,on, and th,! re0re!ent! a ver. !ma** 1ra+t,on o1 the ,nd-!tr.. The 0-*,+ att,n2 avera2e o1 th,!
h,2h*.40a,d ta*ent ,nd,+ate! the. a+h,eved re!-*t! !*,2ht*. *e!! 1avora*e than the %ow.
Both o-r 0ort1o*,o and method o1 o0erat,on d,11er !-!tant,a**. 1rom the ,nve!tment +om0an,e! ,n the ta*e.
@owever, mo!t 0artner!, a! an a*ternat,ve to the,r ,ntere!t ,n the (artner!h,0 wo-*d 0roa*. have the,r 1-nd!
,nve!ted ,n med,a 0rod-+,n2 re!-*t! +om0ara*e w,th ,nve!tment +om0an,e!, and &, there1ore, 1ee* the. o11er a
mean,n21-* !tandard o1 0er1orman+e.
YE9.LY .E'$L&'
Year #ass. Inv.
&rust /)0
Investors
'toc( /)0
Lehan /10 &ri-"ont.
/10
Dow Liited
Partners
1957 411.?= 412.?= 411.?= 42.?= 4;.?= 9.:=
195; ?2.7= ?7.5= ?0.;= ::.2= :;.5= :2.2=
1959 9.0= 10.:= ;.1= ;.?= 20.0= 20.9=
1990 41.0= 40.9= 2.5= 2.;= 49.2= 1;.9=
1991 25.9= 2?.9= 2:.9= 22.5= 22.?= :5.9=
1992 49.;= 41:.?= 41?.?= 410.0= 47.9= 11.9=
199: 20.0= 19.5= 2:.;= 19.5= 20.7= :0.5=
52
I1K $om0-ted 1rom +han2e! ,n a!!et va*-e 0*-! an. d,!tr,-t,on! to ho*der! o1 re+ord d-r,n2 .ear.
I2K From 199: 'ood./! Ban" N F,nan+e 'an-a* 1or 19574927 E!t,mated 1or 199:.
"O#PO$%DED
Year #ass. Inv.
&rust
Investors
'toc(
Lehan &ri-"ont. Dow Liited
Partners
1957 411.?= 412.?= 411.?= 42.?= 4;.?= 9.:=
1957 J 5; 29.?= 29.2= 2?.7= :0.0= 29.9= ??.5=
1957 J 59 :7.;= ?2.5= :?.;= ?0.9= 52.:= 7?.7=
1957 J 90 :9.?= ?1.9= :;.2= ??.;= ?2.9= 107.2=
1957 J 91 71.:= 79.9= 70.;= 77.?= 7?.9= 1;1.9=
1957 J 92 5?.5= 5:.2= ?9.2= 59.7= 91.9= 215.1=
1957 J 9: ;5.?= 7;.5= ;1.0= 90.;= 95.1= :11.2=
Ann-a*
$om0o-nded
Rate
9.2= ;.9= ;.;= 9.7= 10.0= 22.:=
The %ow, o1 +o-r!e, ,! an -nmana2ed ,nde5, and ,t ma. !eem !tran2e to the reader to +ontem0*ate the h,2h
0r,e!t! o1 Wa** #treet !tr,v,n2 va,n*. to !-r0a!! or even e8-a* ,t. @owever, th,! ,! demon!tra*. the +a!e.
'oreover, !-+h a 1a,*-re +annot e rat,ona*,<ed . the a!!-m0t,on that the ,nve!tment +om0an,e! et al are
hand*,n2 them!e*ve! ,n a more +on!ervat,ve manner than the %ow. A! the ta*e aove ,nd,+ate!, and a! more
e5ten!,ve !t-d,e! ear o-t, the ehav,or o1 +ommon !to+" 0ort1o*,o mana2ed . th,! 2ro-0, on avera2e, have
de+*,ned ,n +on+ert w,th the %ow. B. !-+h a te!t o1 ehav,or ,n de+*,n,n2 mar"et!, o-r own method! o1
o0erat,on have 0roven to e +on!,dera*. more +on!ervat,ve than the +ommon !to+" +om0onent o1 the
,nve!tment +om0an. or ,nve!tment adv,!or 2ro-0. Wh,*e th,! ha! een tr-e ,n the 0a!t, there ov,o-!*. +an e no
2-arantee! ao-t the 1-t-re.
The aove ma. !eem *,"e rather !tron2 med,+,ne, -t ,t ,! o11ered a! a 1a+t-a* 0re!entat,on and ,n no wa. a!
+r,t,+,!m. W,th,n the,r ,n!t,t-t,ona* 1ramewor" and hand*,n2 the man. ,**,on! o1 do**ar! ,nvo*ved, the re!-*t!
a+h,eved are the on*. one! atta,na*e. To ehave -n+onvent,ona**. w,th,n th,! 1ramewor" ,! e5treme*. d,11,+-*t.
There1ore, the +o**e+t,ve re+ord o1 !-+h ,nve!tment med,a ,! ne+e!!ar,*. t,ed to the re+ord o1 +or0orate Amer,+a.
The,r mer,t!, e5+e0t ,n the -n-!-a* +a!e, do not *,e ,n !-0er,or re!-*t! or 2reater re!,!tan+e to de+*,ne ,n va*-e.
Rather, & 1ee* the. earn the,r "ee0 . the ea!e o1 hand*,n2, the 1reedom 1rom de+,!,on ma",n2 and the a-tomat,+
d,ver!,1,+at,on the. 0rov,de, 0*-!, 0erha0! mo!t ,m0ortant, the ,n!-*at,on a11orded 1rom tem0tat,on to 0ra+t,+e
0atent*. ,n1er,or te+hn,8-e! wh,+h !eem to ent,+e !o man. wor*d4e ,nve!tor!.
The >o.! o1 $om0o-nd,n2
Now to the 0-*!e48-,+"en,n2 0ort,on o1 o-r e!!a.. La!t .ear, ,n order to dr,ve home the 0o,nt on +om0o-nd,n2, &
too" a 0ot !hot at R-een &!ae**a and her 1,nan+,a* adv,!or!. Go- w,** rememer the. were e-+hred ,nto !-+h an
ov,o-!*. *ow4+om0o-nd !,t-at,on a! the d,!+over. o1 a new hem,!0here.
#,n+e the who*e !-Be+t o1 +om0o-nd,n2 ha! !-+h a +ra!! r,n2 to ,t, & w,** attem0t to ,ntrod-+e a *,tt*e +*a!! ,nto
th,! d,!+-!!,on . t-rn,n2 to the art wor*d. Fran+,! & o1 Fran+e 0a,d ?,000 e+-! ,n 15?0 1or Leonardo da L,n+,D!
'ona L,!a. On the o11 +han+e that a 1ew o1 .o- have not "e0t tra+" o1 the 1*-+t-at,on! o1 the e+- ?,000
+onverted o-t to ao-t H20,000.
&1 Fran+,! had "e0t h,! 1eet on the 2ro-nd and he Iand h,! tr-!tee!K had een a*e to 1,nd a 9= a1ter4ta5
53
,nve!tment, the e!tate now wo-*d e worth !ometh,n2 over H1,000,000,000,000,000.00. That/! H1 8-adr,**,on or
over :,000 t,me! the 0re!ent nat,ona* det, a** 1rom 9=. & tr-!t th,! w,** end a** d,!+-!!,on ,n o-r ho-!eho*d
ao-t an. 0-r+ha!e or 0a,nt,n2! 8-a*,1.,n2 a! an ,nve!tment.
@owever, a! & 0o,nted o-t *a!t .ear, there are other mora*! to e drawn here. One ,! the w,!dom o1 *,v,n2 a *on2
t,me. The other ,m0re!!,ve 1a+tor ,! the !w,n2 0rod-+ed . re*at,ve*. !ma** +han2e! ,n the rate o1 +om0o-nd.
Be*ow are !hown the 2a,n! 1rom H100,000 +om0o-nded at var,o-! rate!3
@7 A7 )17 )+7
10 Gear! H?;,02? H115,;92 H210,5;? H:?1,1?:
20 Gear! H119,111 H:99,09? H;9?,927 H1,;?9,090
:0 Gear! H22?,::7 H909,290 H2,;95,970 H;,?;?,9?0
&t ,! ov,o-! that a var,at,on o1 mere*. a 1ew 0er+enta2e 0o,nt! ha! an enormo-! e11e+t on the !-++e!! o1 a
+om0o-nd,n2 I,nve!tmentK 0ro2ram. &t ,! a*!o ov,o-! that th,! e11e+t m-!hroom! a! the 0er,od *en2then!. &1,
over a mean,n21-* 0er,od o1 t,me, B-11ett (artner!h,0 +an a+h,eve an ed2e o1 even a mode!t n-mer o1
0er+enta2e 0o,nt! over the maBor ,nve!tment med,a, ,t! 1-n+t,on w,** e 1-*1,**ed.
#ome o1 .o- ma. e down+a!t e+a-!e & have not ,n+*-ded ,n the aove ta*e the rate o1 22.:= ment,oned on
0a2e :. Th,! rate, o1 +o-r!e, ,! e1ore ,n+ome ta5e! wh,+h are 0a,d d,re+t*. . .o- 44not the (artner!h,0. Even
e5+*-d,n2 th,! 1a+tor, !-+h a +a*+-*at,on wo-*d on*. 0rove the a!-rd,t. o1 the ,dea o1 +om0o-nd,n2 at ver. h,2h
rate! 44 even w,th ,n,t,a**. mode!t !-m!. '. o0,n,on ,! that the %ow ,! 8-,te -n*,"e*. to +om0o-nd 1or an.
,m0ortant *en2th o1 t,me at the rate ,t ha! d-r,n2 the 0a!t !even .ear! and, a! ment,oned ear*,er, & e*,eve o-r
mar2,n over the %ow +annot e ma,nta,ned at ,t! *eve* to date. The 0rod-+t o1 the!e a!!-m0t,on! wo-*d e a
mater,a**. *ower avera2e rate o1 +om0o-nd 1or B(L ,n the 1-t-re than the rate a+h,eved to date. &nBe+t,n2 a
m,n-! :0= .ear Iwh,+h ,! 2o,n2 to ha00en 1rom t,me to t,meK ,nto o-r ta-*at,on o1 a+t-a* re!-*t! to date, w,th,
!a., a +orre!0ond,n2 m,n-! ?0= 1or the %ow r,n2! oth the 1,2-re! on the %ow and B(L more ,n *,ne w,th
*on2er ran2e 0o!!,,*,t,e!. A! the +om0o-nd,n2 ta*e aove !-22e!t!, !-+h a *owered rate +an !t,** 0rov,de h,2h*.
!at,!1a+tor. *on2 term ,nve!tment re!-*t!.
O-r 'ethod o1 O0erat,on
At th,! 0o,nt & a*wa.! deve*o0 *,terar. !+h,<o0hren,a. On the one hand, & "now that we have ,n the a-d,en+e a
n-mer o1 0artner! to whom deta,*! o1 o-r -!,ne!! are ,ntere!t,n2. We a*!o have a n-mer to whom th,! who*e
th,n2 ,! )ree" and who -ndo-ted*. w,!h & wo-*d 8-,t wr,t,n2 and 2et a+" to wor".
To 0*a+ate oth +am0!, & am B-!t 2o,n2 to !"et+h r,e1*. o-r three +ate2or,e! at th,! 0o,nt and tho!e who are
,ntere!ted ,n 2ett,n2 the,r do+torate +an re1er to the a00end,5 1or e5tended treatment o1 e5am0*e!.
O-r three ,nve!tment +ate2or,e! are not d,11erent,ated . the,r e50e+ted 0ro1,ta,*,t. over an e5tended 0er,od o1
t,me. We are ho0e1-* that the. w,** ea+h, over a ten or 1,1teen .ear 0er,od, 0rod-+e !ometh,n2 *,"e the ten
0er+enta2e 0o,nt mar2,n over the %ow that ,! o-r 2oa*. @owever, ,n a 2,ven .ear the. w,** have v,o*ent*.
d,11erent ehav,or +hara+ter,!t,+!, de0end,n2 0r,mar,*. on the t.0e o1 .ear ,t t-rn! o-t to e 1or the !to+" mar"et
2enera**.. Br,e1*. th,! ,! how the. !ha0e -03
E)enera*!F 4 A +ate2or. o1 2enera**. -nderva*-ed !to+"!, determ,ned 0r,mar,*. . 8-ant,tat,ve
!tandard!, -t w,th +on!,dera*e attent,on a*!o 0a,d to the 8-a*,tat,ve 1a+tor. There ,! o1ten *,tt*e or
noth,n2 to ,nd,+ate ,mmed,ate mar"et ,m0rovement. The ,!!-e! *a+" 2*amo-r or mar"et !0on!or!h,0.
The,r ma,n 8-a*,1,+at,on ,! a ar2a,n 0r,+e7 that ,!, an overa** va*-at,on on the enter0r,!e !-!tant,a**.
e*ow what +are1-* ana*.!,! ,nd,+ate! ,t! va*-e to a 0r,vate owner to e. A2a,n *et me em0ha!,<e that
54
wh,*e the 8-ant,tat,ve +ome! 1,r!t and ,! e!!ent,a*, the 8-a*,tat,ve ,! ,m0ortant. We *,"e 2ood
mana2ement 4 we *,"e a de+ent ,nd-!tr. 4 we *,"e a +erta,n amo-nt o1 E1ermentF ,n a 0rev,o-!*. dormant
mana2ement or !to+"ho*der 2ro-0. B-t we demand va*-e. The 2enera* 2ro-0 ehave! ver. m-+h ,n
!.m0ath. w,th the %ow and w,** t-rn ,n a ,2 m,n-! re!-*t d-r,n2 a .ear o1 !-!tant,a* de+*,ne . the
%ow. $ontrar.w,!e, ,t !ho-*d e the !tar 0er1ormer ,n a !tron2*. advan+,n2 mar"et. Over the .ear! we
e50e+t ,t, o1 +o-r!e, to a+h,eve a !at,!1a+tor. mar2,n over the %ow.
EWor"o-t!F 4 The!e are the !e+-r,t,e! w,th a t,meta*e. The. ar,!e 1rom +or0orate a+t,v,t. 4 !e**4o-t!,
mer2er!, reor2an,<at,on!, !0,n4o11!, et+. &n th,! +ate2or. we are not ta*",n2 ao-t r-mor! or 6,n!,de
,n1ormat,on6 0erta,n,n2 to !-+h deve*o0ment!, -t to 0-*,+*. anno-n+ed a+t,v,t,e! o1 th,! !ort. We wa,t
-nt,* we +an read ,t ,n the 0a0er. The r,!" 0erta,n! not 0r,mar,*. to 2enera* mar"et ehav,or Ia*tho-2h
that ,! !omet,me! t,ed ,n to a de2reeK, -t ,n!tead to !ometh,n2 -0!ett,n2 the a00*e+art !o that the
e50e+ted deve*o0ment doe! not mater,a*,<e. #-+h ",**Bo.! +o-*d ,n+*-de ant,4tr-!t or other ne2at,ve
2overnment a+t,on, !to+"ho*der d,!a00rova*, w,thho*d,n2 o1 ta5 r-*,n2!, et+. The 2ro!! 0ro1,t! ,n man.
wor"o-t! a00ear 8-,te !ma**. A 1r,end re1er! to th,! a! 2ett,n2 the *a!t n,+"e* a1ter the other 1e**ow ha!
made the 1,r!t n,net.41,ve +ent!. @owever, the 0red,+ta,*,t. +o-0*ed w,th a !hort ho*d,n2 0er,od
0rod-+e! 8-,te de+ent ann-a* rate! o1 ret-rn. Th,! +ate2or. 0rod-+e! more !tead. a!o*-te 0ro1,t! 1rom
.ear to .ear than 2enera*! do. &n .ear! o1 mar"et de+*,ne, ,t 0,*e! -0 a ,2 ed2e 1or -!7 d-r,n2 -**
mar"et!, ,t ,! a dra2 on 0er1orman+e. On a *on2 term a!,!, & e50e+t ,t to a+h,eve the !ame !ort o1 mar2,n
over the %ow atta,ned . 2enera*!.
E$ontro*!F 4 The!e are rar,t,e!, -t when the. o++-r the. are *,"e*. to e o1 !,2n,1,+ant !,<e. Un*e!! we
!tart o11 w,th the 0-r+ha!e o1 a !,<a*e *o+" or !to+", +ontro*! deve*o0 1rom the 2enera* +ate2or.. The.
re!-*t 1rom !,t-at,on! where a +hea0 !e+-r,t. doe! noth,n2 0r,+e4w,!e 1or !-+h an e5tended 0er,od o1
t,me that we are a*e to -. a !,2n,1,+ant 0er+enta2e o1 the +om0an./! !to+". At that 0o,nt we are
0roa*. ,n a 0o!,t,on to a!!-me !ome de2ree o1, or 0erha0! +om0*ete, +ontro* o1 the +om0an./!
a+t,v,t,e!7 whether we e+ome a+t,ve or rema,n re*at,ve*. 0a!!,ve at th,! 0o,nt de0end! -0on o-r
a!!e!!ment o1 the +om0an.D! 1-t-re and the mana2ement/! +a0a,*,t,e!. The 2enera* we have een
-.,n2 the mo!t a22re!!,ve*. ,n re+ent month! 0o!!e!!e! e5+e**ent mana2ement 1o**ow,n2 0o*,+,e! that
a00ear to ma"e ver. 2ood !en!e to -!. &1 o-r +ont,n-ed -.,n2 0-t! -! ,n a +ontro**,n2 0o!,t,on at !ome
0o,nt ,n the 1-t-re, we w,** 0roa*. rema,n ver. 0a!!,ve re2ard,n2 the o0erat,on or th,! -!,ne!!.
We do not want to 2et a+t,ve mere*. 1or the !a"e o1 e,n2 a+t,ve. Ever.th,n2 e*!e e,n2 e8-a* & wo-*d
m-+h rather *et other! do the wor". @owever, when an a+t,ve ro*e ,! ne+e!!ar. to o0t,m,<e the
em0*o.ment o1 +a0,ta* .o- +an e !-re we w,** not e !tand,n2 ,n the w,n2!.
A+t,ve or 0a!!,ve, ,n a +ontro* !,t-at,on there !ho-*d e a -,*t4,n 0ro1,t. The !,ne 8-a non o1 th,!
o0erat,on ,! an attra+t,ve 0-r+ha!e 0r,+e. On+e +ontro* ,! a+h,eved, the va*-e o1 o-r ,nve!tment ,!
determ,ned . the va*-e o1 the enter0r,!e, not the o1tent,me! ,rrat,ona*,t,e! o1 the mar"et0*a+e.
O-r w,**,n2ne!! and 1,nan+,a* a,*,t. to a!!-me a +ontro**,n2 0o!,t,on 2,ve! -! two4wa. !tret+h on man.
0-r+ha!e! ,n o-r 2ro-0 o1 2enera*!. &1 the mar"et +han2e! ,t! o0,n,on 1or the etter, the !e+-r,t. w,**
advan+e ,n 0r,+e. &1 ,t doe!n/t, we w,** +ont,n-e to a+8-,re !to+" -nt,* we +an *oo" to the -!,ne!! ,t!e*1
rather than the mar"et 1or v,nd,+at,on o1 o-r B-d2ment.
&nve!tment re!-*t! ,n the +ontro* +ate2or. have to e mea!-red on the a!,! o1 at *ea!t !evera* .ear!.
(ro0er -.,n2 ta"e! t,me. &1 needed, !tren2then,n2 mana2ement, re4d,re+t,n2 the -t,*,<at,on o1 +a0,ta*,
0erha0! e11e+t,n2 a !at,!1a+tor. !a*e or mer2er, et+., are a*!o a** 1a+tor! that ma"e th,! a -!,ne!! to e
mea!-red ,n .ear! rather than month!. For th,! rea!on, ,n +ontro*!, we are *oo",n2 1or w,de mar2,n! o1
0ro1,t4,1 ,t *oo"! at a** +*o!e, we 0a!!.
55
$ontro*! ,n the -.,n2 !ta2e move *ar2e*. ,n !.m0ath. w,th the %ow. &n the *ater !ta2e! the,r ehav,or
,! 2eared more to that o1 wor"o-t!.
A! & have ment,oned ,n the 0a!t, the d,v,!,on o1 o-r 0ort1o*,o amon2 the three +ate2or,e! ,! *ar2e*. determ,ned
. the a++,dent or ava,*a,*,t.. There1ore, ,n a m,n-! .ear 1or the %ow, whether we are 0r,mar,*. ,n 2enera*! or
wor"o-t! ,! *ar2e*. a matter o1 *-+", -t ,t w,** have a 2reat dea* to do w,th o-r 0er1orman+e re*at,ve to the %ow.
Th,! ,! one or man. rea!on! wh. a !,n2*e .ear/! 0er1orman+e ,! o1 m,nor ,m0ortan+e and, 2ood or ad, !ho-*d
never e ta"en too !er,o-!*..
&1 there ,! an. trend a! o-r a!!et! 2row, & wo-*d e50e+t ,t to e toward +ontro*! wh,+h hereto1ore have een o-r
!ma**e!t +ate2or.. & ma. e wron2 ,n th,! e50e+tat,on 4 a 2reat dea* de0end!, o1 +o-r!e, on the 1-t-re ehav,or o1
the mar"et on wh,+h .o-r 2-e!! ,! a! 2ood a! m,ne I& have noneK. At th,! wr,t,n2, we have a maBor,t. o1 o-r
+a0,ta* ,n 2enera*!, wor"o-t! ran" !e+ond, and +ontro*! are th,rd.
',!+e**aneo-!
We are !tart,n2 o11 the .ear w,th net a!!et! o1 H17,?5?,900. O-r ra0,d ,n+rea!e ,n a!!et! a*wa.! ra,!e! the
8-e!t,on o1 whether th,! w,** re!-*t ,n a d,*-t,on o1 1-t-re 0er1orman+e. To date, there ,! more o1 a 0o!,t,ve than
,nver!e +orre*at,on etween !,<e o1 the (artner!h,0 and ,t! mar2,n over the %ow. Th,! !ho-*d not e ta"en
!er,o-!*. however. Lar2er !-m! ma. e an advanta2e at !ome t,me! and a d,!advanta2e at other!. '. o0,n,on ,!
that o-r 0re!ent 0ort1o*,o +o-*d not e ,m0roved ,1 o-r a!!et! were H1 m,**,on or H5 m,**,on. O-r ,dea ,nventor.
ha! a*wa.! !eemed to e 10= ahead o1 o-r an" a++o-nt. &1 that !ho-*d +han2e, .o- +an +o-nt on hear,n2 1rom
me.
#-!,e and & have an ,nve!tment o1 H2,:92,900 ,n the (artner!h,0. For the 1,r!t t,me & had to w,thdraw 1-nd! ,n
add,t,on to m. month*. 0a.ment!, -t ,t wa! a +ho,+e o1 th,! or d,!a00o,nt,n2 the &nterna* Reven-e #erv,+e.
#-!,e and & have a 1ew non4mar"eta*e I*e!! than :00 ho*der!K !e+-r,t,e! o1 nom,na* !,<e *e1t over 1rom ear*,er
.ear! wh,+h ,n a22re2ate are worth 0erha0! 1= o1 o-r 0artner!h,0 ,ntere!t. &n add,t,on we have one non4
mar"eta*e ho*d,n2 o1 more mater,a* !,<e o1 a *o+a* +om0an. 0-r+ha!ed ,n 1990 wh,+h we e50e+t to ho*d
,nde1,n,te*.. A!,de 1rom th,! a** o-r e22! are ,n the B(L a!"et and the. w,** +ont,n-e to e. & +an/t 0rom,!e
re!-*t! -t & +an 0rom,!e a +ommon de!t,n.. &n add,t,on, that end*e!! !tream o1 re*at,ve! o1 m,ne +on!,!t,n2 o1
m. three +h,*dren, mother, 1ather, two !,!ter!, two rother!4,n4*aw, 1ather4,n4*aw, 1o-r a-nt! 1o-r +o-!,n! and
1,ve n,e+e! and ne0hew!, have ,ntere!t! ,n B(L d,re+t*. or ,nd,re+t*. tota*,n2 H1,2?7,190.
B,** #+ott ,! a*!o ,n w,th oth 1eet, hav,n2 an ,ntere!t a*on2 w,th h,! w,1e or H2:7,?00, the *ar2e maBor,t. or the,r
net worth. B,** ha! done an e5+e**ent Bo and on !evera* or o-r more ,ntere!t,n2 !,t-at,on! 2o,n2 ,nto 199?, he
ha! done the maBor,t. or the +onta+t wor". & have a*!o !hoved o11 on h,m a! m-+h a! 0o!!,*e o1 the
adm,n,!trat,ve wor" !o ,1 .o- need an.th,n2 done or have an. 8-e!t,on!, don/t he!,tate to a!" 1or B,** ,1 &/m not
aro-nd.
Beth and %onna have "e0t an ,n+rea!,n2 wor" *oad 1*ow,n2 ,n an e5+e**ent manner. %-r,n2 %e+emer and
>an-ar., & am !-re the. w,!h the. had 1o-nd em0*o.ment e*!ewhere, -t the. a*wa.! mana2e to "ee0 a
mo-nta,n o1 wor" !h,04!ha0e.
(eat, 'arw,+", ',t+he** ha! done the,r -!-a* e5+e**ent Bo o1 meet,n2 a to-2h t,meta*e. We have ,n!tr-+ted
them to +ond-+t two !-r0r,!e +he+"! a .ear Irather than one a! ,n 0a!t .ear!K on o-r !e+-r,t,e!, +a!h, et+., ,n the
1-t-re. The!e are re*at,ve*. ,ne50en!,ve, and & th,n" ma"e a 2ood dea* o1 !en!e ,n an. 1,nan+,a* or2an,<at,on.
W,th,n the ne5t wee" .o- w,** re+e,ve3
I1K A ta5 *etter 2,v,n2 .o- a** B(L ,n1ormat,on needed 1or .o-r 199: 1edera* ,n+ome ta5 ret-rn. Th,! *etter
56
,! the on*. ,tem that +o-nt! 1or ta5 0-r0o!e!.
I2K An a-d,t 1rom (eat, 'arw,+", ',t+he** N $o. 1or 199:, !ett,n2 1orth the o0erat,on! and 1,nan+,a*
0o!,t,on o1 B(L a! we** a! .o-r own +a0,ta* a++o-nt.
I:K A *etter !,2ned . me !ett,n2 1orth the !tat-! o1 .o-r B(L ,ntere!t on 1P1P9?. Th,! ,! ,dent,+a* w,th the
1,2-re deve*o0ed ,n the a-d,t.
I?K #+hed-*e EAF to the 0artner!h,0 a2reement *,!t,n2 a** 0artner!.
Let me "now ,1 an.th,n2 need! +*ar,1.,n2. A! we 2row, there ,! more +han+e o1 m,!!,n2 *etter!, a name !",00ed
over, a 1,2-re tran!0o!,t,on, et+., !o !0ea" -0 ,1 ,t a00ear! we m,2ht have erred. O-r ne5t *etter w,** e ao-t >-*.
15th !-mmar,<,n2 the 1,r!t ha*1.
$ord,a**.,
Warren E. B-11ett
57
A((EN%&T
TETA# NAT&ONAL (ETROLEU'
Th,! !,t-at,on wa! a r-n4o14the4m,** wor"o-t ar,!,n2 1rom the n-mer one !o-r+e o1 wor"o-t! ,n re+ent .ear! 44
the !e**o-t! o1 o,* and 2a! 0rod-+,n2 +om0an,e!.
TN( wa! a re*at,ve*. !ma** 0rod-+er w,th wh,+h & had een va2-e*. 1am,*,ar 1or .ear!.
Ear*. ,n 1992 & heard r-mor! re2ard,n2 a !e**o-t to Un,on O,* o1 $a*,1orn,a. & never a+t on !-+h ,n1ormat,on, -t
,n th,! +a!e ,t wa! +orre+t and !-!tant,a**. more mone. wo-*d have een made ,1 we had 2one ,n at the r-mor
!ta2e rather than the anno-n+ed !ta2e. @owever, that/! !omeod. e*!e/! -!,ne!!, not m,ne.
&n ear*. A0r,*, 1992, the 2enera* term! o1 the dea* were anno-n+ed. TN( had three +*a!!e! o1 !e+-r,t,e!
o-t!tand,n23
I1K 9 1P2= deent-re! +a**a*e at 10? 1P? wh,+h wo-*d ear ,ntere!t -nt,* the !a*e tran!0,red and at that t,me
wo-*d e +a**ed. There were H9.5 m,**,on o-t!tand,n2 o1 wh,+h we 0-r+ha!ed H29?,000 0r,n+,0a*
amo-nt e1ore the !a*e +*o!ed.
I2K Ao-t :.7 m,**,on !hare! o1 +ommon !to+" o1 wh,+h the o11,+er! and d,re+tor! owned ao-t ?0=. The
0ro5. !tatement e!t,mated the 0ro+eed! 1rom the *,8-,dat,on wo-*d 0rod-+e H7.?2 0er !hare. We
0-r+ha!ed 9?,0:5 !hare! d-r,n2 the !,5 month! or !o etween anno-n+ement and +*o!,n2.
I:K 950,000 warrant! to 0-r+ha!e +ommon !to+" at H:.50 0er !hare. U!,n2 the 0ro5. !tatement e!t,mate o1
H7.?2 1or the wor"o-t on the +ommon re!-*ted ,n H:.92 a! a wor"o-t on the warrant!. We were a*e to
-. ;:,200 warrant! or ao-t 1:= o1 the ent,re ,!!-e ,n !,5 month!.
The r,!" o1 !to+"ho*der d,!a00rova* wa! n,*. The dea* wa! ne2ot,ated . the +ontro**,n2 !to+"ho*der!, and the
0r,+e wa! a 2ood one. An. tran!a+t,on !-+h a! th,! ,! !-Be+t to t,t*e !ear+he!, *e2a* o0,n,on!, et+., -t th,! r,!"
+o-*d a*!o e a00ra,!ed at v,rt-a**. n,*. There were no ant,4tr-!t 0ro*em!. Th,! a!en+e o1 *e2a* or ant,4tr-!t
0ro*em! ,! not a*wa.! the +a!e, . an. mean!.
The on*. 1*. ,n the o,ntment wa! the ota,n,n2 o1 the ne+e!!ar. ta5 r-*,n2. Un,on O,* wa! -!,n2 a !tandard AB$
0rod-+t,on 0a.ment method o1 1,nan+,n2. The Un,ver!,t. o1 #o-thern $a*,1orn,a wa! the 0rod-+t,on 0a.ment
ho*der and there wa! !ome de*a. e+a-!e o1 the,r e*eemo!.nar. !tat-!.
Th,! 0o!ed a new 0ro*em 1or the &nterna* Reven-e #erv,+e, -t we -nder!tood U#$ wa! w,**,n2 to wa,ve th,!
!tat-! wh,+h !t,** *e1t them w,th a !at,!1a+tor. 0ro1,t a1ter the. orrowed a** the mone. 1rom a an". Wh,*e
2ett,n2 th,! ,roned o-t +reated de*a., ,t d,d not threaten the dea*.
When we ta*"ed w,th the +om0an. on A0r,* 2:rd and 2?th, the,r e!t,mate wa! that the +*o!,n2 wo-*d ta"e 0*a+e
,n A-2-!t or #e0temer. The 0ro5. mater,a* wa! ma,*ed 'a. 9th and !tated the !a*e 6w,** e +on!-mmated
d-r,n2 the !-mmer o1 1992 and that w,th,n a 1ew month! therea1ter the 2reater 0art o1 the 0ro+eed! w,** e
d,!tr,-ted to !to+"ho*der! ,n *,8-,dat,on.F A! ment,oned ear*,er, the e!t,mate wa! H7.?2 0er !hare.
B,** #+ott attended the !to+"ho*der! meet,n2 ,n @o-!ton on 'a. 29th where ,t wa! !tated the. !t,** e50e+ted to
+*o!e on #e0temer 1!t.
The 1o**ow,n2 are e5+er0t! 1rom !ome o1 the te*e0hone +onver!at,on! we had w,th +om0an. o11,+,a*! ,n en!-,n2
month!3
58
On >-ne 1;th the !e+retar. !tated 6Un,on ha! een to*d a 1avora*e &R# r-*,n2 ha! een 1orm-*ated -t
m-!t e 0a!!ed on . add,t,ona* &R# 0eo0*e. #t,** ho0,n2 1or r-*,n2 ,n >-*..F
On >-*. 2?th the 0re!,dent !a,d that he e50e+ted the &R# r-*,n2 Eear*. ne5t wee".F
On A-2-!t 1:th the trea!-rer ,n1ormed -! that the TN(, Un,on O,*, and U#$ 0eo0*e were a** ,n
Wa!h,n2ton attem0t,n2 to thra!h o-t a r-*,n2.
On #e0temer 1;th the trea!-rer ,n1ormed -! 6No new!, a*tho-2h the &R# !a.! the r-*,n2 +o-*d e read.
. ne5t wee".F
The e!t,mate on 0a.o-t wa! !t,** H7.?2.
The r-*,n2 wa! re+e,ved ,n *ate #e0temer, and the !a*e +*o!ed O+toer :1!t. O-r ond! were +a**ed Novemer
1:th. We +onverted o-r warrant! to +ommon !to+" !hort*. therea1ter and re+e,ved 0a.ment! on the +ommon o1
H:.50 %e+emer 1?, 1992, H:.90 Fer-ar. ?, 199:, and 15 +ent on A0r,* 2?, 199:. We w,** 0roa*. 2et another
? +ent ,n a .ear or two. On 1?7,2:5 !hare! Ia1ter e5er+,!e o1 warrant!K even ? +ent 0er !hare ,! mean,n21-*.
Th,! ,**-!trate! the -!-a* 0attern3 I1K the dea*! ta"e *on2er than or,2,na**. 0roBe+ted7 and I2K the 0a.o-t! tend to
avera2e a *,tt*e etter than e!t,mate!. W,th TN( ,t too" a +o-0*e o1 e5tra month!, and we re+e,ved a +o-0*e o1
e5tra 0er+ent.
The 1,nan+,a* re!-*t! o1 TN( were a! 1o**ow!3
I1K On the ond! we ,nve!ted H290,77: and had an avera2e ho*d,n2 0er,od o1 !*,2ht*. -nder 1,ve month!.
We re+e,ved 9 U= ,ntere!t on o-r mone. and rea*,<ed a +a0,ta* 2a,n o1 H1?,??9. Th,! wor"! o-t to an
overa** rate o1 ret-rn o1 a00ro5,mate*. 20= 0er ann-m.
(2) On the !to+" and warrant! we have rea*,<ed +a0,ta* 2a,n o1 H;9,:0?, and we have !t-! 0re!ent*. va*-ed
at H2,9?9. From an ,nve!tment or H1?9,000 ,n A0r,*, o-r ho*d,n2! ran to H7:1,000 ,n O+toer. Ba!ed on
the t,me the mone. wa! em0*o.ed, the rate or ret-rn wa! ao-t 22= 0er ann-m.
&n oth +a!e!, the ret-rn ,! +om0-ted on an a** e8-,t. ,nve!tment. & de1,n,te*. 1ee* !ome orrowed mone. ,!
warranted a2a,n!t a 0ort1o*,o o1 wor"o-t!, -t 1ee* ,t ,! a ver. dan2ero-! 0ra+t,+e a2a,n!t 2enera*!.
We are not 0re!ent,n2 TN( a! an. earth4!ha",n2 tr,-m0h. We have had wor"o-t! wh,+h were m-+h etter and
!ome wh,+h were 0oorer. &t ,! t.0,+a* o1 o-r read4and4-tter t.0e o1 o0erat,on. We attem0t to ota,n a** 1a+t!
0o!!,*e, +ont,n-e to "ee0 area!t o1 deve*o0ment! and eva*-ate a** o1 th,! ,n term! o1 o-r e50er,en+e. We
+erta,n*. don/t 2o ,nto a** the dea*! that +ome a*on2 44 there ,! +on!,dera*e var,at,on ,n the,r attra+t,vene!!.
When a wor"o-t 1a**! thro-2h, the re!-*t,n2 mar"et va*-e !hr,n" ,! !-!tant,a*. There1ore, .o- +annot a11ord
man. error!, a*tho-2h we 1-**. rea*,<e we are 2o,n2 to have them o++a!,ona**..
%E'(#TER '&LL 'F).
Th,! !,t-at,on !tarted a! a 2enera* ,n 1959. At that t,me the !to+" wa! !e**,n2 at H1; w,th ao-t H72 ,n oo" va*-e
o1 wh,+h H50 0er !hare wa! ,n +-rrent a!!et! I$a!h, re+e,va*e! and ,nventor.K *e!! a** *,a,*,t,e!. %em0!ter had
earned 2ood mone. ,n the 0a!t -t wa! on*. rea",n2 even +-rrent*..
The 8-a*,tat,ve !,t-at,on wa! on the ne2at,ve !,de Ia 1a,r*. to-2h ,nd-!tr. and -n,m0re!!,ve mana2ementK, -t
the 1,2-re! were e5treme*. attra+t,ve. E50er,en+e !how! .o- +an -. 100 !,t-at,on! *,"e th,! and have 0erha0!
70 or ;0 wor" o-t to rea!ona*e 0ro1,t! ,n one to three .ear!. >-!t wh. an. 0art,+-*ar one !ho-*d do !o ,! hard to
59
!a. at the t,me o1 0-r+ha!e, -t the 2ro-0 e50e+tan+. ,! 1avora*e, whether the ,m0et-! ,! 1rom an ,m0roved
,nd-!tr. !,t-at,on, a ta"eover o11er, a +han2e ,n ,nve!tor 0!.+ho*o2., et+.
We +ont,n-ed to -. the !to+" ,n !ma** 8-ant,t,e! 1or 1,ve .ear!. %-r,n2 mo!t or th,! 0er,od & wa! a d,re+tor and
wa! e+om,n2 +on!,!tent*. *e!! ,m0re!!ed w,th the earn,n2! 0ro!0e+t! -nder e5,!t,n2 mana2ement. @owever, &
a*!o e+ame more 1am,*,ar w,th the a!!et! and o0erat,on! and m. eva*-at,on o1 the 8-ant,tat,ve 1a+tor! rema,ned
ver. 1avora*e.
B. m,d41991 we owned ao-t :0= or %em0!ter Iwe had made !evera* tender o11er! w,th 0oor re!-*t!K, -t ,n
A-2-!t and #e0temer 1991 made, !evera* *ar2e 0-r+ha!e! at H:0.25 0er !hare, wh,+h +o-0*ed w,th a
!-!e8-ent tender o11er at the !ame 0r,+e, ro-2ht o-r ho*d,n2 to over 70=. O-r 0-r+ha!e! over the 0rev,o-!
1,ve .ear! had een ,n the H194H25 ran2e.
On a!!-m,n2 +ontro*, we e*evated the e5e+-t,ve v,+e 0re!,dent to 0re!,dent to !ee what he wo-*d do -n1ettered
. the 0rev,o-! 0o*,+,e!. The re!-*t! were -n!at,!1a+tor. and on A0r,* 2:, 1992 we h,red @arr. Bott*e a!
0re!,dent.
@arr. wa! the 0er1e+t man 1or the Bo. & have re+,ted h,! tr,-m0h! e1ore and the a++om0an.,n2 +om0arat,ve
a*an+e !heet! !0ea" *o-der than an. word! ,n demon!trat,n2 the re4em0*o.ment o1 +a0,ta*.
))*?8*+) B*?)*+? /unaudited0
$a!h H199,000 H;9,000
U# )ovDt #e+-r,t,e! J at +o!t H2;9,000
Other mar"eta*e !e+-r,t,e! J at
mar"et Iwh,+h e5+eed! +o!tK
H2,0?9,000
&otal "ash and 'ecurities C)++3888 C13@?+3888
A++o-nt! re+e,va*e InetK H1,0?0,000 H;9?,000
&nventor. H?,20:,000 H;90,000
(re0a,d e50en!e!, et+. H;2,000 H12,000
"urrent 9ssets C63@,)3888 C@31813888
Other A!!et! H?5,000 H92,000
Net (*ant and E8-,0ment H1,:;:,000 H;92,000
&otal 9ssets C+3,),3888 C63)1+3888
Note! (a.a*e H1,2:0,000
Other L,a,*,t. H1,0;;,000 H27?,000
&otal Lia>ilities C13?)A3888 C1B@3888
Net worth
90,1?9 !h!. 11P:0P91
92,1?9 !h!. 7P:1P9: H?,901,000 H?,;52,000
&otal lia>ilities and net worth C+3,),3888 C63)1+3888
@arr.3
I1K too" the ,nventor. 1rom over H? m,**,on Im-+h o1 ,t !*ow mov,n2K to -nder H1 m,**,on red-+,n2 +arr.,n2
+o!t! and o!o*e!+en+e r,!"! tremendo-!*.7
I2K +orre!0ond,n2*. 1reed -0 +a0,ta* 1or mar"eta*e !e+-r,t. 0-r+ha!e! 1rom wh,+h we 2a,ned over
60
H?00,000
I:K +-t adm,n,!trat,on and !e**,n2 e50en!e 1rom H150,000 to H75,000 0er month7
I?K +-t 1a+tor. overhead -rden 1rom H9 to H?.50 0er d,re+t *aor ho-r7
I5K +*o!ed the 1,ve ran+he! o0erat,n2 -n0ro1,ta*. I*eav,n2 -! w,th three 2ood one!K and re0*a+ed them
w,th more 0rod-+t,ve d,!tr,-tor!7
I9K +*eaned -0 a heada+he at an a-5,*,ar. 1a+tor. o0erat,on at $o*-m-!, Nera!"a7
I7K e*,m,nated Boed *,ne! t.,n2 -0 +on!,dera*e mone. Iwh,+h +o-*d e -!ed 0ro1,ta*. ,n !e+-r,t,e!K
wh,*e 0rod-+,n2 no 0ro1,t!7
(8) adB-!ted 0r,+e! o1 re0a,r 0art!, there. 0rod-+,n2 an e!t,mated H200,000 add,t,ona* 0ro1,t w,th v,rt-a**.
no *o!! o1 vo*-me7 and mo!t ,m0ortant7
I9K thro-2h the!e and man. other !te0!, re!tored the earn,n2 +a0a+,t. to a *eve* +ommen!-rate w,th the
+a0,ta* em0*o.ed.
&n 199:, the heav. +or0orate ta5e! we were 1a+,n2 I@arr. !-r0r,!ed me . the !0eed w,th wh,+h he had earned
-0 o-r ta5 *o!! +arr.41orwardK +o-0*ed w,th e5+e!! *,8-,d 1-nd! w,th,n the +or0orat,on +om0e**ed -! to e,ther ,n
!ome wa. de4,n+or0orate or to !e** the -!,ne!!.
We !et o-t to do e,ther one or the other e1ore the end o1 199:. %e4,n+or0orat,n2 had man. 0ro*em! -t wo-*d
have, ,n e11e+t, do-*ed earn,n2! 1or o-r 0artner! and a*!o e*,m,nated the 0ro*em o1 +or0orate +a0,ta* 2a,n ta5
on %em0!ter !e+-r,t,e!.
At v,rt-a**. the *a!t m,n-te, a1ter !evera* ear*,er dea*! had 1a**en thro-2h at rea!ona*. advan+ed !ta2e!, a !a*e o1
a!!et! wa! made. A*tho-2h there were a 2ood man. wr,n"*e! to the !a*e, the net e11e+t wa! to r,n2
a00ro5,mate*. oo" va*-e. Th,!, +o-0*ed w,th the 2a,n we have ,n o-r 0ort1o*,o o1 mar"eta*e !e+-r,t,e!, 2,ve!
-! a rea*,<at,on o1 ao-t H;0 0er !hare. %em0!ter Inow named F,r!t Beatr,+e $or0. 4 we !o*d the name to the
new $o.K ,! down to a*mo!t ent,re*. +a!h and mar"eta*e !e+-r,t,e! now. On B(L/! .earend a-d,t, o-r F,r!t
Beatr,+e ho*d,n2! were va*-ed at a!!et va*-e Iw,th !e+-r,t,e! at mar"etK *e!! a H200,000 re!erve 1or var,o-!
+ont,n2en+,e!.
& m,2ht ment,on that we th,n" the -.er! w,** do ver. we** w,th %em0!ter. The. ,m0re!! -! a! 0eo0*e o1 a,*,t.
and the. have !o-nd 0*an! to e50and the -!,ne!! and ,t! 0ro1,ta,*,t.. We wo-*d have een 8-,te ha00. to
o0erate %em0!ter on an -n,n+or0orated a!,!, -t we are a*!o 8-,te ha00. to !e** ,t 1or a rea!ona*e 0r,+e. O-r
-!,ne!! ,! ma",n2 e5+e**ent 0-r+ha!e! 44 not ma",n2 e5traord,nar. !a*e!.
@arr. wor"! the !ame wa. & do 44 he *,"e! ,2 +arrot!. @e ,! 0re!ent*. a *,m,ted 0artner o1 B(L, and the ne5t
e*t4t,2hten,n2 o0erat,on we have, he/! o-r man.
The %em0!ter !a2a 0o,nt! -0 !evera* mora*!3
I1K O-r -!,ne!! ,! one re8-,r,n2 0at,en+e. &t ha! *,tt*e ,n +ommon w,th a 0ort1o*,o o1 h,2h41*.,n2 2*amo-r
!to+"! and d-r,n2 0er,od! o1 0o0-*ar,t. 1or the *atter, we ma. a00ear 8-,te !tod2..
&t ,! to o-r advanta2e to have !e+-r,t,e! do noth,n2 0r,+e w,!e 1or month!, or 0erha0! .ear!, wh. we are
-.,n2 them. Th,! 0o,nt! -0 the need to mea!-re o-r re!-*t! over an ade8-ate 0er,od o1 t,me. We
61
!-22e!t three .ear! a! a m,n,m-m.
I2K We +annot ta*" ao-t o-r +-rrent ,nve!tment o0erat,on!. #-+h an o0en4mo-th 0o*,+. +o-*d never
,m0rove o-r re!-*t! and ,n !ome !,t-at,on! +o-*d !er,o-!*. h-rt -!. For th,! rea!on, !ho-*d an.one,
,n+*-d,n2 0artner!, a!" -! whether we are ,ntere!ted ,n an. !e+-r,t., we m-!t 0*ead the E5th
Amendment.F
62
BUFFETT (ARTNER#@&(, LT%.
;10 A&EW&T (LAOA
OMAHA 31, NEBRASKA
>-*. ;, 199?
F,r!t @a*1 (er1orman+e
The who*e 1am,*. ,! *eav,n2 1or $a*,1orn,a on >-ne 2:rd !o & am 1-d2,n2 a ,t on th,! re0ort and wr,t,n2 ,t >-ne
1;th. @owever, 1or tho!e o1 .o- who !et .o-r wat+he! . the re+e,0t o1 o-r *etter!. & w,** ma,nta,n o-r -!-a*
+hrono*o2,+a* !.mmetr. ,n re0ort,n2, *eav,n2 a 1ew *an"! wh,+h B,** w,** 1,** ,n a1ter the 1,na* >-ne :0th 1,2-re!
are ava,*a*e.
%-r,n2 the 1,r!t ha*1 o1 199? the %ow4>one! &nd-!tr,a* Avera2e Ihere,na1ter +a**ed the E%OWFK advan+ed 1rom
792.95 to ;:1.50. &1 one had owned the %ow d-r,n2 th,! 0er,od, d,v,dend! o1 a00ro5,mate*. 1?.?0 wo-*d have
een re+e,ved, r,n2,n2 the overa** ret-rn 1rom the %ow d-r,n2 the 1,r!t ha*1 to 0*-! 10.0=. A! & wr,te th,! on
>-ne 1;th, ,t a00ear! that o-r re!-*t! w,** d,11er on*. ,n!,2n,1,+ant*. 1rom tho!e o1 the %ow. & wo-*d 1ee* m-+h
etter re0ort,n2 to .o- that the %ow had ro"en even, and we had een 0*-! 5=, or etter !t,**, that the %ow had
een m,n-! 10=, and we had ro"en even. & have a*wa.! 0o,nted o-t, however, that 2a,n,n2 an ed2e on the %ow
,! more d,11,+-*t 1or -! ,n advan+,n2 mar"et! than ,n !tat,+ or de+*,n,n2 one!.
To r,n2 the re+ord -0 to date, the 1o**ow,n2 !-mmar,<e! the 0er1orman+e o1 the %ow, the 0er1orman+e o1 the
(artner!h,0 e1ore a**o+at,on to the 2enera* 0artner and the *,m,ted 0artner!/ re!-*t!3
Year Overall .esults :ro
Dow /)0
Partnership .esults /10 Liited Partners!
.esults /?0
1957 4;.?= 10.?= 9.:=
195; :;.5= ?0.9= :2.2=
1959 20.0= 25.9= 20.9=
1990 49.2= 22.;= 1;.9=
1991 22.?= ?5.9= :5.9=
1992 47.9= 1:.9= 11.9=
199: 20.9= :;.7= :0.5=
1
!t
ha*1 199? 10.9= 12.0= 10.5=
"uulative results ))+.)7 61).87 ?6@.@7
9nnual copounded
rate
)8.A7 1B.+7 11.17
I#ee ne5t 0a2e 1or 1ootnote! to ta*e.K
:ootnotes to preceding ta>le3
I1K Ba!ed on .ear*. +han2e! ,n the va*-e o1 the %ow 0*-! d,v,dend! that wo-*d have een re+e,ved thro-2h
owner!h,0 o1 the %ow d-r,n2 that .ear. The ta*e ,n+*-de! a** +om0*ete .ear! o1 0artner!h,0 a+t,v,t..
I2K For 1957491 +on!,!t! o1 +om,ned re!-*t! o1 a** 0rede+e!!or *,m,ted 0artner!h,0! o0erat,n2 thro-2ho-t
the ent,re .ear a1ter a** e50en!e! -t e1ore d,!tr,-t,on! to 0artner! or a**o+at,on! to the 2enera* 0artner.
I:K For 1957491 +om0-ted on the a!,! o1 the 0re+ed,n2 +o*-mn o1 0artner!h,0 re!-*t! a**ow,n2 1or
63
a**o+at,on to the 2enera* 0artner a!ed -0 on the 0re!ent 0artner!h,0 a2reement, -t e1ore month*.
w,thdrawa*! . *,m,ted 0artner!.
B-.,n2 a+t,v,t,e! d-r,n2 the 1,r!t ha*1 were 8-,te !at,!1a+tor.. Th,! ,! o1 0art,+-*ar !at,!1a+t,on to me !,n+e &
+on!,der the -.,n2 end to e ao-t 90= o1 th,! -!,ne!!. O-r )enera* +ate2or. now ,n+*-de! three +om0an,e!
where B.(.L. ,! the *ar2e!t !,n2*e !to+"ho*der. The!e !to+"! have een o-2ht and are +ont,n-,n2 to e o-2ht at
0r,+e! +on!,dera*. e*ow the,r va*-e to a 0r,vate owner. We have een -.,n2 one o1 the!e !,t-at,on! 1or
a00ro5,mate*. e,2hteen month! and oth o1 the other! 1or ao-t a .ear. &t wo-*d not !-r0r,!e me ,1 we +ont,n-e
to do noth,n2 -t 0at,ent*. -. the!e !e+-r,t,e! wee" a1ter wee" 1or at *ea!t another .ear, and 0erha0! even two
.ear! or more.
What we rea**. *,"e to !ee ,n !,t-at,on! *,"e the three ment,oned aove ,! a +ond,t,on where the +om0an. ,!
ma",n2 !-!tant,a* 0ro2re!! ,n term! o1 ,m0rov,n2 earn,n2!, ,n+rea!,n2 a!!et va*-e!, et+., -t where the mar"et
0r,+e o1 the !to+" ,! do,n2 ver. *,tt*e wh,*e we +ont,n-e to a+8-,re ,t. Th,! doe!n/t do m-+h 1or o-r !hort4term
0er1orman+e, 0art,+-*ar*. re*at,ve to a r,!,n2 mar"et, -t ,t ,! a +om1orta*e and *o2,+a* 0rod-+er o1 *on2er4term
0ro1,t!. #-+h a+t,v,t. !ho-*d -!-a**. re!-*t ,n e,ther a00re+,at,on o1 mar"et 0r,+e! 1rom e5terna* 1a+tor! or the
a+8-,!,t,on . -! o1 a +ontro**,n2 0o!,t,on ,n a -!,ne!! at a ar2a,n 0r,+e. E,ther a*ternat,ve !-,t! me.
&t ,! ,m0ortant to rea*,<e, however, that mo!t o1 o-r ho*d,n2! ,n the )enera* +ate2or. +ont,n-e to e !e+-r,t,e!
wh,+h we e*,eve to e +on!,dera*. -nderva*-ed, -t where there ,! not the !*,2hte!t 0o!!,,*,t. that we +o-*d
have a +ontro**,n2 0o!,t,on. We e50e+t the mar"et to B-!t,1. o-r ana*.!e! o1 !-+h !,t-at,on! ,n a rea!ona*e
0er,od o1 t,me, -t we do not have the two !tr,n2! to o-r ow ment,oned ,n the aove 0ara2ra0h wor",n2 1or -!
,n the!e !e+-r,t,e!.
&nve!tment $om0an,e!
We re2-*ar*. +om0are o-r re!-*t! w,th the two *ar2e!t o0en4end ,nve!tment +om0an,e! Im-t-a* 1-nd!K that
1o**ow a 0o*,+. o1 e,n2 t.0,+a**. 95=4100= ,nve!ted ,n +ommon !to+"!, and the two *ar2e!t d,ver!,1,ed +*o!ed4
end ,nve!tment +om0an,e!. The!e 1o-r +om0an,e!, 'a!!a+h-!ett! &nve!tor! Tr-!t, &nve!tor! #to+" F-nd, Tr,4
$ont,nenta* $or0., and Lehman $or0., mana2e over H? ,**,on and are 0roa*. t.0,+a* o1 mo!t o1 the H2;
,**,on ,nve!tment +om0an. ,nd-!tr.. The,r re!-*t! are !hown e*ow. '. o0,n,on ,! that th,! 0er1orman+e
ro-2h*. 0ara**e*! that o1 the overwhe*m,n2 maBor,t. o1 other ,nve!tment adv,!or. or2an,<at,on! wh,+h hand*e, ,n
a22re2ate, va!t*. 2reater !-m!.
Year #ass. Inv.
&rust /)0
Investors
'toc( /)0
Lehan /10 &ri-"ont.
/10
Dow Liited
Partners
1957 411.?= 412.?= 411.?= 42.?= 4;.?= 9.:=
195; ?2.7= ?7.5= ?0.;= ::.2= :;.5= :2.2=
1959 9.0= 10.:= ;.1= ;.?= 20.0= 20.9=
1990 41.0= 40.9= 2.5= 2.;= 49.2= 1;.9=
1991 25.9= 2?.9= 2:.9= 22.5= 22.?= :5.9=
1992 49.;= 41:.?= 41?.?= 410.0= 47.9= 11.9=
199: 20.0= 19.5= 2:.7= 1;.:= 20.9= :0.5=
1
!t
ha*1 199? 11.0= 9.5= 9.9= ;.9= 10.9= 10.5=
$-m-*at,ve
Re!-*t!
105.;= 95.5= 9;.2= 105.1= 119.1= :5?.?=
Ann-a*
$om0o-nded
Rate
10.1= 9.?= 9.9= 10.1= 10.;= 22.2=
64
I1K $om0-ted 1rom +han2e! ,n a!!et va*-e 0*-! an. d,!tr,-t,on! to ho*der! o1 re+ord d-r,n2 .ear.
I2K From 199? 'ood./! Ban" N F,nan+e 'an-a* 1or 195749:. E!t,mated 1or 1,r!t ha*1 199?.
The!e 1,2-re! +ont,n-e to !how that the mo!t h,2h*. 0a,d and re!0e+ted ,nve!tment mana2ement ha! d,11,+-*t.
mat+h,n2 the 0er1orman+e o1 an -nmana2ed ,nde5 o1 *-e +h,0 !to+"!. The re!-*t! o1 the!e +om0an,e! ,n !ome
wa.! re!em*e the a+t,v,t. o1 a d-+" !,tt,n2 on a 0ond. When the water Ithe mar"etK r,!e!, the d-+" r,!e!7 when ,t
1a**!, a+" 2oe! the d-+". #($A or no #($A, & th,n" the d-+" +an on*. ta"e the +red,t Ior *ameK 1or h,! own
a+t,v,t,e!. The r,!e and 1a** o1 the *a"e ,! hard*. !ometh,n2 1or h,m to 8-a+" ao-t. The water *eve* ha! een o1
2reat ,m0ortan+e to B.(.LD! 0er1orman+e a! the ta*e on 0a2e one ,nd,+ate!. @owever, we have a*!o o++a!,ona**.
1*a00ed o-r w,n2!.
& wo-*d *,"e to em0ha!,<e that & am not !a.,n2 that the %ow ,! the on*. wa. o1 mea!-r,n2 ,nve!tment
0er1orman+e ,n +ommon !to+"!. @owever, & do !a. that a** ,nve!tment mana2ement! I,n+*-d,n2 !e*14
mana2ementK !ho-*d e !-Be+ted to oBe+t,ve te!t!, and that the !tandard! !ho-*d e !e*e+ted a 0r,or, rather than
+onven,ent*. +ho!en retro!0e+t,ve*..
The mana2ement o1 mone. ,! ,2 -!,ne!!. &nve!tment mana2er! 0*a+e 2reat !tre!! on eva*-at,n2 +om0an.
mana2ement! ,n the a-to ,nd-!tr., !tee* ,nd-!tr., +hem,+a* ,nd-!tr., et+. The!e eva*-at,on! ta"e enormo-!
amo-nt! o1 wor", are -!-a**. de*,vered w,th 2reat !o*emn,t., and are devoted to 1,nd,n2 o-t wh,+h +om0an,e!
are we** mana2ed and wh,+h +om0an,e! have mana2ement wea"ne!!e!. A1ter devot,n2 !tren-o-! e11ort! to
oBe+t,ve*. mea!-r,n2 the mana2ement! o1 0ort1o*,o +om0an,e!, ,t !eem! !tran2e ,ndeed that !,m,*ar
e5am,nat,on ,! not a00*,ed to the 0ort1o*,o mana2er! them!e*ve!. We 1ee* ,t ,! e!!ent,a* that ,nve!tor! and
,nve!tment mana2ement! e!ta*,!h !tandard! o1 0er1orman+e and, re2-*ar*. and oBe+t,ve*., !t-d. the,r own
re!-*t! B-!t a! +are1-**. a! the. !t-d. the,r ,nve!tment!.
We w,** re2-*ar*. 1o**ow th,! 0o*,+. wherever ,t ma. *ead. &t ,! 0erha0! too ov,o-! to !a. that o-r 0o*,+. o1
mea!-r,n2 0er1orman+e ,n no wa. 2-arantee! 2ood re!-*t!44,t mere*. 2-arantee! oBe+t,ve eva*-at,on. & want to
!tre!! the 0o,nt! ment,oned ,n the 6)ro-nd R-*e!6 re2ard,n2 a00*,+at,on o1 the !tandard44name*. that ,t !ho-*d
e a00*,ed on at *ea!t a three4.ear a!,! e+a-!e o1 the nat-re o1 o-r o0erat,on and a*!o that d-r,n2 a !0e+-*at,ve
oom we ma. *a2 the 1,e*d. @owever, one th,n2 & +an 0rom,!e .o-. We !tarted o-t w,th a :94,n+h .ard!t,+" and
we/** "ee0 ,t that wa.. &1 we don/t mea!-re -0, we won/t +han2e .ard!t,+"!. &n m. o0,n,on, the ent,re 1,e*d o1
,nve!tment mana2ement, ,nvo*v,n2 h-ndred! o1 ,**,on! o1 do**ar!, wo-*d e more !at,!1a+tor,*. +ond-+ted ,1
ever.one had a 2ood .ard!t,+" 1or mea!-rement o1 a,*,t. and !en!,*. a00*,ed ,t. Th,! ,! re2-*ar*. done . mo!t
0eo0*e ,n the +ond-+t o1 the,r own -!,ne!! when eva*-at,n2 mar"et!, 0eo0*e, ma+h,ne!, method!, et+., and
mone. mana2ement ,! the *ar2e!t -!,ne!! ,n the wor*d.
Ta5e!
We entered 199? w,th net -nrea*,<ed 2a,n! o1 H2,991,090 wh,+h ,! a** attr,-ta*e to 0artner! e*on2,n2 d-r,n2
199:. Thro-2h >-ne :0th we have rea*,<ed +a0,ta* 2a,n! o1 H2,;29,2?;.79 Io1 wh,+h 99= are *on2 termK !o ,t
a00ear! ver. *,"e*. that at *ea!t a** the -nrea*,<ed a00re+,at,on attr,-ta*e to .o-r ,ntere!t and re0orted to .o- ,n
o-r *etter o1 >an-ar. 25, 199?, I,tem :K w,** e rea*,<ed th,! .ear. & a2a,n want to em0ha!,<e that th,! ha! noth,n2
to do w,th how we are do,n2. &t ,! 0o!!,*e that & +o-*d have made the aove !tatement, and the mar"et va*-e o1
.o-r B.(.L. ,ntere!t +o-*d have !hr-n" !-!tant,a**. !,n+e >an-ar. 1
!t
, !o the 1a+t that we have *ar2e rea*,<ed
2a,n! ,! no +a-!e 1or e5-*tat,on. #,m,*ar*. when o-r rea*,<ed 2a,n! are ver. !ma** there ,! not ne+e!!ar,*. an.
rea!on to e d,!+o-ra2ed. We do not 0*a. an. 2ame! to e,ther a++e*erate or de1er ta5e!. We ma"e ,nve!tment
de+,!,on! a!ed on o-r eva*-at,on o1 the mo!t 0ro1,ta*e +om,nat,on o1 0roa,*,t,e!. &1 th,! mean! 0a.,n2 ta5e!
&/m 2*ad the rate! on *on24term +a0,ta* 2a,n! are a! *ow a! the. are.
A! 0rev,o-!*. !tated ,n o-r mo!t re+ent ta5 *etter o1 A0r,* 1, 199? the !a1e +o-r!e to 1o**ow on ,nter,m e!t,mate!
65
,! to 0a. the !ame e!t,mated ta5 1or 199? a! .o-r a+t-a* ta5 wa! 1or 199:. There +an e no 0ena*t,e! ,1 .o-
1o**ow th,! 0ro+ed-re.
The ta5 *,a,*,t. 1or 0artner! who entered >an-ar. 1
!t
w,**, o1 +o-r!e, e 8-,te moderate, a! ,t a*wa.! ,! ,n the 1,r!t
.ear 1or an. 0artner. Th,! o++-r! e+a-!e rea*,<ed +a0,ta* 2a,n! are 1,r!t attr,-ted to o*d 0artner! hav,n2 an
,ntere!t ,n -nrea*,<ed a00re+,at,on. Th,!, a2a,n, o1 +o-r!e, ha! noth,n2 to do w,th e+onom,+ 0er1orman+e. A**
*,m,ted 0artner!, new and o*d, Ie5+e0t 1or B,** #+ott, R-th #+ott and #-!an B-11ett 0er 0ara2ra0h 1,ve o1 the
(artner!h,0 A2reementK end -0 w,th e5a+t*. the !ame re!-*t!. A! -!-a*, net ord,nar. ,n+ome 1or a** 0artner! ,!
nom,na* to date.
A! ,n 0a!t .ear!, we w,** have a *etter o-t ao-t Novemer 1
!t
Ito 0artner! and tho!e who have ,nd,+ated an
,ntere!t, to -! . that t,me ,n e+om,n2 0artner!K w,th the amendment to the (artner!h,0 A2reement,
$omm,tment Letter 1or 1995, e!t,mate or the 199? ta5 !,t-at,on, et+. &n the meant,me, "ee0 B,** -!. th,!
!-mmer +*ear,n2 -0 an.th,n2 ,n th,! *etter that +ome! o-t 1-<<..
$ord,a**.,
Warren E. B-11ett
66
BUFFETT (ARTNER#@&(, LT%.
;10 A&EW&T (LAOA
OMAHA 31, NEBRASKA
>an-ar. 1;, 1995
O-r (er1orman+e ,n 199?
A*tho-2h we had an overa** 2a,n o1 H?,;?9,:12.:7 ,n 199?, ,t wa! not one o1 o-r etter .ear! a! B-d2ed . o-r
1-ndamenta* .ard!t,+", the %ow4>one! &nd-!tr,a* Avera2e Ihere,na1ter +a**ed the 6%ow6K. The overa** re!-*t 1or
B(L wa! 0*-! 27.;= +om0ared to an overa** 0*-! 1;.7= 1or the %ow. The overa** re!-*t 1or *,m,ted 0artner! wa!
0*-! 22.:=. Both the advanta2e o1 9.1 0er+enta2e 0o,nt! on a 0artner!h,0 a!,! and :.9 0o,nt! . the *,m,ted
0artner! were the 0oore!t !,n+e 1959, wh,+h wa! a .ear o1 ro-2h*. +om0ara*e 2a,n! 1or the %ow.
Neverthe*e!!, & am not de0re!!ed. &t wa! a !tron2 .ear 1or the 2enera* mar"et, and ,t ,! a*wa.! to-2her 1or -! to
o-t!h,ne the %ow ,n !-+h a .ear. We are +erta,n to have .ear! when the %ow 2,ve! -! a dr-,n2 and, ,n !ome
re!0e+t!, & 1ee* rather 1ort-nate that 199? wa!n/t the .ear. Be+a-!e o1 the 0ro*em! that 2a**o0,n2 mar"et! 0o!e
1or -!, a %ow re0eat ,n 1995 o1 199? re!-*t! wo-*d ma"e ,t mo!t d,11,+-*t 1or -! to mat+h ,t! 0er1orman+e, *et
a*one !-r0a!! ,t . a de+ent mar2,n.
To r,n2 the re+ord -0 to date, the 1o**ow,n2 !-mmar,<e! the .ear4.4.ear 0er1orman+e o1 the %ow, the
0er1orman+e o1 the (artner!h,0 e1ore a**o+at,on to the 2enera* 0artner, and the *,m,ted 0artner/! re!-*t!3
Year Overall .esults :ro
Dow /)0
Partnership .esults /10 Liited Partners!
.esults /?0
1957 4;.?= 10.?= 9.:=
195; :;.5= ?0.9= :2.2=
1959 20.0= 25.9= 20.9=
1990 49.2= 22.;= 1;.9=
1991 22.?= ?5.9= :5.9=
1992 47.9= 1:.9= 11.9=
199: 20.9= :;.7= :0.5=
199? 1;.7= 27.;= 22.:=
I1K Ba!ed on .ear*. +han2e! ,n the va*-e o1 the %ow 0*-! d,v,dend! that wo-*d have een re+e,ved thro-2h
owner!h,0 o1 the %ow d-r,n2 that .ear. The ta*e ,n+*-de! a** +om0*ete .ear! o1 0artner!h,0 a+t,v,t..
I2K For 1957491 +on!,!t! o1 +om,ned re!-*t! o1 a** 0rede+e!!or *,m,ted 0artner!h,0! o0erat,n2 thro-2ho-t
the ent,re .ear a1ter a** e50en!e!, -t e1ore d,!tr,-t,on! to 0artner! or a**o+at,on! to the 2enera*
0artner.
I:K For 1957491 +om0-ted on the a!,! o1 the 0re+ed,n2 +o*-mn o1 0artner!h,0 re!-*t! a**ow,n2 1or
a**o+at,on to the 2enera* 0artner a!ed -0on the 0re!ent 0artner!h,0 a2reement, -t e1ore month*.
w,thdrawa*! . *,m,ted 0artner!.
On a +-m-*at,ve or +om0o-nded a!,!, the re!-*t! are3
Year Overall .esults :ro
Dow
Partnership .esults Liited Partners!
.esults
1957 4;.?= 10.?= 9.:=
1957 J 5; 29.9= 55.9= ??.5=
67
1957 J 59 52.:= 95.9= 7?.7=
1957 J 90 ?2.9= 1?0.9= 107.2=
1957 J 91 7?.9= 251.0= 1;1.9=
1957 J 92 91.9= 299.;= 215.1=
1957 J 9: 9?.9= ?5?.5= :11.2=
1957 J 9? 1:1.:= 90;.7= ?02.9=
9nnual "opounded
.ate
)).)7 1B.B7 11.?7
&nve!tment $om0an,e!
We re2-*ar*. +om0are o-r re!-*t! w,th the two *ar2e!t o0en4end ,nve!tment +om0an,e! Im-t-a* 1-nd!K that
1o**ow a 0o*,+. o1 e,n2 t.0,+a**. 954100= ,nve!ted ,n +ommon !to+", and the two *ar2e!t d,ver!,1,ed +*o!ed4
end ,nve!tment +om0an,e!. The!e 1o-r +om0an,e!, 'a!!a+h-!ett! &nve!tor! Tr-!t, &nve!tor! #to+" F-nd, Tr,4
$ont,nenta* $or0orat,on, and Lehman $or0orat,on, mana2e ao-t H?.5 ,**,on, are owned . ao-t 550,000
!hareho*der!, and are 0roa*. t.0,+a* o1 mo!t o1 the H:0 ,**,on ,nve!tment +om0an. ,nd-!tr.. '. o0,n,on ,!
that the,r re!-*t! ro-2h*. 0ara**e* tho!e o1 the overwhe*m,n2 maBor,t. o1 other ,nve!tment adv,!or. or2an,<at,on!
wh,+h hand*e, ,n a22re2ate, va!t*. 2reater !-m!.
The 0-r0o!e o1 th,! ta-*at,on, wh,+h ,! !hown e*ow, ,! to ,**-!trate that the %ow ,! no 0-!hover a! an ,nde5 o1
,nve!tment a+h,evement. The adv,!or. ta*ent mana2,n2 B-!t the 1o-r +om0an,e! !hown +ommand! ann-a* 1ee! o1
over H; m,**,on and th,! re0re!ent! a ver. !ma** 1ra+t,on o1 the 0ro1e!!,ona* ,nve!tment mana2ement ,nd-!tr..
The 0-*,+ att,n2 avera2e o1 th,! h,2h*.40a,d and w,de*. re!0e+ted ta*ent ,nd,+ate! 0er1orman+e a !hade e*ow
that o1 the %ow, an -nmana2ed ,nde5.
GEARLG RE#ULT#
Year #ass. Inv.
&rust /)0
Investors
'toc( /)0
Lehan /10 &ri-"ont
/10
Dow Liited
Partners
1957 411.?= 412.?= 411.?= 42.?= 4;.?= 9.:=
195; ?2.7= ?7.5= ?0.;= ::.2= :;.5= :2.2=
1959 9.0= 10.:= ;.1= ;.?= 20.0= 20.9=
1990 41.0= 40.9= 2.5= 2.;= 49.2= 1;.9=
1991 25.9= 2?.9= 2:.9= 22.5= 22.?= :5.9=
1992 49.;= 41:.?= 41?.?= 410.0= 47.9= 11.9=
199: 20.0= 19.5= 2:.7= 1;.:= 20.9= :0.5=
199? 15.9= 1?.:= 1:.9= 12.9= 1;.7= 22.:=
I1K $om0-ted 1rom +han2e! ,n a!!et va*-e 0*-! an. d,!tr,-t,on! to ho*der! o1 re+ord d-r,n2 .ear.
I2K From 199? 'ood./! Ban" N F,nan+e 'an-a* 1or 195749:. E!t,mated 1or 199?.
$O'(OUN%E%
Year #ass. Inv.
&rust /)0
Investors
'toc( /)0
Lehan /10 &ri-"ont
/10
Dow Liited
Partners
1957 411.?= 412.?= 411.?= 42.?= 4;.?= 9.:=
1957 J 5; 29.?= 29.2= 2?.7= :0.0= 29.9= ??.5=
1957 J 59 :7.;= ?2.5= :?.;= ?0.9= 52.:= 7?.7=
1957 J 90 :9.?= ?1.9= :;.2= ??.;= ?2.9= 107.2=
68
1957 J 91 71.:= 79.9= 70.;= 77.?= 7?.9= 1;1.9=
1957 J 92 5?.5= 5:.2= ?9.2= 59.7= 91.9= 215.1=
1957 J 9: ;5.?= 7;.5= ;0.;= ;;.9= 9?.9= :11.2=
1957 J 9? 11?.9= 10?.0= 105.?= 112.7= 1:1.:= ?02.9=
9nnual
"opounded
.ate
)8.87 ,.?7 ,.@7 ,.,7 )).)7 11.?7
The re0et,t,on o1 the!e ta*e! ha! +a-!ed 0artner! to a!"3 6Wh. ,n the wor*d doe! th,! ha00en to ver. ,nte**,2ent
mana2ement! wor",n2 w,th I1K r,2ht, ener2et,+ !ta11 0eo0*e, I2K v,rt-a**. -n*,m,ted re!o-r+e!, I:K the mo!t
e5ten!,ve -!,ne!! +onta+t!, and I?K *,tera**. +ent-r,e! o1 a22re2ate ,nve!tment e50er,en+eM6 IThe *atter
8-a*,1,+at,on r,n2! to m,nd the 1e**ow who a00*,ed 1or a Bo and !tated he had twent. .ear! o1 e50er,en+e 4
wh,+h wa! +orre+ted . the 1ormer em0*o.er to read Eone .ear/! e50er,en+e 4twent. t,me!.FK
Th,! 8-e!t,on ,! o1 enormo-! ,m0ortan+e, and .o- wo-*d e50e+t ,t to e the !-Be+t o1 +on!,dera*e !t-d. .
,nve!tment mana2er! and !-!tant,a* ,nve!tor!. A1ter a**, ea+h 0er+enta2e 0o,nt on H:0 ,**,on ,! H:00 m,**,on
0er .ear. $-r,o-!*. eno-2h, there ,! 0ra+t,+a**. noth,n2 ,n the *,terat-re o1 Wa** #treet attra+t,n2 th,! 0ro*em,
and d,!+-!!,on o1 ,t ,! v,rt-a**. a!ent at !e+-r,t. ana*.!t !o+,et. meet,n2!, +onvent,on!, !em,nar!, et+. '.
o0,n,on ,! that the 1,r!t Bo o1 an. ,nve!tment mana2ement or2an,<at,on ,! to ana*.<e ,t! own te+hn,8-e! and
re!-*t! e1ore 0rono-n+,n2 B-d2ment on the mana2er,a* a,*,t,e! and 0er1orman+e o1 the maBor +or0orate ent,t,e!
o1 the Un,ted #tate!.
&n the 2reat maBor,t. o1 +a!e! the *a+" o1 0er1orman+e e5+eed,n2 or even mat+h,n2 an -nmana2ed ,nde5 ,n no
wa. re1*e+t! *a+" o1 e,ther ,nte**e+t-a* +a0a+,t. or ,nte2r,t.. & th,n" ,t ,! m-+h more the 0rod-+t o13 I1K 2ro-0
de+,!,on! 4 m. 0erha0! Ba-nd,+ed v,ew ,! that ,t ,! +*o!e to ,m0o!!,*e 1or o-t!tand,n2 ,nve!tment mana2ement
to +ome 1rom a 2ro-0 o1 an. !,<e w,th a** 0art,e! rea**. 0art,+,0at,n2 ,n de+,!,on!7 I2K a de!,re to +on1orm to the
0o*,+,e! and Ito an e5tentK the 0ort1o*,o! o1 other *ar2e we**4re2arded or2an,<at,on!7 I:K an ,n!t,t-t,ona*
1ramewor" where. avera2e ,! 6!a1e6 and the 0er!ona* reward! 1or ,nde0endent a+t,on are ,n no wa.
+ommen!-rate w,th the 2enera* r,!" atta+hed to !-+h a+t,on7 I?K an adheren+e to +erta,n d,ver!,1,+at,on 0ra+t,+e!
wh,+h are ,rrat,ona*7 and 1,na**. and ,m0ortant*., I5K ,nert,a.
(erha0! the aove +omment! are -nB-!t. (erha0! even o-r !tat,!t,+a* +om0ar,!on! are -nB-!t. Both o-r 0ort1o*,o
and method o1 o0erat,on d,11er !-!tant,a**. 1rom the ,nve!tment +om0an,e! ,n the ta*e. @owever, & e*,eve
oth o-r 0artner! and the,r !to+"ho*der! 1ee* the,r mana2ement! are !ee",n2 the !ame 2oa* 4 the ma5,m-m *on24
term avera2e ret-rn on +a0,ta* ota,na*e w,th the m,n,m-m r,!" o1 0ermanent *o!! +on!,!tent w,th a 0ro2ram o1
+ont,n-o-! ,nve!tment ,n e8-,t,e!. #,n+e we !ho-*d have +ommon 2oa*!, and mo!t 0artner!, a! an a*ternat,ve to
the,r ,ntere!t ,n B(L, wo-*d 0roa*. have the,r 1-nd! ,nve!ted ,n med,a 0rod-+,n2 re!-*t! +om0ara*e w,th
the!e ,nve!tment +om0an,e!, & 1ee* the,r 0er1orman+e re+ord ,! mean,n21-* ,n B-d2,n2 o-r own re!-*t!.
There ,! no 8-e!t,on that an ,m0ortant !erv,+e ,! 0rov,ded to ,nve!tor! . ,nve!tment +om0an,e!, ,nve!tment
adv,!or!, tr-!t de0artment!, et+. Th,! !erv,+e revo*ve! aro-nd the atta,nment o1 ade8-ate d,ver!,1,+at,on, the
0re!ervat,on o1 a *on24term o-t*oo", the ea!e o1 hand*,n2 ,nve!tment de+,!,on! and me+han,+!, and mo!t
,m0ortant*., the avo,dan+e o1 the 0atent*. ,n1er,or ,nve!tment te+hn,8-e! wh,+h !eem to ent,+e !ome ,nd,v,d-a*!.
A** -t a 1ew o1 the or2an,<at,on! do not !0e+,1,+a**. 0rom,!e to de*,ver !-0er,or ,nve!tment 0er1orman+e
a*tho-2h ,t ,! 0erha0! not -nrea!ona*e 1or the 0-*,+ to draw !-+h an ,n1eren+e 1rom the,r advert,!ed em0ha!,!
on 0ro1e!!,ona* mana2ement.
One th,n2 & 0*ed2e to .o- a! 0artner! 4 B-!t a! & +on!,der the 0rev,o-!*. !tated 0er1orman+e +om0ar,!on to e
mean,n21-* now, !o w,** & ,n 1-t-re .ear!, no, matter what ta*e -n1o*d!. $orre!0ond,n2*., & a!" that .o-, ,1 .o-
do not 1ee* !-+h a !tandard to e re*evant, re2,!ter !-+h d,!a2reement now and !-22e!t other !tandard! wh,+h +an
e a00*,ed 0ro!0e+t,ve*. rather than retro!0e+t,ve*..
69
One add,t,ona* tho-2ht 4 & have not ,n+*-ded a +o*-mn ,n m. ta*e 1or the mo!t w,de*.4-!ed ,nve!tment adv,!or
,n the wor*d 4 Be** mana2ement. (eo0*e who wat+h the,r we,2ht, 2o*1 !+ore!, and 1-e* ,**! !eem to !h-n
8-ant,tat,ve eva*-at,on o1 the,r ,nve!tment mana2ement !",**! a*tho-2h ,t ,nvo*ve! the mo!t ,m0ortant +*,ent ,n
the wor*d 4 them!e*ve!. Wh,*e ,t ma. e o1 a+adem,+ ,ntere!t to eva*-ate the mana2ement a++om0*,!hment! o1
'a!!a+h-!ett! &nve!tor! Tr-!t or Lehman $or0orat,on, ,t ,! o1 enormo-! do**ar!4and4+ent! ,m0ortan+e to
eva*-ate oBe+t,ve*. the a++om0*,!hment! o1 the 1e**ow who ,! a+t-a**. hand*,n2 .o-r mone. 4 even ,1 ,tD! .o-.
The R-e!t,on o1 $on!ervat,!m
&n *oo",n2 at the ta*e o1 ,nve!tment +om0an. 0er1orman+e, the 8-e!t,on m,2ht e a!"ed3 EGe!, -t aren/t tho!e
+om0an,e! r-n more +on!ervat,ve*. than the (artner!h,0M6 &1 .o- a!"ed that 8-e!t,on o1 the ,nve!tment +om0an.
mana2ement!, the., ,n a!o*-te hone!t., wo-*d !a. the. were more +on!ervat,ve. &1 .o- a!"ed the 1,r!t h-ndred
!e+-r,t. ana*.!t! .o- met, & am !-re that a ver. *ar2e maBor,t. o1 them a*!o wo-*d an!wer 1or the ,nve!tment
+om0an,e!. & wo-*d d,!a2ree. & have over 90= o1 m. net worth ,n B(L, and mo!t o1 m. 1am,*. have 0er+enta2e!
,n that area, -t o1 +o-r!e, that on*. demon!trate! the !,n+er,t. o1 m. v,ew 4 not the va*,d,t. o1 ,t.
&t ,! -n8-e!t,ona*. tr-e that the ,nve!tment +om0an,e! have the,r mone. more +onvent,ona**. ,nve!ted than we
do. To man. 0eo0*e +onvent,ona*,t. ,! ,nd,!t,n2-,!ha*e 1rom +on!ervat,!m. &n m. v,ew, th,! re0re!ent!
erroneo-! th,n",n2. Ne,ther a +onvent,ona* nor an -n+onvent,ona* a00roa+h, 0er !e, ,! +on!ervat,ve.
Tr-*. +on!ervat,ve a+t,on! ar,!e 1rom ,nte**,2ent h.0othe!e!, +orre+t 1a+t! and !o-nd rea!on,n2. The!e 8-a*,t,e!
ma. *ead to +onvent,ona* a+t!, -t there have een man. t,me! when the. have *ed to -northodo5.. &n !ome
+orner o1 the wor*d the. are 0roa*. !t,** ho*d,n2 re2-*ar meet,n2! o1 the F*at Earth #o+,et..
We der,ve no +om1ort e+a-!e ,m0ortant 0eo0*e, vo+a* 0eo0*e, or 2reat n-mer! o1 0eo0*e a2ree w,th -!. Nor do
we der,ve +om1ort ,1 the. don/t. A 0-*,+ o0,n,on 0o** ,! no !-!t,t-te 1or tho-2ht. When we rea**. !,t a+" w,th
a !m,*e on o-r 1a+e ,! when we r-n ,nto a !,t-at,on we +an -nder!tand, where the 1a+t! are a!+erta,na*e and
+*ear, and the +o-r!e o1 a+t,on ov,o-!. &n that +a!e 4 whether other +onvent,ona* or -n+onvent,ona* 4 whether
other! a2ree or d,!a2ree 4 we 1ee* 4 we are 0ro2re!!,n2 ,n a +on!ervat,ve manner.
The aove ma. !eem h,2h*. !-Be+t,ve. &t ,!. Go- !ho-*d 0re1er an oBe+t,ve a00roa+h to the 8-e!t,on. & do. '.
!-22e!t,on a! to one rat,ona* wa. to eva*-ate the +on!ervat,vene!! o1 0a!t 0o*,+,e! ,! to !t-d. 0er1orman+e ,n
de+*,n,n2 mar"et!. We have on*. three .ear! o1 de+*,n,n2 mar"et! ,n o-r ta*e and -n1ort-nate*. I1or 0-r0o!e! o1
th,! te!t on*.K the. were a** moderate de+*,ne!. &n a** three o1 the!e .ear! we a+h,eved a00re+,a*. etter
,nve!tment re!-*t! than an. o1 the more +onvent,ona* 0ort1o*,o!.
#0e+,1,+a**., ,1 tho!e three .ear! had o++-rred ,n !e8-en+e, the +-m-*at,ve re!-*t! wo-*d have een3
Tr,4$ont,nenta* $or0. 49.7=
%ow 420.9=
'a!!. &nve!tor! Tr-!t 420.9=
Lehman $or0. 422.:=
&nve!tor! #to+" F-nd 42?.9=
L,m,ted (artner! V?5.0=
We donDt th,n" th,! +om0ar,!on ,! a** ,m0ortant, -t we do th,n" ,t ha! !ome re*evan+e. We +erta,n*. th,n" ,t
ma"e! more !en!e than !a.,n2 EWe own Ire2ard*e!! o1 0r,+eK A.T. NT., )enera* E*e+tr,+, &B' and )enera*
'otor! and are there1ore +on!ervat,ve.F &n an. event, eva*-at,on o1 the +on!ervat,!m o1 an. ,nve!tment 0ro2ram
or mana2ement I,n+*-d,n2 !e*14mana2ementK !ho-*d e a!ed -0on rat,ona* oBe+t,ve !tandard!, and & !-22e!t
0er1orman+e ,n de+*,n,n2 mar"et! to e at *ea!t one mean,n21-* te!t.
70
The >o.! o1 $om0o-nd,n2
Reader! o1 o-r ear*. ann-a* *etter! re2,!tered d,!+ontent at a mere re+,ta* o1 +ontem0orar. ,nve!tment
e50er,en+e, -t ,n!tead h-n2ered 1or the ,nte**e+t-a* !t,m-*at,on that on*. +o-*d e 0rov,ded . a de0th !t-d. o1
,nve!tment !trate2. !0ann,n2 the +ent-r,e!. @en+e, th,! !e+t,on.
O-r *a!t two e5+-r!,on! ,nto the m.tho*o2. o1 1,nan+,a* e50ert,!e have revea*ed that 0-r0orted*. !hrewd
,nve!tment! . &!ae**a Ia+",n2 the vo.a2e o1 $o*-m-!K and Fran+,! & Ior,2,na* 0-r+ha!e o1 'ona L,!aK
ordered on 1,!+a* *-na+.. A0o*o2,!t! 1or the!e 0art,e! have 0re!ented an arra. o1 !ent,menta* tr,v,a. Thro-2h ,t
a**, o-r +om0o-nd,n2 ta*e! have not een dented . atta+".
Neverthe*e!!, one +r,t,+,!m ha! !t-n2 a ,t. The +har2e ha! een made that th,! +o*-mn ha! a+8-,red a ne2at,ve
tone w,th on*. the 1,nan+,a* ,n+om0etent! o1 h,!tor. re+e,v,n2 +omment. We have een +ha**en2ed to re+ord on
the!e 0a2e! a !tor. o1 1,nan+,a* 0er!0,+a+,t. wh,+h w,** e a en+h mar" o1 r,**,an+e down thro-2h the a2e!.
One !tor. !tand! o-t. Th,!, o1 +o-r!e, ,! the !a2a o1 trad,n2 a+-men et+hed ,nto h,!tor. . the 'anhattan &nd,an!
when the. -n*oaded the,r ,!*and to that notor,o-! !0endthr,1t, (eter ',n-,t ,n 1929. '. -nder!tand,n2 ,! that
the. re+e,ved H2? net. For th,!, ',n-,t re+e,ved 22.: !8-are m,*e! wh,+h wor"! o-t to ao-t 921,9;;,:20 !8-are
1eet. Wh,*e on the a!,! o1 +om0ara*e !a*e!, ,t ,! d,11,+-*t to arr,ve at a 0re+,!e a00ra,!a*, a H20 0er !8-are 1oot
e!t,mate !eem! rea!ona*e 2,v,n2 a +-rrent *and va*-e 1or the ,!*and o1 H12,?::,799,?00 IH12 1P2 ,**,onK. To the
nov,+e, 0erha0! th,! !o-nd! *,"e a de+ent dea*. @owever, the &nd,an! have on*. had to a+h,eve a 9 1P2= ret-rn
IThe tr,a* m-t-a* 1-nd re0re!entat,ve wo-*d have 0rom,!ed them th,!.K to ota,n the *a!t *a-2h on ',n-,t. At 9
1P2=, H2? e+ome! H?2,105,772,;00 IH?2 ,**,onK ,n ::; .ear!, and ,1 the. B-!t mana2ed to !8-ee<e o-t an e5tra
ha*1 0o,nt to 2et to 7=, the 0re!ent va*-e e+ome! H205 ,**,on.
#o m-+h 1or that.
#ome o1 .o- ma. v,ew .o-r ,nve!tment 0o*,+,e! on a !horter term a!,!. For .o-r +onven,en+e, we ,n+*-de o-r
-!-a* ta*e ,nd,+at,n2 the 2a,n! 1rom +om0o-nd,n2 H100,000 at var,o-! rate!3
?= ;= 12= 19=
10 Gear! H?;,02? H115,;92 H210,5;? H:?1,1?:
20 Gear! H119,111 H:99,09? H;9?,927 H1,;?9,090
:0 Gear! H22?,::7 H909,290 H2,;95,970 H;,?;?,9?0
Th,! ta*e ,nd,+ate! the 1,nan+,a* advanta2e! o13
I1K A *on2 *,1e I,n the er-d,te vo+a-*ar. o1 the 1,nan+,a* !o0h,!t,+ate th,! ,! re1erred to a! the 'eth-!a*ah
Te+hn,8-eK
I2K A h,2h +om0o-nd rate
I:K A +om,nat,on o1 oth Ie!0e+,a**. re+ommended . th,! a-thorK
To e o!erved are the enormo-! ene1,t! 0rod-+ed . re*at,ve*. !ma** 2a,n! ,n the ann-a* earn,n2! rate. Th,!
e50*a,n! o-r att,t-de wh,+h wh,*e ho0e1-* o1 a+h,ev,n2 a !tr,",n2 mar2,n o1 !-0er,or,t. over avera2e ,nve!tment
re!-*t!, neverthe*e!!, re2ard! ever. 0er+enta2e 0o,nt o1 ,nve!tment ret-rn aove avera2e a! hav,n2 rea* mean,n2.
O-r )oa*
71
Go- w,** note that there are no +o*-mn! ,n the 0re+ed,n2 ta*e 1or the 27.7= avera2e o1 the (artner!h,0 d-r,n2
,t! e,2ht4.ear *,1e!0an or the 22.:= avera2e o1 the *,m,ted 0artner!. #-+h 1,2-re! are non!en!,+a* 1or the *on2
term 1or !evera* rea!on!3 I%on/t worr. ao-t me 6ho*d,n2 a+"6 to !-!tant,ate th,! 0ro0he+..K
I1K An. !,2n,1,+ant !-m! +om0o-nded at !-+h rate! ta"e on nat,ona* det 0ro0ort,on! at a*arm,n2 !0eed.
I2K %-r,n2 o-r e,2ht4.ear h,!tor. a 2enera* reva*-at,on o1 !e+-r,t,e! ha! 0rod-+ed avera2e ann-a* rate! o1
overa** 2a,n 1rom the who*e +ommon !to+" 1,e*d wh,+h & e*,eve -natta,na*e ,n 1-t-re de+ade!. Over a
!0an o1 20 or :0 .ear!, & wo-*d e50e+t !ometh,n2 more *,"e 9= 4 7= overa** ann-a* 2a,n 1rom the %ow
,n!tead o1 the 11.1= d-r,n2 o-r r,e1 h,!tor.. Th,! 1a+tor a*one wo-*d tend to "no+" ? 0o,nt! or !o o11 o1
o-r ann-a* +om0o-nd,n2 rate. &t wo-*d on*. ta"e a m,n-! 20.5= .ear ,n 1995 1or the %ow to r,n2 ,t
down to a 7= avera2e 1,2-re 1or the n,ne .ear!. #-+h .ear! Ior wor!eK !ho-*d de1,n,te*. e e50e+ted
1rom t,me to t,me . tho!e ho*d,n2 e8-,t. ,nve!tment!. &1 a 20= or :0= dro0 ,n the mar"et va*-e o1
.o-r e8-,t. ho*d,n2! I!-+h a! B(LK ,! 2o,n2 to 0rod-+e emot,ona* or 1,nan+,a* d,!tre!!, .o- !ho-*d
!,m0*. avo,d +ommon !to+" t.0e ,nve!tment!. &n the word! o1 the 0oet 4 @arr. Tr-man J E&1 .o- +anDt
!tand the heat, !ta. o-t o1 the ",t+hen. &t ,! 0re1era*e, o1 +o-r!e, to +on!,der the 0ro*em e1ore .o-
enter the E",t+hen.F
I:K We do not +on!,der ,t 0o!!,*e on an e5tended a!,! to ma,nta,n the 19.9 0er+enta2e 0o,nt advanta2e
over the %ow o1 the (artner!h,0 or the 11.2 0er+enta2e 0o,nt ed2e enBo.ed . the *,m,ted 0artner!. We
have had e,2ht +on!e+-t,ve .ear! ,n wh,+h o-r 0oo* o1 mone. ha! o-t40er1ormed the %ow, a*tho-2h the
0ro1,t a**o+at,on arran2ement *e1t the *,m,ted 0artner! !hort o1 %ow re!-*t! ,n one o1 tho!e .ear!. We are
+erta,n to have .ear! Inote the 0*-ra*K when the (artner!h,0 re!-*t! 1a** !hort o1 the %ow de!0,te
+on!,dera*e 2na!h,n2 o1 teeth . the 2enera* 0artner I& ho0e not too m-+h . the *,m,ted 0artner!K.
When that ha00en! o-r avera2e mar2,n o1 !-0er,or,t. w,** dro0 !har0*.. & m,2ht !a. that & a*!o th,n" we
w,** +ont,n-e to have !ome .ear! o1 ver. de+ent mar2,n! ,n o-r 1avor. @owever, to date we have
ene1,ted . the 1a+t that we have not had a rea**. med,o+re Ior wor!eK .ear ,n+*-ded ,n o-r avera2e, and
th,! ov,o-!*. +annot e e50e+ted to e a 0ermanent e50er,en+e.
#o what +an we e50e+t to a+h,eveM O1 +o-r!e, an.th,n2 & m,2ht !a. ,! *ar2e*. 2-e!!wor", and m. own
,nve!tment 0h,*o!o0h. ha! deve*o0ed aro-nd the theor. that 0ro0he+. revea*! 1ar more o1 the 1ra,*t,e! o1 the
0ro0het than ,t revea*! o1 the 1-t-re.
Neverthe*e!!, .o-, a! 0artner!, are ent,t*ed to "now m. e50e+tat,on!, ten-o-! a! the. ma. e. & am ho0e1-* that
o-r *on2er term e50er,en+e w,** -n1o*d a*on2 the 1o**ow,n2 a!,!3
(1) An overa** 2a,n 1rom the %ow I,n+*-d,n2 d,v,dend!, o1 +o-r!eK avera2,n2 ,n the area o1 7= 0er ann-m,
e5h,,t,n2 +-!tomar,*. w,de am0*,t-de! ,n a+h,ev,n2 th,! avera2e 44 !a., on the order or m,n-! ?0= to
0*-! 50= at the e5treme! w,th the maBor,t. o1 .ear! ,n the m,n-! 10= to 0*-! 20= ran2e7
I2K An avera2e advanta2e o1 ten 0er+enta2e 0o,nt! 0er ann-m 1or B(L e1ore a**o+at,on to the 2enera*
0artner 4 a2a,n w,th *ar2e am0*,t-de! ,n the mar2,n 1rom 0erha0! 10 0er+enta2e 0o,nt! wor!e than the
%ow ,n a ad .ear to 25 0er+enta2e 0o,nt! etter when ever.th,n2 +*,+"!7 and
I:K The 0rod-+t o1 the!e two a!!-m0t,on! 2,ve! an avera2e o1 17= to B(L or ao-t 1?= to *,m,ted 0artner!.
Th,! 1,2-re wo-*d var. enormo-!*. 1rom .ear to .ear7 the 1,na* am0*,t-de!, o1 +o-r!e, de0end,n2, on the
,nter0*a. o1 the e5treme! h.0othe!,<ed ,n I1K and I2K.
& wo-*d *,"e to em0ha!,<e that the aove ,! +onBe+t-re, 0erha0! heav,*. ,n1*-en+ed . !e*14,ntere!t, e2o, et+.
An.one w,th a !en!e o1 1,nan+,a* h,!tor. "now! th,! !ort o1 2-e!!wor" ,! !-Be+t to enormo-! error. &t m,2ht
etter e *e1t o-t o1 th,! *etter, -t ,t ,! a 8-e!t,on 1re8-ent*. and *e2,t,mate*. a!"ed . 0artner!. Lon24ran2e
72
e50e+ta*e ret-rn ,! the 0r,mar. +on!,derat,on o1 a** o1 -! e*on2,n2 to B(L, and ,t ,! rea!ona*e that & !ho-*d e
0-t on re+ord, 1oo*,!h a! that ma. *ater ma"e me a00ear. '. rather 0-r,tan,+a* v,ew ,! that an. ,nve!tment
mana2er, whether o0erat,n2 a! ro"er, ,nve!tment +o-n!e*or, tr-!t de0artment, &nve!tment $om0an., et+.,
!ho-*d e w,**,n2 to !tate -ne8-,vo+a**. what he ,! 2o,n2 to attem0t to a++om0*,!h and how he 0ro0o!e! to
mea!-re the e5tent to wh,+h he 2et! the Bo done.
O-r 'ethod o1 O0erat,on
&n 0a!t ann-a* *etter! & have a*wa.! -t,*,<ed three +ate2or,e! to de!+r,e ,nve!tment o0erat,on! we +ond-+t. & now
1ee* that a 1o-r4+ate2or. d,v,!,on ,! more a00ro0r,ate. (art,a**., the add,t,on o1 a new !e+t,on 4 6)enera*!
Re*at,ve*. Underva*-ed6 4 re1*e+t! m. 1-rther +on!,derat,on o1 e!!ent,a* d,11eren+e! that have a*wa.! e5,!ted to a
!ma** e5tent w,th o-r 6)enera*!6 2ro-0. (art,a**., ,t re1*e+t! the 2row,n2 ,m0ortan+e o1 what on+e wa! a ver.
!ma** !-4+ate2or. -t ,! now a m-+h more !,2n,1,+ant 0art o1 o-r tota* 0ort1o*,o. Th,! ,n+rea!,n2 ,m0ortan+e
ha! een a++om0an,ed . e5+e**ent re!-*t! to date B-!t,1.,n2 !,2n,1,+ant t,me and e11ort devoted to 1,nd,n2
add,t,ona* o00ort-n,t,e! ,n th,! area. F,na**., ,t 0art,a**. re1*e+t! the deve*o0ment and ,m0*ementat,on o1 a new
and !omewhat -n,8-e ,nve!tment te+hn,8-e de!,2ned to ,m0rove the e50e+tan+. and +on!,!ten+. o1 o0erat,on!
,n th,! +ate2or.. There1ore, o-r 1o-r 0re!ent +ate2or,e! are3
1. E)enera*! 4(r,vate Owner Ba!,!F 4 a +ate2or. o1 2enera**. -nderva*-ed !to+"!, determ,ned . 8-ant,tat,ve
!tandard!, -t w,th +on!,dera*e attent,on a*!o 0a,d to the 8-a*,tat,ve 1a+tor. There ,! o1ten *,tt*e or noth,n2 to
,nd,+ate ,mmed,ate mar"et ,m0rovement. The ,!!-e! *a+" 2*amo-r or mar"et !0on!or!h,0. The,r ma,n
8-a*,1,+at,on ,! a ar2a,n 0r,+e7 that ,!, an overa** va*-at,on o1 the enter0r,!e !-!tant,a**. e*ow what +are1-*
ana*.!,! ,nd,+ate! ,t! va*-e to a 0r,vate owner to e. A2a,n, *et me em0ha!,<e that wh,*e the 8-ant,tat,ve +ome!
1,r!t and ,! e!!ent,a*, the 8-a*,tat,ve ,! ,m0ortant. We *,"e 2ood mana2ement 4 we *,"e a de+ent ,nd-!tr. 4 we *,"e
a +erta,n amo-nt o1 E1ermentF ,n a 0rev,o-!*. dormant mana2ement or !to+"ho*der 2ro-0. B-t, we demand
va*-e.
'an. t,me! ,n th,! +ate2or. we have the de!,ra*e 6two !tr,n2! to o-r ow6 !,t-at,on where we !ho-*d e,ther
a+h,eve a00re+,at,on o1 mar"et 0r,+e! 1rom e5terna* 1a+tor! or 1rom the a+8-,!,t,on o1 a +ontro**,n2 0o!,t,on ,n a
-!,ne!! at a ar2a,n 0r,+e. Wh,*e the 1ormer ha00en! ,n the overwhe*m,n2 maBor,t. o1 +a!e!, the *atter
re0re!ent! an ,n!-ran+e 0o*,+. mo!t ,nve!tment o0erat,on! don/t have. We have +ont,n-ed to en*ar2e the
0o!,t,on! ,n the three +om0an,e! de!+r,ed ,n o-r 199? m,d.ear re0ort where we are the *ar2e!t !to+"ho*der. A**
three +om0an,e! are ,n+rea!,n2 the,r 1-ndamenta* va*-e at a ver. !at,!1a+tor. rate, and we are +om0*ete*. 0a!!,ve
,n two !,t-at,on! and a+t,ve on*. on a ver. m,nor !+a*e ,n the th,rd. &t ,! -n*,"e*. that we w,** ever ta"e a rea**.
a+t,ve 0art ,n 0o*,+.4ma",n2 ,n an. o1 the!e three +om0an,e!, -t we !tand read. ,1 needed.
2. 6)enera*! 4Re*at,ve*. Underva*-ed6 4 th,! +ate2or. +on!,!t! o1 !e+-r,t,e! !e**,n2 at 0r,+e! re*at,ve*. +hea0
+om0ared to !e+-r,t,e! o1 the !ame 2enera* 8-a*,t.. We demand !-!tant,a* d,!+re0an+,e! 1rom +-rrent va*-at,on
!tandard!, -t I-!-a**. e+a-!e o1 *ar2e !,<eK do not 1ee* va*-e to a 0r,vate owner to e a mean,n21-* +on+e0t. &t
,! ,m0ortant ,n th,! +ate2or., o1 +o-r!e, that a00*e! e +om0ared to a00*e! 4 and not to oran2e!, and we wor"
hard at a+h,ev,n2 that end. &n the 2reat maBor,t. o1 +a!e! we !,m0*. do not "now eno-2h ao-t the ,nd-!tr. or
+om0an. to +ome to !en!,*e B-d2ment! 4,n that !,t-at,on we 0a!!.
A! ment,oned ear*,er, th,! new +ate2or. ha! een 2row,n2 and ha! 0rod-+ed ver. !at,!1a+tor. re!-*t!. We have
re+ent*. e2-n to ,m0*ement a te+hn,8-e, wh,+h 2,ve! 0rom,!e o1 ver. !-!tant,a**. red-+,n2 the r,!" 1rom an
overa** +han2e ,n va*-at,on !tandard!7 e.2. & we -. !ometh,n2 at 12 t,me! earn,n2! when +om0ara*e or 0oorer
8-a*,t. +om0an,e! !e** at 20 t,me! earn,n2!, -t then a maBor reva*-at,on ta"e! 0*a+e !o the *atter on*. !e** at 10
t,me!.
Th,! r,!" ha! a*wa.! othered -! enormo-!*. e+a-!e o1 the he*0*e!! 0o!,t,on ,n wh,+h we +o-*d e *e1t
+om0ared to the 6)enera*! 4(r,vate Owner6 or 6Wor"o-t!6 t.0e!. W,th th,! r,!" d,m,n,!hed, we th,n" th,!
+ate2or. ha! a 0rom,!,n2 1-t-re.
73
:. 6Wor"o-t!6 4 the!e are the !e+-r,t,e! w,th a t,meta*e. The. ar,!e 1rom +or0orate a+t,v,t. 4 !e**4o-t!, mer2er!,
reor2an,<at,on!, !0,n4o11!, et+. &n th,! +ate2or. we are not ta*",n2 ao-t r-mor! or 6,n!,de ,n1ormat,on6
0erta,n,n2 to !-+h deve*o0ment!, -t to 0-*,+*. anno-n+ed a+t,v,t,e! o1 th,! !ort. We wa,t -nt,* we +an read ,t ,n
the 0a0er. The r,!" 0erta,n! not 0r,mar,*. to 2enera* mar"et ehav,or Ia*tho-2h that ,! !omet,me! t,ed ,n to a
de2reeK, -t ,n!tead to !ometh,n2 -0!ett,n2 the a00*e+art !o that the e50e+ted deve*o0ment doe! not mater,a*,<e.
#-+h ",**Bo.! +o-*d ,n+*-de ant,4tr-!t or other ne2at,ve 2overnment a+t,on, !to+"ho*der d,!a00rova*, w,thho*d,n2
o1 ta5 r-*,n2!, et+. The 2ro!! 0ro1,t! ,n man. wor"o-t! a00ear 8-,te !ma**. &t/! a *,tt*e *,"e *oo",n2 1or 0ar",n2
meter! w,th !ome t,me *e1t on them. @owever, the 0red,+ta,*,t. +o-0*ed w,th a !hort ho*d,n2 0er,od 0rod-+e!
8-,te de+ent avera2e ann-a* rate! o1 ret-rn a1ter a**owan+e 1or the o++a!,ona* !-!tant,a* *o!!. Th,! +ate2or.
0rod-+e! more !tead. a!o*-te 0ro1,t! 1rom .ear to .ear than 2enera*! do. &n .ear! o1 mar"et de+*,ne ,t !ho-*d
-!-a**. 0,*e -0 a ,2 ed2e 1or -!7 d-r,n2 -** mar"et! ,t w,** 0roa*. e a dra2 on 0er1orman+e. On a *on24term
a!,!, & e50e+t the wor"o-t! to a+h,eve the !ame !ort o1 mar2,n over the %ow atta,ned . 2enera*!.
?. 6$ontro*!6 4 the!e are rar,t,e!, -t when the. o++-r the. are *,"e*. to e o1 !,2n,1,+ant !,<e. Un*e!! we !tart o11
w,th the 0-r+ha!e o1 a !,<a*e *o+" o1 !to+", +ontro*! deve*o0 1rom the 2enera* 4 0r,vate owner +ate2or.. The.
re!-*t 1rom !,t-at,on! where a +hea0 !e+-r,t. doe! noth,n2 0r,+ew,!e 1or !-+h an e5tended 0er,od o1 t,me that we
are a*e to -. a !,2n,1,+ant 0er+enta2e o1 the +om0an./! !to+". At that 0o,nt we are 0roa*. ,n a 0o!,t,on to
a!!-me a de2ree o1 or 0erha0! +om0*ete +ontro* o1 the +om0an./! a+t,v,t,e!. Whether we e+ome a+t,ve or
rema,n re*at,ve*. 0a!!,ve at th,! 0o,nt de0end! -0on o-r a!!e!!ment o1 the +om0an./! 1-t-re and the
mana2ement! +a0a,*,t,e!.
We do not want to 2et a+t,ve mere*. 1or the !a"e o1 e,n2 a+t,ve. Ever.th,n2 e*!e e,n2 e8-a*, & wo-*d m-+h
rather *et other! do the wor". @owever, when an a+t,ve ro*e ,! ne+e!!ar. to o0t,m,<e the em0*o.ment o1 +a0,ta*,
.o- +an e !-re we w,** not e !tand,n2 ,n the w,n2!.
A+t,ve or 0a!!,ve, ,n a +ontro* !,t-at,on there !ho-*d e a -,*t4,n 0ro1,t. The !,ne 8-a non o1 th,! o0erat,on ,! an
attra+t,ve 0-r+ha!e 0r,+e. On+e +ontro* ,! a+h,eved, the va*-e o1 o-r ,nve!tment ,! determ,ned . the va*-e o1 the
enter0r,!e, not the o1tent,me! ,rrat,ona*,t,e! o1 the mar"et 0*a+e.
An. o1 the three !,t-at,on! where we are now the *ar2e!t !to+"ho*der! ment,oned -nder )enera*! 4 (r,vate
Owner +o-*d, . v,rt-e o1 the two4wa. !tret+h the. 0o!!e!!, t-rn ,nto +ontro*!. That wo-*d !-,t -! 1,ne, -t ,t
a*!o !-,t! -! ,1 the. advan+e ,n the mar"et to a 0r,+e more ,n *,ne w,th ,ntr,n!,+ va*-e ena*,n2 -! to !e** them,
there. +om0*et,n2 a !-++e!!1-* 2enera*! 4 0r,vate owner o0erat,on.
&nve!tment re!-*t! ,n the +ontro* +ate2or. have to e mea!-red on the a!,! o1 at *ea!t !evera* .ear!. (ro0er
-.,n2 ta"e! t,me. &1 needed, !tren2then,n2 mana2ement, red,re+t,n2 the -t,*,<at,on o1 +a0,ta*, 0erha0! e11e+t,n2
a !at,!1a+tor. !a*e or mer2er, et+., are a*!o a** 1a+tor! that ma"e th,! a -!,ne!! to e mea!-red ,n .ear! rather
than month!. For th,! rea!on, ,n +ontro*!, we are *oo",n2 1or w,de mar2,n! o1 0ro1,t 4,1 ,t a00ear! at a** +*o!e, we
8-,t+*a,m.
$ontro*! ,n the -.,n2 !ta2e move *ar2e*. ,n !.m0ath. w,th the %ow. &n the *ater !ta2e! the,r ehav,or ,! 2eared
more to that o1 wor"o-t!.
Go- m,2ht e ,ntere!ted to "now that the -.er! o1 o-r 1ormer +ontro* !,t-at,on, %em0!ter ',** 'an-1a+t-r,n2,
!eem to e do,n2 ver. we** w,th ,t. Th,! 1-*1,**! o-r e50e+tat,on and ,! a !o-r+e o1 !at,!1a+t,on. An ,nve!tment
o0erat,on that de0end! on the -*t,mate -.er ma",n2 a -m dea* I,n Wa** #treet the. +a** th,! the 6B,22er Foo*
Theor.6K ,! ten-o-! ,ndeed. @ow m-+h more !at,!1a+tor. ,t ,! to -. at rea**. ar2a,n 0r,+e! !o that on*. an
avera2e d,!0o!,t,on r,n2! 0*ea!ant re!-*t!.
A! & have ment,oned ,n the 0a!t, the d,v,!,on o1 o-r 0ort1o*,o amon2 +ate2or,e! ,! *ar2e*. determ,ned . the
74
a++,dent o1 ava,*a,*,t.. There1ore, ,n an. 2,ven .ear the m,5 etween 2enera*!, wor"o-t!, or +ontro*! ,! *ar2e*. a
matter o1 +han+e, and th,! 1,+"*e 1a+tor w,** have a 2reat dea* to do w,th o-r 0er1orman+e re*at,ve to the %ow.
Th,! ,! one o1 man. rea!on! wh. !,n2*e .ear/! 0er1orman+e ,! o1 m,nor ,m0ortan+e and 2ood or ad, !ho-*d
never e ta"en too !er,o-!*..
To 2,ve an e5am0*e o1 B-!t how ,m0ortant the a++,dent o1 d,v,!,on etween the!e +ate2or,e! ,!, *et me +,te the
e5am0*e o1 the 0a!t three .ear!. U!,n2 an ent,re*. d,11erent method o1 +a*+-*at,on than that -!ed to mea!-re the
0er1orman+e o1 B(L ,n ent,ret., where. the avera2e month*. ,nve!tment at mar"et va*-e . +ate2or. ,!
-t,*,<ed, orrowed mone. and o11,+e o0erat,n2 e50en!e! e5+*-ded, et+., Ith,! 2,ve! the mo!t a++-rate a!,! 1or
,nter2ro-0 +om0ar,!on! -t doe! not re1*e+t overa** B(L re!-*t!K the 2enera*! Ioth 0re!ent +ate2or,e!
+om,nedK, wor"o-t!, and the %ow, !ha0e -0 a! 1o**ow!3
Year Generals 4or(outs Dow
1992 41.0= 1?.9= 4;.9=
199: 20.5= :0.9= 1;.?=
199? 27.;= 10.:= 19.7=
Ov,o-!*. the wor"o-t! Ia*on2 w,th +ontro*!K !aved the da. ,n 1992, and ,1 we had een *,2ht ,n th,! +ate2or.
that .ear, o-r 1,na* re!-*t wo-*d have een m-+h 0oorer, a*tho-2h !t,** 8-,te re!0e+ta*e +on!,der,n2 mar"et
+ond,t,on! d-r,n2 the .ear. We +o-*d B-!t a! we** have had a m-+h !ma**er 0er+enta2e o1 o-r 0ort1o*,o ,n
wor"o-t! that .ear7 ava,*a,*,t. de+,ded ,t, not an. not,on on m. 0art a! to what the mar"et wa! 2o,n2 to do.
There1ore, ,t ,! ,m0ortant to rea*,<e that ,n 1992 we were B-!t 0*a,n *-+". re2ard,n2 m,5 o1 +ate2or,e!.
&n 199: we had one !en!at,ona* wor"o-t wh,+h 2reat*. ,n1*-en+ed re!-*t!, and 2enera*! 2ave a 2ood a++o-nt o1
them!e*ve!, re!-*t,n2 ,n a anner .ear. &1 wor"o-t! had een norma*, I!a., more *,"e 1992K we wo-*d have
*oo"ed m-+h 0oorer +om0ared to the %ow. @ere ,t wa!n/t o-r m,5 that d,d m-+h 1or -!, -t rather e5+e**ent
!,t-at,on!.
F,na**., ,n 199? wor"o-t! were a ,2 dra2 on 0er1orman+e. Th,! wo-*d e norma* ,n an. event d-r,n2 a ,2 0*-!
.ear 1or the %ow !-+h a! 199?, -t the. were even a 2reater dra2 than e50e+ted e+a-!e o1 med,o+re e50er,en+e.
&n retro!0e+t ,t wo-*d have een 0*ea!ant to have een ent,re*. ,n 2enera*!, -t we donDt 0*a. the 2ame ,n
retro!0e+t.
& ho0e the 0re+ed,n2 ta*e dr,ve! home the 0o,nt that re!-*t! ,n a 2,ven .ear are !-Be+t to man. var,a*e! 4 !ome
re2ard,n2 wh,+h we have *,tt*e +ontro* or ,n!,2ht. We +on!,der a** +ate2or,e! to e 2ood -!,ne!!e! and we are
ver. ha00. we have !evera* to re*. on rather than B-!t one. &t ma"e! 1or more d,!+r,m,nat,on w,th,n ea+h
+ate2or. and red-+e! the +han+e we w,** e 0-t +om0*ete*. o-t o1 o0erat,on . the e*,m,nat,on o1 o00ort-n,t,e!
,n a !,n2*e +ate2or..
Ta5e!
We have had a +hor-! o1 2roan! th,! .ear re2ard,n2 0artner!/ ta5 *,a,*,t,e!. O1 +o-r!e, we a*!o m,2ht have had a
1ew ,1 the ta5 !heet had 2one o-t *an".
'ore ,nve!tment !,n! are 0roa*. +omm,tted . otherw,!e 8-,te ,nte**,2ent 0eo0*e e+a-!e o1 6ta5
+on!,derat,on!6 than 1rom an. other +a-!e. One o1 m. 1r,end! 4 a noted We!t $oa!t 0h,*o!o0her ma,nta,n! that a
maBor,t. o1 *,1e/! error! are +a-!ed . 1or2ett,n2 what one ,! rea**. tr.,n2 to do. Th,! ,! +erta,n*. the +a!e when
an emot,ona**. !-0er+har2ed e*ement *,"e ta5e! enter! the 0,+t-re I& have another 1r,end 4a noted Ea!t $oa!t
0h,*o!o0her who !a.! ,t ,!n/t the *a+" o1 re0re!entat,on he m,nd! 4,t/! the ta5at,onK.
Let/! 2et a+" to the We!t $oa!t. What ,! one rea**. tr.,n2 to do ,n the ,nve!tment wor*dM Not 0a. the *ea!t
75
ta5e!, a*tho-2h that ma. e a 1a+tor to e +on!,dered ,n a+h,ev,n2 the end. 'ean! and end !ho-*d not e
+on1-!ed, however, and the end ,! to +ome awa. w,th the *ar2e!t a1ter4ta5 rate o1 +om0o-nd. R-,te ov,o-!*. ,1
two +o-r!e! o1 a+t,on 0rom,!e e8-a* rate! o1 0re4ta5 +om0o-nd and one ,nvo*ve! ,n+-rr,n2 ta5e! and the other
doe!n/t the *atter +o-r!e ,! !-0er,or. @owever, we 1,nd th,! ,! rare*. the +a!e.
&t ,! e5treme*. ,m0roa*e that 20 !to+"! !e*e+ted 1rom, !a., :000 +ho,+e! are 2o,n2 to 0rove to e the o0t,m-m
0ort1o*,o oth now and a .ear 1rom now at the ent,re*. d,11erent 0r,+e! Ioth 1or the !e*e+t,on! and the
a*ternat,ve!K 0reva,*,n2 at that *ater date. &1 o-r oBe+t,ve ,! to 0rod-+e the ma5,m-m a1ter4ta5 +om0o-nd rate,
we !,m0*. have to own the mo!t attra+t,ve !e+-r,t,e! ota,na*e at +-rrent 0r,+e!, And, w,th :,000 rather ra0,d*.
!h,1t,n2 var,a*e!, th,! m-!t mean +han2e Iho0e1-**. Eta542enerat,n2F +han2eK.
&t ,! ov,o-! that the 0er1orman+e o1 a !to+" *a!t .ear or *a!t month ,! no rea!on, 0er !e, to e,ther own ,t or to not
own ,t now. &t ,! ov,o-! that an ,na,*,t. to 62et even6 ,n a !e+-r,t. that ha! de+*,ned ,! o1 no ,m0ortan+e. &t ,!
ov,o-! that the ,nner warm 2*ow that re!-*t! 1rom hav,n2 he*d a w,nner *a!t .ear ,! o1 no ,m0ortan+e ,n ma",n2
a de+,!,on a! to whether ,t e*on2! ,n an o0t,m-m 0ort1o*,o th,! .ear.
&1 2a,n! are ,nvo*ved, +han2,n2 0ort1o*,o! ,nvo*ve! 0a.,n2 ta5e!. E5+e0t ,n ver. -n-!-a* +a!e! I& w,** read,*.
adm,t there are !ome +a!e!K, the amo-nt o1 the ta5 ,! o1 m,nor ,m0ortan+e ,1 the d,11eren+e ,n e50e+ta*e
0er1orman+e ,! !,2n,1,+ant. & have never een a*e to -nder!tand wh. the ta5 +ome! a! !-+h a od. *ow to
man. 0eo0*e !,n+e the rate on *on24term +a0,ta* 2a,n ,! *ower than on mo!t *,ne! o1 endeavor Ita5 0o*,+.
,nd,+ate! d,22,n2 d,t+he! ,! re2arded a! !o+,a**. *e!! de!,ra*e than !h-11*,n2 !to+" +ert,1,+ate!K.
& have a *ar2e 0er+enta2e o1 0ra2mat,!t! ,n the a-d,en+e !o & had etter 2et o11 that ,dea*,!t,+ ",+". There are on*.
three wa.! to avo,d -*t,mate*. 0a.,n2 the ta53 I1K d,e w,th the a!!et 4 and that/! a *,tt*e too -*t,mate 1or me even
the <ea*ot! wo-*d have to v,ew th,! 6+-re6 w,th m,5ed emot,on!7 I2K 2,ve the a!!et awa. 4 .o- +erta,n*. don/t
0a. an. ta5e! th,! wa., -t o1 +o-r!e .o- don/t 0a. 1or an. 2ro+er,e!, rent, et+., e,ther7 and I:K *o!e a+" the 2a,n
,1 .o-r mo-th water! at th,! ta54!aver, & have to adm,re .o- 4.o- +erta,n*. have the +o-ra2e o1 .o-r +onv,+t,on!.
#o ,t ,! 2o,n2 to +ont,n-e to e the 0o*,+. o1 B(L to tr. to ma5,m,<e ,nve!tment 2a,n!, not m,n,m,<e ta5e!. We
w,** do o-r *eve* e!t to +reate the ma5,m-m reven-e 1or the Trea!-r. 4at the *owe!t rate! the r-*e! w,** a**ow.
An ,ntere!t,n2 !,de*,2ht on th,! who*e -!,ne!! o1 ta5e!, v,!4W4v,! ,nve!tment mana2ement, ha! a00eared ,n the
*a!t 1ew .ear!. Th,! ha! ar,!en thro-2h the +reat,on o1 !o4+a**ed 6!wa0 1-nd!6 wh,+h are ,nve!tment +om0an,e!
+reated . the e5+han2e o1 the ,nve!tment +om0an./! !hare! 1or 2enera* mar"et !e+-r,t,e! he*d . 0otent,a*
,nve!tor!. The dom,nant !a*e! ar2-ment ha! een the de1erment Ide1erment, when 0rono-n+ed . an enth-!,a!t,+
!a*e!man, !omet,me! +ome! ver. +*o!e 0honet,+a**. to e*,m,nat,onK o1 +a0,ta* 2a,n! ta5e! wh,*e trad,n2 a !,n2*e
!e+-r,t. 1or a d,ver!,1,ed 0ort1o*,o. The ta5 w,** on*. 1,na**. e 0a,d when the !wa0 1-nd/! !hare! are redeemed.
For the *-+". one!, ,t w,** e avo,ded ent,re*. when an. o1 tho!e de*,2ht1-* a*ternat,ve! ment,oned two
0ara2ra0h! ear*,er event-ate!.
The rea!on,n2 ,m0*,+,t ,n the !wa0ee/! a+t,on ,! rather ,ntere!t,n2. @e ov,o-!*. doe!n/t rea**. want to ho*d what
he ,! ho*d,n2 or he wo-*dn/t B-m0 at the +han+e to !wa0 ,t Iand 0a. a 1a,r*. hea*th. +omm,!!,on 4 -!-a**. -0 to
H100,000K 1or a 2ra4a2 o1 !,m,*ar hot 0otatoe! he*d . other ta54n-med ,nve!tor!. &n a** 1a,rne!!, & !ho-*d
0o,nt o-t that a1ter a** o11eree! have !-m,tted the,r !e+-r,t,e! 1or e5+han2e and had a +han+e to rev,ew the
0ro0o!ed 0ort1o*,o the. have a +han+e to a+" o-t -t & -nder!tand a re*at,ve*. !ma** 0ro0ort,on do !o.
There have een twe*ve !-+h 1-nd! Ithat & "now o1K e!ta*,!hed !,n+e or,2,nat,on o1 the ,dea ,n 1990, and !evera*
more are +-rrent*. ,n the wor"!. The ,dea ,! not w,tho-t a00ea* !,n+e !a*e! tota*ed we** over H900 m,**,on. A** o1
the 1-nd! reta,n an ,nve!tment mana2er to whom the. -!-a**. 0a. 1P2 o1 1= o1 a!!et va*-e. Th,! ,nve!tment
mana2er 1a+e! an ,ntere!t,n2 0ro*em7 he ,! 0a,d to mana2e the 1-nd ,nte**,2ent*. I,n ea+h o1 the 1,ve *ar2e!t
1-nd! th,! 1ee +-rrent*. ran2e! 1rom H250,000 to H700,000 0er .earK, -t e+a-!e o1 the *ow ta5 a!,! ,nher,ted
76
1rom the +ontr,-tor! o1 !e+-r,t,e!, v,rt-a**. h,! ever. move +reate! +a0,ta* 2a,n! ta5 *,a,*,t,e!. And, o1 +o-r!e,
he "now! that ,1 he ,n+-r! !-+h *,a,*,t,e!, he ,! do,n2 !o 1or 0eo0*e who are 0roa*. 8-,te !en!,t,ve to ta5e! or
the. wo-*dn/t own !hare! ,n the !wa0 1-nd ,n the 1,r!t 0*a+e.
& am 0-tt,n2 a** o1 th,! a ,t !tron2*., and & am !-re there are !ome +a!e! where a !wa0 1-nd ma. e the e!t
an!wer to an ,nd,v,d-a*/! +om,ned ta5 and ,nve!tment 0ro*em!. Neverthe*e!!, & 1ee* the. o11er a ver.
,ntere!t,n2 te!t4t-e to mea!-re the a,*,t. o1 !ome o1 the mo!t re!0e+ted ,nve!tment adv,!or! when the. are
tr.,n2 to mana2e mone. w,tho-t 0a.,n2 I!,2n,1,+antK ta5e!.
The three *ar2e!t !wa0 1-nd! were a** or2an,<ed ,n 1991, and +om,ned have a!!et! now o1 ao-t H:00 m,**,on.
One o1 the!e, %,ver!,1,+at,on F-nd, re0ort! on a 1,!+a* .ear a!,! wh,+h ma"e! e5tra+t,on o1 re*evant data 8-,te
d,11,+-*t 1or +a*endar .ear +om0ar,!on!. The other two, Federa* #treet F-nd and We!tm,n!ter F-nd Ire!0e+t,ve*.
1,r!t and th,rd *ar2e!t ,n the 2ro-0K are mana2ed . ,nve!tment adv,!or! who over!ee at *ea!t H2 ,**,on o1
,n!t,t-t,ona* mone..
@ere/! how the. !ha0e -0 1or a** 1-** .ear! o1 e5,!ten+e3
Year :ederal 'treet 4estinster Dow
1992 419.0= 422.5= 47.9=
199: 17.0= 1;.7= 20.9=
199? 1:.;= 12.:= 1;.7=
Ann-a* $om0o-nded
Rate
2.9= 1.1= 9.;=
Th,! ,! !tr,+t*. the mana2ement re+ord. No a**owan+e ha! een made 1or the +omm,!!,on ,n enter,n2 and an.
ta5e! 0a,d . the 1-nd on eha*1 o1 the !hareho*der! have een added a+" to 0er1orman+e.
An.one 1or ta5e!M
',!+e**aneo-!
&n the %e+emer 21!t ,!!-e o1 AUTO'OT&LE NEW# ,t wa! re0orted that Ford 'otor $o. 0*an! to !0end H700
m,**,on ,n 1995 to add 9,7?2,000 !8-are 1eet to ,t! 1a+,*,t,e! thro-2ho-t the wor*d. B-11ett (artner!h,0, Ltd.,
never 1ar eh,nd, 0*an! to add 227 1P? !8-are 1eet to ,t! 1a+,*,t,e! ,n the !0r,n2 o1 1995.
O-r 2rowth ,n net a!!et! 1rom H105,100 Ithere/! no 0r,<e 1or 2-e!!,n2 who 0-t ,n the H100K on 'a. 5, 1959
when the 1,r!t 0rede+e!!or *,m,ted 0artner!h,0.IB-11ett A!!o+,ate!, Ltd. K wa! or2an,<ed, to H29,07?,000 on
1P1P95 +reate! the need 1or an o++a!,ona* reor2an,<at,on ,n ,nterna* ro-t,ne. There1ore, ro-2h*.
+ontem0oraneo-!*. w,th the o*d move 1rom 9;2 to 909 X !8-are 1eet, a h,2h*. +a0a*e ,! 2o,n2 to Bo,n o-r
or2an,<at,on w,th re!0on!,,*,t. 1or the adm,n,!trat,ve Iand +erta,n otherK 1-n+t,on!. Th,! move w,** 0art,+-*ar*.
!erve to 1ree -0 more o1 B,** #+ott/! t,me 1or !e+-r,t. ana*.!,! wh,+h ,! h,! 1orte. &D** have more to re0ort on th,!
,n the m,d.ear *etter.
B,** Iwho +ont,n-e! to do a terr,1,+ BoK and h,! w,1e have an ,nve!tment ,n the (artner!h,0 o1 H29;,7?9, a ver.
*ar2e maBor,t. o1 the,r net worth. O-r new a!!o+,ate Ih,! name ,! e,n2 w,thhe*d -nt,* h,! 0re!ent em0*o.er ha!
re0*a+ed h,mK, a*on2 w,th h,! w,1e and +h,*dren, ha! made an ,m0ortant ,nve!tment ,n the (artner!h,0. #-!,e and
& 0re!ent*. have an ,ntere!t o1 H:,?09,700 ,n B(L wh,+h re0re!ent! v,rt-a**. o-r ent,re net worth, w,th the
e5+e0t,on o1 o-r +ont,n-ed ho*d,n2 o1 ',d4$ont,nent Ta $ard $o., a *o+a* +om0an. ,nto wh,+h & o-2ht ,n
1990 when ,t had *e!! than 10 !to+"ho*der!. Add,t,ona**., m. re*at,ve!, +on!,!t,n2 o1 three +h,*dren, mother ,
two !,!ter!, two rother!4,n4*aw, 1ather4,n4Law, 1o-r a-nt!, 1o-r +o-!,n! and !,5 n,e+e! and ne0hew!, have
,ntere!t! ,n B(L, d,re+t*. or ,nd,re+t*., tota*,n2 H1,9?2,592. #o we a** +ont,n-e to eat home +oo",n2.
77
We +ont,n-e to re0re!ent the -*t,mate ,n !ea!ona* -!,ne!!e! 44o0en one da. a .ear. Th,! +reate! rea* 0ro*em! ,n
"ee0,n2 the 0a0er 1*ow,n2 !mooth*., -t Beth and %onna +ont,n-e to do an o-t!tand,n2 Bo o1 +o0,n2 w,th th,!
and other 0ro*em!.
(eat, 'arw,+", ',t+he** ha! d,!t,n2-,!hed ,t!e*1 ,n ,t! -!-a* v,ta* ro*e o1 1,nd,n2 o-t what e*on2! to whom. We
+ont,n-e to throw ,m0o!!,*e dead*,ne! at them 44and the. +ont,n-e to 0er1orm ma2n,1,+ent*.. Go- w,** note ,n
the,r +ert,1,+ate th,! .ear that the. have ,m0*emented the new 0ro+ed-re where. the. now 0o-n+e on -!
-nanno-n+ed tw,+e a .ear ,n add,t,on to the re2-*ar .earend e11ort.
F,na**. 4and mo!t !,n+ere*. 4*et me than" .o- 0artner! who +oo0erate ma2n,1,+ent*. ,n 2ett,n2 th,n2! to -!
0rom0t*. and 0ro0er*. and there. ma5,m,<e the t,me we +an !0end wor",n2 where we !ho-*d e 4. the +a!h
re2,!ter. & am e5treme*. 1ort-nate ,n e,n2 a*e to !0end the 2reat maBor,t. o1 m. t,me th,n",n2 ao-t where o-r
mone. !ho-*d e ,nve!ted, rather than 2ett,n2 o22ed down ,n the m,n-t,ae that !eem! to overwhe*m !o man.
-!,ne!! ent,t,e!. We have an or2an,<at,ona* !tr-+t-re wh,+h ma"e! th,! e11,+,en+. a 0o!!,,*,t., and more
,m0ortant*., we have a 2ro-0 o1 0artner! that ma"e ,t a rea*,t.. For th,!, & am mo!t a00re+,at,ve and we are a**
wea*th,er.
O-r 0a!t 0o*,+. ha! een to adm,t +*o!e re*at,ve! o1 0re!ent 0artner! w,tho-t a m,n,m-m +a0,ta* *,m,tat,on. Th,!
.ear a 1*ood o1 +h,*dren, 2rand+h,*dren, et+., a00eared wh,+h +a**ed th,! 0o*,+. ,nto 8-e!t,on7 there1ore, & have
de+,ded to ,n!t,t-te a H25,000 m,n,m-m on ,ntere!t! o1 ,mmed,ate re*at,ve! o1 0re!ent 0artner!.
W,th,n the +om,n2 two wee"! .o- w,** re+e,ve3
I1K A ta5 *etter 2,v,n2 .o- a** B(L ,n1ormat,on needed 1or .o-r 199? 1edera* ,n+ome ta5 ret-rn. Th,! *etter
,! the on*. ,tem that +o-nt! 1or ta5 0-r0o!e!.
I2K An a-d,t 1rom (eat, 'arw,+", ',t+he** N $o. 1or 199?, !ett,n2 1orth the o0erat,on! and 1,nan+,a*
0o!,t,on o1 B(L a! we** a! .o-r own +a0,ta* a++o-nt.
I:K A *etter !,2ned . me !ett,n2 1orth the !tat-! o1 .o-r B(L ,ntere!t on 111195. Th,! ,! ,dent,+a* w,th the
1,2-re deve*o0ed ,n the a-d,t.
I?K #+hed-*e EAF to the 0artner!h,0 a2reement *,!t,n2 a** 0artner!.
Let B,** or me "now ,1 an.th,n2 need! +*ar,1.,n2. Even w,th o-r !0*end,d !ta11 o-r 2rowth mean! there ,! more
+han+e o1 m,!!,n2 *etter!, over*oo"ed ,n!tr-+t,on!, a name !",00ed over, a 1,2-re tran!0o!,t,on, et+., !o !0ea" -0
,1 .o- have an. 8-e!t,on at a** that we m,2ht have erred. '. ne5t *etter w,** e ao-t >-*. 15th6 !-mmar,<,n2
the 1,r!t ha*1 o1 th,! .ear.
$ord,a**.,
Warren E. B-11ett
78
BUFFETT (ARTNER#@&(, LT%.
;10 A&EW&T (LAOA
O'A@A :1, NEBRA#AA
>-*. 9, 1995
Warren E. B-11ett, )enera* (artner
W,**,am #+ott
>ohn '. @ard,n2
F,r!t @a*1 (er1orman+e3
%-r,n2 the 1,r!t ha*1 o1 1995, the %ow >one! &nd-!tr,a* Avera2e Ihere,na1ter +a** the E%owFK de+*,ned 1rom
;7?.1: to ;9;.0:. Th,! m,nor +han2e wa! a++om0*,!hed ,n a de+,ded*. non4E-+*,d,an manner. The %ow ,n!tead
too" the !+en,+ ro-te, rea+h,n2 a h,2h o1 9:9.92 on 'a. 1?
th
. Add,n2 a+" d,v,dend! on the %ow o1 1:.?9 2,ve!
an overa** 2a,n thro-2h owner!h,0 o1 the %ow 1or the 1,r!t ha*1 o1 7.:9 or 0.;=.
We had one o1 o-r etter 0er,od! w,th an overa** 2a,n, e1ore a**o+at,on to the 2enera* 0artner, o1 10.?= or a 9.9
0er+enta2e 0o,nt advanta2e over the %ow. To r,n2 the re+ord -0 to date, the 1o**ow,n2 !-mmar,<e! the .ear4.4
.ear 0er1orman+e o1 the %ow, the 0er1orman+e o1 the (artner!h,0 e1ore a**o+at,on to the 2enera* 0artner, and
the *,m,ted 0artner!D re!-*t!3
Gear
Overall .esults :ro
Dow /)0
Partnership .esults /10 Liited Partners!
.esults /?0
1957 4;.?= 10.?= 9.:=
195; :;.5= ?0.9= :2.2=
1959 20.0= 25.9= 20.9=
1990 49.2= 22.;= 1;.9=
1991 22.?= ?5.9= :5.9=
1992 47.9= 1:.9= 11.9=
199: 20.9= :;.7= :0.5=
199? 1;.7= 27.;= 22.:=
1
!t
ha*1 1995 0.;= 10.?= 9.:=
"uulative results )??.17 +A1.@7 @@,.B7
9nnual copounded
rate
)8.67 1B.@7 11.17
I1K Ba!ed on .ear*. +han2e! ,n the va*-e o1 the %ow 0*-! d,v,dend! that wo-*d have een re+e,ved
thro-2h owner!h,0 o1 the %ow d-r,n2 that .ear. The ta*e ,n+*-de! a** +om0*ete .ear! o1 0artner!h,0
a+t,v,t..
I2K For 1957491 +on!,!t! o1 +om,ned re!-*t! o1 a** 0rede+e!!or *,m,ted 0artner!h,0! o0erat,n2
thro-2ho-t the ent,re .ear a1ter a** e50en!e! -t e1ore d,!tr,-t,on! to 0artner! or a**o+at,on! to the
2enera* 0artner.
I:K For 1957491 +om0-ted on the a!,! o1 the 0re+ed,n2 +o*-mn o1 0artner!h,0 re!-*t! a**ow,n2 1or
a**o+at,on to the 2enera* 0artner a!ed -0on the 0re!ent 0artner!h,0 a2reement, -t e1ore month*.
w,thdrawa*! . *,m,ted 0artner!.
O-r +on!tant admon,t,on! have een3 I1K that !hort4term re!-*t! I*e!! than three .ear!K have *,tt*e mean,n2,
0art,+-*ar*. ,n re1eren+e to an ,nve!tment o0erat,on !-+h a! o-r! that ma. devote a 0ort,on o1 re!o-r+e! to
+ontro* !,t-at,on!7 and, I2K that o-r re!-*t!, re*at,ve to the %ow and other +ommon4!to+"41orm med,a -!-a**. w,**
e etter ,n de+*,n,n2 mar"et! and ma. we** have a d,11,+-*t t,me B-!t mat+h,n2 !-+h med,a ,n ver. !tron2
79
mar"et!.
W,th the *atter 0o,nt ,n m,nd, ,t m,2ht e ,ma2,ned that we !tr-22*ed d-r,n2 the 1,r!t 1o-r month! o1 the ha*1 to
!ta. even w,th the %ow and then o0ened -0 o-r mar2,n a! ,t de+*,ned ,n 'a. and >-ne. >-!t the o00o!,te
o++-rred. We a+t-a**. a+h,eved a w,de mar2,n d-r,n2 the -0!w,n2 and then 1e** at a rate 1-**. e8-a* to the %ow
d-r,n2 the mar"et de+*,ne.
& donDt ment,on th,! e+a-!e & am 0ro-d o1 !-+h 0er1orman+e J on the +ontrar., & wo-*d 0re1er ,t ,1 we had
a+h,eved o-r 2a,n ,n the h.0othe!,<ed manner. Rather, & ment,on ,t 1or two rea!on!3 I1K .o- are a*wa.! ent,t*ed
to "now when & am wron2 a! we** a! r,2ht7 and, I2K ,t demon!trate! that a*tho-2h we dea* w,th 0roa,*,t,e! and
e50e+tat,on!, the a+t-a* re!-*t! +an dev,ate !-!tant,a**. 1rom !-+h e50e+tat,on!, 0art,+-*ar*. on a !hort4term
a!,!. A! ment,oned ,n the mo!t re+ent ann-a* *etter, o-r *on24term 2oa* ,! to a+h,eve a ten 0er+enta2e 0o,nt 0er
ann-m advanta2e over the %ow. O-r advanta2e o1 9.9 0o,nt! a+h,eved d-r,n2 the 1,r!t !,5 month! m-!t e
re2arded a! !-!tant,a**. aove avera2e. The 1ort,t-de demon!trated . o-r 0artner! ,n to*erat,n2 !-+h 1avora*e
var,at,on! ,! +ommenda*e. We !ha** mo!t +erta,n*. en+o-nter 0er,od! when the var,at,on! are ,n the other
d,re+t,on.
%-r,n2 the 1,r!t ha*1, a !er,e! o1 0-r+ha!e! re!-*ted ,n the a+8-,!,t,on o1 a +ontro**,n2 ,ntere!t ,n one o1 the
!,t-at,on! de!+r,ed ,n the E)enera* (r,vate OwnerF !e+t,on o1 the *a!t ann-a* *etter. When !-+h a +ontro**,n2
,ntere!t ,! a+8-,red, the a!!et! and earn,n2 0ower o1 the -!,ne!! e+ome the ,mmed,ate 0redom,nant 1a+tor! ,n
va*-e. When a !ma** m,nor,t. ,ntere!t ,n a +om0an. ,! he*d, earn,n2 0ower and a!!et! are, o1 +o-r!e, ver.
,m0ortant, -t the. re0re!ent an ,nd,re+t ,n1*-en+e on va*-e wh,+h, ,n the !hort r-n, ma. or ma. not dom,nate
the 1a+tor! ear,n2 on !-00*. and demand wh,+h re!-*t ,n 0r,+e.
When a +ontro**,n2 ,ntere!t ,! he*d, we own a -!,ne!! rather then a !to+", and a -!,ne!! va*-at,on ,!
a00ro0r,ate. We have +arr,ed o-r +ontro**,n2 0o!,t,on at a +on!ervat,ve va*-at,on at m,d.ear and w,** reeva*-ate
,t ,n term! o1 a!!et! and earn,n2 0ower at .earend. The ann-a* *etter, ,!!-ed ,n >an-ar., 1999, w,** +arr. a 1-**
!tor. on th,! +-rrent +ontro* !,t-at,on. At th,! t,me ,t ,! eno-2h to !a. that we are de*,2hted w,th oth the
a+8-,!,t,on +o!t and the -!,ne!! o0erat,on, and even ha00,er ao-t the 0eo0*e we have mana2,n2 the -!,ne!!.
&nve!tment $om0an,e!3
We re2-*ar*. +om0are o-r re!-*t! w,th the two *ar2e!t o0en4end ,nve!tment +om0an,e! Im-t-a* 1-nd!K that
1o**ow a 0o*,+. o1 e,n2, t.0,+a**., 954100= ,nve!ted ,n +ommon !to+"!, and the two *ar2e!t d,ver!,1,ed +*o!ed4
end ,nve!tment +om0an,e!. The!e 1o-r +om0an,e!, 'a!!a+h-!ett! &nve!tor! Tr-!t, &nve!tor! #to+" F-nd, Tr,4
$ont,nenta* $or0., and Lehman $or0., mana2e over H? ,**,on and are 0roa*. t.0,+a* o1 mo!t o1 the H:0
,**,on ,nve!tment +om0an. ,nd-!tr.. The,r re!-*t! are !hown ,n the 1o**ow,n2 ta*e. '. o0,n,on ,! that th,!
0er1orman+e ro-2h*. 0ara**e*! that o1 the overwhe*m,n2 maBor,t. o1 other ,nve!tment adv,!or. or2an,<at,on!
wh,+h hand*e, ,n a22re2ate, va!t*. 2reater !-m!.
Gear
#ass. Inv.
&rust /)0
Investors
'toc( /)0
Lehan /10 &ri-"ont /10 Dow Liited
Partners
1957 411.?= 412.?= 411.?= 42.?= 4;.?= 9.:=
195; ?2.7 ?7.5 ?0.; ::.2 :;.5 :2.2
1959 9.0 10.: ;.1 ;.? 20.0 20.9
1990 41.0 40.9 2.5 2.; 49.2 1;.9
1991 25.9 2?.9 2:.9 22.5 22.? :5.9
1992 49.; 41:.? 41?.? 410.0 47.9 11.9
199: 20.0 19.5 2:.7 1;.7 20.9 :0.5
199? 15.9 1?.: 1?.0 1:.9 1;.7 22.:
1
!t
ha*1 1995 0.0 40.9 2.7 0.0 0.; 9.:
80
$-m-*at,ve
Re!-*t!
11?.9 102.; 111.7 115.? 1::.2 ??9.7
Ann-a*
$om0o-nded
Rate
9.? ;.7 9.2 9.5 10.5 22.2
I1K $om0-ted 1rom +han2e! ,n a!!et va*-e 0*-! an. d,!tr,-t,on! to ho*der! o1 re+ord d-r,n2 .ear.
I2K From 1995 'ood.D! Ban" N F,nan+e 'an-a* 1or 195749?. E!t,mated 1or 1,r!t ha*1 1995.
La!t .ear & ment,oned that the 0er1orman+e o1 the!e +om0an,e! ,n !ome wa.! re!em*e! the a+t,v,t. o1 a d-+"
!,tt,n2 on a 0ond. When the water Ithe mar"etK r,!e!, the d-+" r,!e!7 when ,1 1a**!, a+" 2oe! the d-+". The water
*eve* wa! v,rt-a**. -n+han2ed d-r,n2 the 1,r!t ha*1 o1 1995. The d-+"!, a! .o- +an !ee 1rom the ta*e, are !t,**
!,tt,n2 on the 0ond.
A! & ment,oned ear*,er ,n the *etter, the e o1 the t,de ,n 'a. and >-ne a*!o !-!tant,a**. a11e+ted -!.
Neverthe*e!!, the 1a+t we had 1*a00ed o-r w,n2! a 1ew t,me! ,n the 0re+ed,n2 1o-r month! ena*ed -! to 2a,n a
*,tt*e a*t,t-de on the re!t o1 the 1*o+". Ut,*,<,n2 a !omewhat more re!tra,ned *e5,+on, >ame! @. Lor,e, d,re+tor o1
the Un,ver!,t. o1 $h,+a2oD! $enter 1or Re!ear+h ,n #e+-r,t. (r,+e! wa! 8-oted ,n the 'a. 25, 1995, WALL
#TREET >OURNAL a! !a.,n23 EThere ,! no ev,den+e that m-t-a* 1-nd! !e*e+t !to+"! etter than . the random
method.F
O1 +o-r!e, the ea-t. o1 the Amer,+an e+onom,+ !+ene ha! een that random re!-*t! have een 0rett. darned
2ood re!-*t!. The water *eve* ha! een r,!,n2. &n o-r o0,n,on, the 0roa,*,t,e! are that over a *on2 0er,od o1
t,me, ,t w,** +ont,n-e to r,!e, tho-2h, +erta,n*. not w,tho-t ,m0ortant ,nterr-0t,on!. &t w,** e o-r 0o*,+.,
however, to endeavor to !w,m !tron2*., w,th or a2a,n!t the t,de. &1 o-r 0er1orman+e de+*,ne! to a *eve* .o- +an
a+h,eve . 1*oat,n2 on .o-r a+", we w,** t-rn ,n o-r !-,t!.
Advan+e (a.ment! and Advan+e W,thdrawa*!3
We a++e0t advan+e 0a.ment! 1rom 0artner! and 0ro!0e+t,ve 0artner! at 9= ,ntere!t 1rom date o1 re+e,0t -nt,* the
end o1 the .ear. Wh,*e there ,! no o*,2at,on to +onvert !-+h advan+e 0a.ment! to a 0artner!h,0 ,ntere!t at the
end o1 the .ear, th,! !ho-*d e the ,ntent at the t,me ,t ,! 0a,d to -!.
#,m,*ar*., we a**ow 0artner! to w,thdraw -0 to 20= o1 the,r 0artner!h,0 a++o-nt 0r,or to .earend and +har2e
them 9= 1rom date o1 w,thdrawa* -nt,* .earend when ,t ,! +har2ed a2a,n!t the,r +a0,ta* a++o-nt. A2a,n, ,t ,! not
,ntended that 0artner! -!e -! *,"e a an", -t that the. -!e the w,thdrawa* r,2ht 1or a tr-*. -ne50e+ted need 1or
1-nd!. (red,+ta*e need! 1or 1-nd! !-+h a! 8-arter*. 1edera* ta5 0a.ment! !ho-*d e hand*ed . a e2,nn,n24o14
the4.ear red-+t,on ,n +a0,ta* rather than thro-2h advan+e w,thdrawa*! 1rom B.(.L. d-r,n2 the .ear. The
w,thdrawa* 0r,v,*e2e ,! to 0rov,de 1or the -nant,+,0ated.
The w,**,n2ne!! to orrow Ithro-2h advan+e 0a.ment!K and *end Ithro-2h advan+e w,thdrawa*!K at the !ame 9=
rate ma. !o-nd downr,2ht E-n4B-11ett*,"eF. IGo- +an e !-re ,t doe!nDt !tart m. adrena*,ne 1*ow,n2.K $erta,n*.
!-+h a no4!0read ar,tra2e ,! devo,d o1 the +ommer+,a* overtone! an o!erver m,2ht ,m0-te to the
0re0onderan+e o1 o-r tran!a+t,on!. Neverthe*e!!, we th,n" ,t ma"e! !en!e and ,! ,n the e!t ,ntere!t o1 a**
0artner!.
The 0artner who ha! a *ar2e ,nve!tment ,n ,nd,re+t owner!h,0 o1 a 2ro-0 o1 *,8-,d a!!et! !ho-*d have !ome
*,8-,d,t. 0re!ent ,n h,! 0artner!h,0 ,ntere!t other than at .earend. A! a 0ra+t,+a* matter, we are rea!ona*. +erta,n
81
that advan+e w,thdrawa*! w,** e 1ar more than +overed . advan+e 0a.ment!. For e5am0*e, on >-ne :0, 1995,
we had H9;,;51 o1 advan+e w,thdrawa*! and H952,9:1 o1 advan+e 0a.ment!.
Wh. then the w,**,n2ne!! to 0a. 9= 1or the net o1 advan+e 0a.ment! over advan+e w,thdrawa*! when we +an
orrow 1rom +ommer+,a* an"! at !-!tant,a**. *ower rate!M The an!wer ,! that we e50e+t on a *on24term a!,!
to earn etter than 9= Ithe 2enera* 0artnerD! a**o+at,on ,! <ero -n*e!! we doK a*tho-2h ,t ,! *ar2e*. a matter o1
+han+e whether we a+h,eve the 9= 1,2-re ,n an. !hort 0er,od. 'oreover, & +an ado0t a d,11erent att,t-de
re2ard,n2 the ,nve!tment o1 mone. that +an e e50e+ted to !oon e a 0art o1 o-r e8-,t. +a0,ta* than & +an on
!hort4term orrowed mone.. The advan+e 0a.ment! have the added advanta2e to -! o1 !0read,n2 the ,nve!tment
o1 new mone. over the .ear, rather than hav,n2 ,t h,t -! a** at on+e ,n >an-ar.. On the other hand, 9= ,! more
than +an e ota,ned ,n !hort4term do**ar !e+-re ,nve!tment! . o-r 0artner!, !o & +on!,der ,t m-t-a**. 0ro1,ta*e.
#iscellaneousD
The o*d e50an!,on 0ro2ram to 909 X !8-are 1eet de!+r,ed ,n the ann-a* *etter wa! +arr,ed o11 w,tho-t a h,t+h
Ithe (e0!,D! never even 2ot warmK.
>ohn @ard,n2 Bo,ned -! ,n A0r,* and ,! +ont,n-,n2 the re+ord where. a** the a+t,on! ,n the 0er!onne* 1,e*d have
een w,nn,n2 one!.
A! ,n 0a!t .ear!, we w,** have a *etter o-t ao-t Novemer 1
!t
Ito 0artner! and tho!e who have ,nd,+ated an
,ntere!t to me . that t,me ,n e+om,n2 0artner!K w,th the +omm,tment *etter 1or 1999, e!t,mate o1 the 1995 ta5
!,t-at,on, et+.
$ord,a**.,
Warren E. B-11ett
82
BUFFETT (ARTNER#@&(, LT%.
;10 A&EW&T (LAOA
O'A@A :1, NEBRA#AA
Novemer 1, 1995
To '. (artner! 1or 19993
En+*o!ed are3
(1) Two +o0,e! or the +omm,tment *etter 1or 1999, one to e "e0t . .o- and one ret-rned to -!. Go- ma.
amend the +omm,tment *etter r,2ht -0 to m,dn,2ht, %e+emer :1!t. #o 2et ,t a+" to -! ear*., and ,1 ,t
need! to e +han2ed, B-!t *et -! "now . *etter or 0hone. $omm,tment *etter! e+ome 1,na* on %e+emer
:1!t. Ever. .ear & 2et a n-mer or +a**! ,n the 1,r!t wee" ,n >an-ar. e50re!!,n2 a de!,re to add to the
>an-ar. 1
!t
+a0,ta*. T@&# $AN/T BE %ONE.
I2K A +o0. o1 o-r ever40o0-*ar 6The )ro-nd R-*e!.6 &t ,! e!!ent,a* that we !ee e.e4to4e.e on the matter!
+overed there,n. &1 .o- have d,11erent v,ew! 4 1,ne, .o-r! ma. e etter 4 -t .o- !ho-*dn/t e ,n the
0artner!h,0. (*ea!e 0art,+-*ar*. note )ro-nd R-*e 7. Th,! ha! een added th,! .ear re1*e+t,n2 a moderate
!h,1t ,n m. att,t-de over a 0er,od o1 t,me. &t re0re!ent! a de+,ded*. -n+onvent,ona* I-t *o2,+a* ,n m.
o0,n,on when a00*,ed to o-r o0erat,onK a00roa+h and ,! there1ore !0e+,1,+a**. +a**ed to .o-r attent,on.
An. w,thdrawa*! w,** e 0a,d >an-ar. 5th. Go- ma. w,thdraw an. amo-nt .o- de!,re 1rom H100 -0 to .o-r
ent,re e8-,t.. #,m,*ar*., add,t,on! +an e 1or an. amo-nt and !ho-*d rea+h -! . >an-ar. 10
th
. &n the event .o-
are d,!0o!,n2 o1 an.th,n2, th,! w,** 2,ve .o- a +han+e to have the tran!a+t,on ,n 1999 ,1 that a00ear! to e
advanta2eo-! 1or ta5 rea!on!. &1 add,t,on! rea+h -! ,n Novemer, the. ta"e on the !tat-! o1 advan+e 0a.ment!
and draw 9= ,ntere!t -nt,* .earend. Th,! ,! not tr-e o1 add,t,on! rea+h,n2 -! ,n %e+emer.
The 0artner!h,0 own! a +ontro**,n2 ,ntere!t ,n Ber"!h,re @athawa. &n+., a 0-*,+*.4traded !e+-r,t.. A!
ment,oned ,n m. m,d.ear *etter, a!!et va*-e! and earn,n2 0ower are the dom,nant 1a+tor! a11e+t,n2 the
va*-at,on o1 a +ontro**,n2 ,ntere!t ,n a -!,ne!!. 'ar"et 0r,+e, wh,+h 2overn! va*-at,on o1 m,nor,t. ,ntere!t
0o!,t,on!, ,! o1 *,tt*e or no ,m0ortan+e ,n va*-,n2 a +ontro**,n2 ,ntere!t. We w,** va*-e o-r 0o!,t,on ,n Ber"!h,re
@athawa. at .earend at a 0r,+e ha*1wa. etween net +-rrent a!!et va*-e and oo" va*-e. Be+a-!e o1 the nat-re
o1 o-r re+e,va*e! and ,nventor. th,!, ,n e11e+t, amo-nt! to va*-at,on o1 o-r +-rrent a!!et! at 100 +ent! on the
do**ar and o-r 1,5ed a!!et! at 50 +ent! on the do**ar. #-+h a va*-e ,n m. o0,n,on ,! 1a,r to oth add,n2 and
w,thdraw,n2 0artner!. &t ma. e e,ther o1 *ower than mar"et va*-e at the t,me.
A! & wr,te th,!, we are or,t,n2 ,n 8-,te !at,!1a+tor. 1a!h,on. O-r mar2,n over the %ow ,! we** aove avera2e,
and even tho!e Neandertha* 0artner! who -t,*,<e !-+h +r-de .ard!t,+"! a! net 0ro1,t wo-*d 1,nd 0er1orman+e
!at,!1a+tor.. Th,! ,! a**, o1 +o-r!e, !-Be+t to !-!tant,a* +han2e . .earend.
&1 an.th,n2 need! +*ar,1,+at,on, +a** or wr,te >ohn @ard,n2 who ,! ,n +har2e o1 6de4+on1-!,n26 0artner!. The ta5
!,t-at,on ,! ao-t a! re0orted ,n the A-2-!t *etter, -t ,1 .o- wo-*d *,"e >ohn to ma"e the +a*+-*at,on 1or .o-,
he w,** e 2*ad to do ,t.
$ord,a**.,
Warren E. B-11ett
83
(P#3 We are +ont,n-,n2 o-r 6no 0r,<e6 0o*,+. 1or the *a!t one! to 2et the,r +omm,tment *etter! a+" to -!. &t w,**
ma"e th,n2! ea!,er 1or -! ,1 .o- 2et ,t a+" 0ronto. &1 .o- want to ma"e +han2e! *ater Ie1ore >an-ar. *!tK, B-!t
2,ve -! a +a**, and we/** amend ,t 1or .o-.
84
BUFFETT (ARTNER#@&(, LT%.
;10 A&EW&T (LAOA
O'A@A :1, NEBRA#AA
>an-ar. 20, 1999
O-r (er1orman+e ,n 1995
O-r War on (overt. wa! !-++e!!1-* ,n 1995.
#0e+,a**., we were H12,:0?,090 *e!! 0oor at the end o1 the .ear.
La!t .ear -nder a !e+t,on ,n the ann-a* *etter ent,t*ed EO-r )oa*F I0*ea!e 0art,+-*ar*. note ,t wa! not headed
6O-r (rom,!e6K, & !tated we were tr.,n2 to a+h,eve EY An avera2e advanta2e Ire*at,ve to the %owK o1 ten
0er+enta2e 0o,nt! 0er ann-m 1or B(L e1ore a**o+at,on to the 2enera* 0artner a2a,n w,th *ar2e am0*,t-de! ,n the
mar2,n 1rom 0erha0! 10 0er+enta2e 0o,nt! wor!e than the %ow ,n a ad .ear to 25 0er+enta2e 0o,nt! etter when
ever.th,n2 +*,+"!.F
'. 1a**,,*,t. a! a 1ore+a!ter wa! 8-,+"*. demon!trated when the 1,r!t .ear 1e** o-t!,de m. 0arameter!. We
a+h,eved o-r w,de!t mar2,n over the %ow ,n the h,!tor. o1 B(L w,th an overa** 2a,n o1 ?7.2= +om0ared to an
overa** 2a,n I,n+*-d,n2 d,v,dend! wh,+h wo-*d have een re+e,ved thro-2h owner!h,0 o1 the %owK o1 1?.2= 1or
the %ow. Nat-ra**., no wr,ter *,"e! to e 0-*,+*. h-m,*,ated . !-+h a m,!ta"e. &t ,! -n*,"e*. to e re0eated.
The 1o**ow,n2 !-mmar,<e! the .ear4.4.ear 0er1orman+e o1 the %ow, the 0er1orman+e o1 the (artner!h,0 e1ore
a**o+at,on Ione 8-arter o1 the e5+e!! over 9=K to the 2enera* 0artner, and the re!-*t! 1or *,m,ted 0artner!3
Year Overall .esults :ro
Dow /)0
Partnership .esults /10 Liited Partners!
.esults /?0
1957 4;.?= 10.?= 9.:=
195; :;.5= ?0.9= :2.2=
1959 20.0= 25.9= 20.9=
1990 49.2= 22.;= 1;.9=
1991 22.?= ?5.9= :5.9=
1992 47.9= 1:.9= 11.9=
199: 20.9= :;.7= :0.5=
199? 1;.7= 27.;= 22.:=
1995 1?.2= ?7.2= :9.9=
I1K Ba!ed on .ear*. +han2e! ,n the va*-e o1 the %ow 0*-! d,v,dend! that wo-*d have een re+e,ved thro-2h
owner!h,0 o1 the %ow d-r,n2 that .ear. The ta*e ,n+*-de! a** +om0*ete .ear! o1 0artner!h,0 a+t,v,t..
I2K For 1957491 +on!,!t! o1 +om,ned re!-*t! o1 a** 0rede+e!!or *,m,ted 0artner!h,0! o0erat,n2 thro-2ho-t
the ent,re .ear a1ter a** e50en!e!, -t e1ore d,!tr,-t,on! to 0artner! or a**o+at,on! to the 2enera*
0artner.
I:K For 1957491 +om0-ted on the a!,! o1 the 0re+ed,n2 +o*-mn o1 0artner!h,0 re!-*t! a**ow,n2 1or
a**o+at,on to the 2enera* 0artner a!ed -0on the 0re!ent 0artner!h,0 a2reement, -t e1ore month*.
w,thdrawa*! . *,m,ted 0artner!.
On a +-m-*at,ve or +om0o-nded a!,!, the re!-*t! are3
85
Year Overall .esults :ro
Dow
Partnership .esults Liited Partners!
.esults
1957 4;.?= 10.?= 9.:=
1957 J 5; 29.9= 55.9= ??.5=
1957 J 59 52.:= 95.9= 7?.7=
1957 J 90 ?2.9= 1?0.9= 107.2=
1957 J 91 7?.9= 251.0= 1;1.9=
1957 J 92 91.9= 299.;= 215.1=
1957 J 9: 95.1= ?5?.5= :11.2=
1957 J 9? 1:1.:= 90;.7= ?02.9=
1957 J 95 19?.1= 9?:.2= 5;;.5=
9nnual "opounded
.ate
)).@7 1,.A7 1?.,7
A1ter *a!t .ear the 8-e!t,on nat-ra**. ar,!e!, 6What do we do 1or an en+oreMF A d,!advanta2e o1 th,! -!,ne!! ,!
that ,t doe! not 0o!!e!! moment-m to an. !,2n,1,+ant de2ree. &1 )enera* 'otor! a++o-nt! 1or 5?= o1 dome!t,+
new +ar re2,!trat,on! ,n 1995, ,t ,! a 0rett. !a1e et that the. are 2o,n2 to +ome 1a,r*. +*o!e to that 1,2-re ,n 1999
d-e to owner *o.a*t,e!, dea*er +a0a,*,t,e!, 0rod-+t,ve +a0a+,t., +on!-mer ,ma2e, et+. Not !o 1or B(L. We !tart
1rom !+rat+h ea+h .ear w,th ever.th,n2 va*-ed at mar"et when the 2-n 2oe! o11. (artner! ,n 1999, new or o*d,
ene1,t to on*. a ver. *,m,ted e5tent 1rom the e11ort! o1 199? and 1995. The !-++e!! o1 0a!t method! and ,dea!
doe! not tran!1er 1orward to 1-t-re one!.
& +ont,n-e to ho0e, on a *on2er4ran2e a!,!, 1or the !ort o1 a+h,evement o-t*,ned ,n the 6O-r )oa*6 !e+t,on o1 *a!t
.ear/! *etter I+o0,e! !t,** ava,*a*eK. @owever, tho!e who e*,eve 1995 re!-*t! +an e a+h,eved w,th an.
1re8-en+. are 0roa*. attend,n2 wee"*. meet,n2! o1 the @a**e.D! $omet O!erver! $*-. We are 2o,n2 to have
*o!! .ear! and are 2o,n2 to have .ear! ,n1er,or to the %ow 4 no do-t ao-t ,t. B-t & +ont,n-e to e*,eve we +an
a+h,eve avera2e 0er1orman+e !-0er,or to the %ow ,n the 1-t-re. &1 m. e50e+tat,on re2ard,n2 th,! !ho-*d +han2e,
.o- w,** hear ,mmed,ate*..
&nve!tment $om0an,e!
We re2-*ar*. +om0are o-r re!-*t! w,th the two *ar2e!t o0en4end ,nve!tment +om0an,e! Im-t-a* 1-nd!K that
1o**ow a 0o*,+. o1 e,n2 t.0,+a**. 95= 4 100= ,nve!ted ,n +ommon !to+"!, and the two *ar2e!t d,ver!,1,ed
+*o!ed4end ,nve!tment +om0an,e!. The!e 1o-r +om0an,e!, 'a!!a+h-!ett! &nve!tor! Tr-!t, &nve!tor! #to+" F-nd,
Tr,4$ont,nenta* $or0., and Lehman $or0. mana2e over H5 ,**,on, are owned . ao-t 900,000 !hareho*der!,
and are 0roa*. t.0,+a* o1 mo!t o1 the H:5 ,**,on ,nve!tment +om0an. ,nd-!tr.. '. o0,n,on ,! that the,r re!-*t!
ro-2h*. 0ara**e* tho!e o1 the overwhe*m,n2 maBor,t. o1 other ,nve!tment adv,!or. or2an,<at,on! wh,+h hand*e,
,n a22re2ate, va!t*. 2reater !-m!.
The 0-r0o!e o1 th,! ta-*at,on ,! to ,**-!trate that the %ow ,! no 0-!hover a! an ,nde5 o1 ,nve!tment
a+h,evement. The adv,!or. ta*ent mana2,n2 B-!t the 1o-r +om0an,e! !hown +ommand! ann-a* 1ee! o1 ao-t H10
m,**,on and th,! re0re!ent! a ver. !ma** 1ra+t,on o1 the 0ro1e!!,ona* ,nve!tment mana2ement ,nd-!tr.. The 0-*,+
att,n2 avera2e o1 th,! h,2h*. 0a,d and w,de*. re!0e+ted ta*ent ,nd,+ate! 0er1orman+e a !hade e*ow that o1 the
%ow, an -nmana2ed ,nde5.
GEARLG RE#ULT#
Year #ass. Inv. Investors Lehan /10 &ri-"ont Dow Liited
86
&rust /)0 'toc( /)0 /10 Partners
1957 411.?= 412.?= 411.?= 42.?= 4;.?= 9.:=
195; ?2.7= ?7.5= ?0.;= ::.2= :;.5= :2.2=
1959 9.0= 10.:= ;.1= ;.?= 20.0= 20.9=
1990 41.0= 40.9= 2.5= 2.;= 49.2= 1;.9=
1991 25.9= 2?.9= 2:.9= 22.5= 22.?= :5.9=
1992 49.;= 41:.?= 41?.?= 410.0= 47.9= 11.9=
199: 20.0= 19.5= 2:.7= 1;.:= 20.9= :0.5=
199? 15.9= 1?.:= 1:.9= 12.9= 1;.7= 22.:=
1995 10.2= 9.;= 19.0= 10.7= 1?.2= :9.9=
I1K $om0-ted 1rom +han2e! ,n a!!et va*-e 0*-! an. d,!tr,-t,on! to ho*der! o1 re+ord d-r,n2 .ear.
I2K From 1995 'ood./! Ban" N F,nan+e 'an-a* 1or 195749?. E!t,mated 1or 1995.
$O'(OUN%E%
Year #ass. Inv.
&rust /)0
Investors
'toc( /)0
Lehan /10 &ri-"ont
/10
Dow Liited
Partners
1957 411.?= 412.?= 411.?= 42.?= 4;.?= 9.:=
1957 J 5; 29.?= 29.2= 2?.7= :0.0= 29.9= ??.5=
1957 J 59 :7.;= ?2.5= :?.;= ?0.9= 52.:= 7?.7=
1957 J 90 :9.?= ?1.9= :;.2= ??.;= ?2.9= 107.2=
1957 J 91 71.:= 79.9= 70.;= 77.?= 7?.9= 1;1.9=
1957 J 92 5?.5= 5:.2= ?9.2= 59.7= 91.9= 215.1=
1957 J 9: ;5.?= 7;.5= ;0.;= ;;.9= 9?.9= :11.2=
1957 J 9? 11?.9= 10?.0= 105.?= 112.7= 1:1.:= ?02.9=
1957 J 95 1:9.;= 12?.0= 1?5.:= 1:;.?= 19?.1= 5;;.5=
9nnual
"opounded
.ate
)8.)7 ,.@7 )8.67 )8.)7 )).@7 1?.,7
A n-mer o1 the *ar2e!t ,nve!tment adv,!or. o0erat,on! Imana2,n2, ,n !ome +a!e!, we** ,nto the ,**,on! o1
do**ar!K a*!o mana2e ,nve!tment +om0an,e! 0art*. a! a +onven,en+e 1or !ma**er +*,ent! and 0art*. a! a 0-*,+
!how+a!e. The re!-*t! o1 the!e 1-nd! ro-2h*. 0ara**e* tho!e o1 the 1o-r 1-nd! on wh,+h we re0ort.
& !tron2*. e*,eve ,n mea!-rement. The ,nve!tment mana2er! ment,oned aove -t,*,<e mea!-rement +on!tant*.
,n the,r a+t,v,t,e!. The. +on!tant*. !t-d. +han2e! ,n mar"et !hare!, 0ro1,t mar2,n!, ret-rn on +a0,ta*, et+. The,r
ent,re de+,!,on4ma",n2 0ro+e!! ,! 2eared to mea!-rement 4 o1 mana2ement!, ,nd-!tr,e!, +om0arat,ve .,e*d!, et+.
& am !-re the. "ee0 !+ore on the,r new -!,ne!! e11ort! a! we** a! the 0ro1,ta,*,t. o1 the,r adv,!or. o0erat,on.
What then +an e more 1-ndamenta* than the mea!-rement, ,n t-rn, o1 ,nve!tment ,dea! and de+,!,on!M &
+erta,n*. do not e*,eve the !tandard! & -t,*,<e Iand w,!h m. 0artner! to -t,*,<eK ,n mea!-r,n2 m. 0er1orman+e
are the a00*,+a*e one! 1or a** mone. mana2er!. B-t & +erta,n*. do e*,eve an.one en2a2ed ,n the mana2ement
o1 mone. !ho-*d have a !tandard o1 mea!-rement, and that oth he and the 0art. who!e mone. ,! mana2ed
!ho-*d have a +*ear -nder!tand,n2 wh. ,t ,! the a00ro0r,ate !tandard, what t,me 0er,od !ho-*d e -t,*,<ed, et+.
Fran" B*o+" 0-t ,t ver. we** ,n the Novemer4%e+emer 1995 ,!!-e o1 the F,nan+,a* Ana*.!t! >o-rna*. #0ea",n2
o1 mea!-rement o1 ,nve!tment 0er1orman+e he !a,d,6 ...@owever, the 1a+t ,! that *,terat-re !-11er! a .awn,n2
h,at-! ,n th,! !-Be+t. &1 ,nve!tment mana2ement or2an,<at,on! !o-2ht a*wa.! the e!t 0er1orman+e, there wo-*d
e noth,n2 -n,8-e ,n +are1-* mea!-rement o1 ,nve!tment re!-*t!. &t doe! not matter that the +-!tomer ha! 1a,*ed
to a!" 1or a 1orma* 0re!entat,on o1 the re!-*t!. (r,de a*one !ho-*d e !-11,+,ent to demand that ea+h or -!
determ,ne oBe+t,ve*. the 8-a*,t. o1 h,! re+ommendat,on!. Th,! +an hard*. e done w,tho-t 0re+,!e "now*ed2e
87
o1 the o-t+ome. On+e th,! "now*ed2e ,! ,n hand, ,t !ho-*d e 0o!!,*e to e5tend the ana*.!,! to !ome 0o,nt at
wh,+h 0attern! o1 wea"ne!! and !tren2th e2,n to a!!ert them!e*ve!. We +r,t,+,<e a +or0orate mana2ement 1or
1a,*-re to -!e the e!t o1 too*! to "ee0 ,t aware o1 the 0ro2re!! o1 a +om0*,+ated ,nd-!tr,a* or2an,<at,on. We +an
hard*. e e5+-!ed 1or 1a,*-re to 0rov,de o-r!e*ve! w,th e8-a* too*! to !how the e11,+,en+. o1 o-r own e11ort! to
hand*e other 0eo0*eD! mone.. ...Th-!, ,t ,! o-r drear. d-t. to re0ort that !.!tem! o1 0er1orman+e mea!-rement
are not a-tomat,+a**. ,n+*-ded ,n the data 0ro+e!!,n2 0ro2ram! o1 mo!t ,nve!tment mana2ement or2an,<at,on!.
The !ad 1a+t ,! that !ome !eem to 0re1er not to "now how we** or 0oor*. the. are do,n2.
Fran"*., & have !evera* !e*1,!h rea!on! 1or ,n!,!t,n2 that we a00*. a .ard!t,+" and that we oth -t,*,<e the !ame
.ard!t,+". Nat-ra**., & 2et a ",+" o-t o1 eat,n2 0ar 4 ,n the *.r,+a* word! o1 $a!e. #ten2e*, 6#how me a 2ood
*o!er, and &D** !how .o- a *o!er.F 'ore ,m0ortant*., & ,n!-re that & w,** not 2et *amed 1or the wron2 rea!on
Ihav,n2 *o!,n2 .ear!K -t on*. 1or the r,2ht rea!on Ido,n2 0oorer than the %owK. Anow,n2 0artner! w,** 2rade me
on the r,2ht a!,! he*0! me do a etter Bo. F,na**., !ett,n2 -0 the re*evant .ard!t,+"! ahead o1 t,me ,n!-re! that
we w,** a** 2et o-t o1 th,! -!,ne!! ,1 the re!-*t! e+ome med,o+re Ior wor!eK. &t mean! that 0a!t !-++e!!e! +annot
+*o-d B-d2ment o1 +-rrent re!-*t!. &t !ho-*d red-+e the +han+e o1 ,n2en,o-! rat,ona*,<at,on! o1 ,ne0t
0er1orman+e. IBad *,2ht,n2 ha! een other,n2 me at the r,d2e ta*e *ate*..K Wh,*e th,! ma!o+h,!t,+ a00roa+h to
mea!-rement ma. not !o-nd *,"e m-+h o1 an advanta2e, & +an a!!-re .o- 1rom m. o!ervat,on! o1 -!,ne!!
ent,t,e! that !-+h eva*-at,on wo-*d have a++om0*,!hed a 2reat dea* ,n man. ,nve!tment and ,nd-!tr,a*
or2an,<at,on!.
#o ,1 .o- are eva*-at,n2 other! Ior .o-r!e*1SK ,n the ,nve!tment 1,e*d, th,n" o-t !ome !tandard! 4 a00*. them 4
,nter0ret them. &1 .o- do not 1ee* o-r !tandard Ia m,n,m-m o1 a three4.ear te!t ver!-! the %owK ,! an a00*,+a*e
one, .o- !ho-*d not e ,n the (artner!h,0. &1 .o- do 1ee* ,t ,! a00*,+a*e, .o- !ho-*d e a*e to ta"e the m,n-!
.ear! w,th e8-an,m,t. ,n the v,!+era* re2,on! a! we** a! the +erera* re2,on! 4a! *on2 a! we are !-r0a!!,n2 the
re!-*t! o1 the %ow.
The #orrow! o1 $om0o-nd,n2
U!-a**., at th,! 0o,nt ,n m. *etter, & have 0a-!ed to mode!t*. attem0t to !et !tra,2ht the h,!tor,+a* error! o1 the
*a!t 1o-r or 1,ve h-ndred .ear!. Wh,*e ,t m,2ht !eem d,11,+-*t to a++om0*,!h th,! ,n on*. a 1ew 0ara2ra0h! a .ear,
& 1ee* & have done m. !hare to re!ha0e wor*d o0,n,on on $o*-m-!, &!ae**a, Fran+,! &, (eter ',n-,t and the
'anhattan &nd,an!. A .40rod-+t o1 th,! endeavor ha! een to demon!trate the overwhe*m,n2 0ower o1
+om0o-nd ,ntere!t. To ,n!-re reader attent,on & have ent,t*ed the!e e!!a.! 6The >o.! o1 $om0o-nd,n2. 6 The
!har04e.ed ma. not,+e a !*,2ht +han2e th,! .ear.
A de+ent rate Ietter we have an ,nde+ent rateK o1 +om0o-nd 40*-! the add,t,on o1 !-!tant,a* new mone. ha!
ro-2ht o-r e2,nn,n2 +a0,ta* th,! .ear to H?:,9?5,000. #evera* t,me! ,n the 0a!t & have ra,!ed the 8-e!t,on
whether ,n+rea!,n2 amo-nt! o1 +a0,ta* wo-*d harm o-r ,nve!tment 0er1orman+e. Ea+h t,me & have an!wered
ne2at,ve*. and 0rom,!ed .o- that ,1 m. o0,n,on +han2ed, & wo-*d 0rom0t*. re0ort ,t.
& do not 1ee* that ,n+rea!ed +a0,ta* ha! h-rt o-r o0erat,on to date. A! a matter o1 1a+t, & e*,eve that we have done
!omewhat etter d-r,n2 the 0a!t 1ew .ear! w,th the +a0,ta* we have had ,n the (artner!h,0 than we wo-*d have
done ,1 we had een wor",n2 w,th a !-!tant,a**. !ma**er amo-nt. Th,! wa! d-e to the 0art*. 1ort-,to-!
deve*o0ment o1 !evera* ,nve!tment! that were B-!t the r,2ht !,<e 1or -! 4,2 eno-2h to e !,2n,1,+ant and !ma**
eno-2h to hand*e.
& now 1ee* that we are m-+h +*o!er to the 0o,nt where ,n+rea!ed !,<e ma. 0rove d,!advanta2eo-!. & don/t want to
a!+r,e too m-+h 0re+,!,on to that !tatement !,n+e there are man. var,a*e! ,nvo*ved. What ma. e the o0t,m-m
!,<e -nder !ome mar"et and -!,ne!! +,r+-m!tan+e! +an e !-!tant,a**. more or *e!! than o0t,m-m -nder other
+,r+-m!tan+e!. There have een a 1ew t,me! ,n the 0a!t when on a ver. !hort4term a!,! & have 1e*t ,t wo-*d have
een advanta2eo-! to e !ma**er -t !-!tant,a**. more t,me! when the +onver!e wa! tr-e.
88
Neverthe*e!!, a! +,r+-m!tan+e! 0re!ent*. a00ear, & 1ee* !-!tant,a**. 2reater !,<e ,! more *,"e*. to harm 1-t-re
re!-*t! than to he*0 them. Th,! m,2ht not e tr-e 1or m. own 0er!ona* re!-*t!, -t ,t ,! *,"e*. to e tr-e 1or .o-r
re!-*t!.
There1ore, -n*e!! ,t a00ear! that +,r+-m!tan+e! have +han2ed I-nder !ome +ond,t,on! added +a0,ta* wo-*d
,m0rove re!-*t!K or -n*e!! new 0artner! +an r,n2 !ome a!!et to the (artner!h,0 other than !,m0*. +a0,ta*, &
,ntend to adm,t no add,t,ona* 0artner! to B(L.
The on*. wa. to ma"e th,! e11e+t,ve ,! to a00*. ,t a+ro!!4the4oard and & have not,1,ed #-!,e that ,1 we have an.
more +h,*dren, ,t ,! -0 to her to 1,nd !ome other 0artner!h,0 1or them.
Be+a-!e & ant,+,0ate that w,thdrawa*! I1or ta5e!, amon2 other rea!on!K ma. we** a00roa+h add,t,on! . 0re!ent
0artner! and a*!o e+a-!e & v,!-a*,<e the +-rve o1 e50e+ta*e 0er1orman+e !*o0,n2 on*. ver. m,*d*. a! +a0,ta*
,n+rea!e!, & 0re!ent*. !ee no rea!on wh. we !ho-*d re!tr,+t +a0,ta* add,t,on! . e5,!t,n2 0artner!.
The med,+a**. or,ented 0roa*. w,** ,nter0ret th,! ent,re !e+t,on a! +on+*-!,ve ev,den+e that an e11e+t,ve
ant,th.ro,d 0,** ha! een deve*o0ed.
Trend! ,n O-r B-!,ne!!
La!t .ear & d,!+-!!ed o-r var,o-! +ate2or,e! o1 ,nve!tment!. Anow,n2 the 0ena*t,e! 1or +r-e* and -n-!-a*
0-n,!hment!, & w,** !",0 a reha!h o1 the +hara+ter,!t,+! o1 ea+h +ate2or., -t mere*. re1er .o- to *a!t .ear/! *etter.
@owever, a 1ew word! !ho-*d e !a,d to r,n2 .o- -0 to date on the var,o-! !e2ment! o1 the -!,ne!!, and
0erha0! to 2,ve .o- a etter ,n!,2ht ,nto the,r !tren2th! and wea"ne!!e!.
The 6Wor"o-t6 -!,ne!! ha! e+ome ver. !0a!mod,+. We were a*e to em0*o. an avera2e o1 on*. ao-t H9
m,**,on d-r,n2 the .ear ,n the Wor"o-t !e+t,on, and th,! ,nvo*ved on*. a ver. *,m,ted n-mer o1 !,t-at,on!.
A*tho-2h we earned ao-t H1,?10,000 or ao-t 2: U= on avera2e +a0,ta* em0*o.ed Ith,! ,! +a*+-*ated on an a**
e8-,t. a!,! 4 orrowed mone. ,! a00ro0r,ate ,n mo!t Wor"o-t !,t-at,on!, and we -t,*,<e ,t, wh,+h ,m0rove! o-r
rate o1 ret-rn aove th,! 0er+enta2eK, over ha*1 o1 th,! wa! earned 1rom one !,t-at,on. & th,n" ,t -n*,"e*. that a
rea**. ,ntere!t,n2 rate o1 ret-rn +an e earned +on!,!tent*. on *ar2e !-m! o1 mone. ,n th,! -!,ne!! -nder 0re!ent
+ond,t,on!. Neverthe*e!!, we w,** +ont,n-e to tr. to rema,n a*ert 1or the o++a!,ona* ,m0ortant o00ort-n,t. and
0roa*. +ont,n-e to -t,*,<e a 1ew o1 the !ma**er o00ort-n,t,e! where we *,"e the 0roa,*,t,e!.
The 6)enera*!4(r,vate Owner Ba!,!6 +ate2or. wa! ver. 2ood to -! ,n 1995. O00ort-n,t,e! ,n th,! area have
e+ome more !+ar+e w,th a r,!,n2 %ow, -t when the. +ome a*on2, the. are o1ten 8-,te !,2n,1,+ant. & ment,oned
at the !tart o1 *a!t .ear that we were the *ar2e!t !to+"ho*der o1 three +om0an,e! ,n th,! +ate2or.. O-r *ar2e!t
.earend 199? ,nve!tment ,n th,! +ate2or. wa! d,!0o!ed o1 ,n 1995 0-r!-ant to a tender o11er re!-*t,n2 ,n a
rea*,<ed 2a,n 1or B(L o1 H:,1;;,000. At .earend 199? we had -nrea*,<ed a00re+,at,on ,n th,! ,nve!tment o1
H?51,000. There1ore, the e+onom,+ 2a,n attr,-ta*e to 1995 1or th,! tran!a+t,on wa! on*. H2,7:7,000 even
tho-2h the ent,re ta5 e11e+t 1e** ,n that .ear. & ment,on the!e 1,2-re! to ,**-!trate how o-r rea*,<ed 2a,n 1or ta5
0-r0o!e! ,n an. .ear ear! no ne+e!!ar. re*at,on!h,0 to o-r e+onom,+ 2a,n.
The 1-ndamenta* +on+e0t -nder*.,n2 the )enera*!4(r,vate Owner +ate2or. ,! demon!trated . the aove +a!e. A
0r,vate owner wa! 8-,te w,**,n2 Iand ,n o-r o0,n,on 8-,te w,!eK to 0a. a 0r,+e 1or +ontro* o1 the -!,ne!! wh,+h
,!o*ated !to+" -.er! were not w,**,n2 to 0a. 1or ver. !ma** 1ra+t,on! o1 the -!,ne!!. Th,! ha! een a 8-,te
+ommon +ond,t,on ,n the !e+-r,t,e! mar"et! over man. .ear!, and a*tho-2h 0-r+ha!e! ,n th,! +ate2or. wor" o-t
!at,!1a+tor,*. ,n term! o1 B-!t 2enera* !to+" mar"et ehav,or, there ,! the o++a!,ona* dramat,+ 0ro1,t d-e to
+or0orate a+t,on !-+h a! the one aove.
89
The 6$ontro*6 !e+t,on o1 o-r -!,ne!! re+e,ved a tran!1er memer 1rom o-r E(r,vate OwnerF +ate2or.. #hare! ,n
Ber"!h,re @athawa. had een a+8-,red !,n+e Novemer 1992 on m-+h the !ame *,ne o1 rea!on,n2 a! 0reva,*ed
,n the !e+-r,t. ment,oned aove. &n the +a!e o1 Ber"!h,re, however, we ended -0 0-r+ha!,n2 eno-2h !to+" to
a!!-me a +ontro**,n2 0o!,t,on o-r!e*ve! rather than the more -!-a* +a!e o1 e,ther !e**,n2 o-r !to+" ,n the mar"et
or to another !,n2*e -.er.
O-r 0-r+ha!e! o1 Ber"!h,re !tarted at a 0r,+e o1 H7.90 0er !hare ,n 1992. Th,! 0r,+e 0art,a**. re1*e+ted *ar2e
*o!!e! ,n+-rred . the 0r,or mana2ement ,n +*o!,n2 !ome o1 the m,**! made o!o*ete . +han2,n2 +ond,t,on!
w,th,n the te5t,*e -!,ne!! Iwh,+h the o*d mana2ement had een 8-,te !*ow to re+o2n,<eK. &n the 0o!twar 0er,od
the +om0an. had !*,d downh,** a +on!,dera*e d,!tan+e, hav,n2 h,t a 0ea" ,n 19?; when ao-t H29 1P2 m,**,on
wa! earned e1ore ta5 and ao-t 11,000 wor"er! were em0*o.ed. Th,! re1*e+ted o-t0-t 1rom 11 m,**!.
At the t,me we a+8-,red +ontro* ,n !0r,n2 o1 1995, Ber"!h,re wa! down to two m,**! and ao-t 2,:00 em0*o.ee!.
&t wa! a ver. 0*ea!ant !-r0r,!e to 1,nd that the rema,n,n2 -n,t! had e5+e**ent mana2ement 0er!onne*, and we
have not had to r,n2 a !,n2*e man 1rom the o-t!,de ,nto the o0erat,on. &n re*at,on to o-r e2,nn,n2 a+8-,!,t,on
+o!t o1 H7.90 0er !hare Ithe avera2e +o!t, however, wa! H1?.;9 0er !hare, re1*e+t,n2 ver. heav. 0-r+ha!e! ,n
ear*. 1995K, the +om0an. on %e+emer :1, 1995, had net wor",n2 +a0,ta* a*one Ie1ore 0*a+,n2 an. va*-e on the
0*ant! and e8-,0mentK o1 ao-t H19 0er !hare.
Ber"!h,re ,! a de*,2ht to own. There ,! no 8-e!t,on that the !tate o1 the te5t,*e ,nd-!tr. ,! the dom,nant 1a+tor ,n
determ,n,n2 the earn,n2 0ower o1 the -!,ne!!, -t we are mo!t 1ort-nate to have Aen $ha+e r-nn,n2 the
-!,ne!! ,n a 1,r!t4+*a!! manner, and we a*!o have !evera* o1 the e!t !a*e! 0eo0*e ,n the -!,ne!! head,n2 -0 th,!
end o1 the,r re!0e+t,ve d,v,!,on!.
Wh,*e a Ber"!h,re ,! hard*. 2o,n2 to e a! 0ro1,ta*e a! a Tero5, Fa,r+h,*d $amera or Nat,ona* L,deo ,n a
h.0erten!ed mar"et, ,t ,! a ver. +om1ort a*e !ort o1 th,n2 to own. A! m. We!t $oa!t 0h,*o!o0her !a.!, E&t ,!
we** to have a d,et +on!,!t,n2 o1 oatmea* a! we** a! +ream 0-11!.F
Be+a-!e o1 o-r +ontro**,n2 ,ntere!t, o-r ,nve!tment ,n Ber"!h,re ,! va*-ed 1or o-r a-d,t a! a -!,ne!!, not a! a
mar"eta*e !e+-r,t.. &1 Ber"!h,re advan+e! H5 0er !hare ,n the mar"et, ,t doe! B(L no 2ood 4 o-r ho*d,n2! are
not 2o,n2 to e !o*d. #,m,*ar*., ,1 ,t 2oe! down H5 0er !hare, ,t ,! not mean,n21-* to -!. The va*-e o1 o-r ho*d,n2
,! determ,ned d,re+t*. . the va*-e o1 the -!,ne!!. & re+e,ved no d,v,ne ,n!0,rat,on ,n that va*-at,on o1 o-r
ho*d,n2!. I'a.e the owner! o1 the three wonder !to+"! ment,oned aove do re+e,ve !-+h a me!!a2e ,n re!0e+t
to the,r ho*d,n2! 4& 1ee* & wo-*d need !ometh,n2 at *ea!t that re*,a*e to !*ee0 we** at 0re!ent 0r,+e!.K & attem0t to
a00*. a +on!ervat,ve va*-at,on a!ed -0on m. "now*ed2e o1 a!!et!, earn,n2 0ower, ,nd-!tr. +ond,t,on!,
+om0et,t,ve 0o!,t,on, et+. We wo-*d not e a !e**er o1 o-r ho*d,n2! at !-+h a 1,2-re, -t ne,ther wo-*d we e a
!e**er o1 the other ,tem! ,n o-r 0ort1o*,o at .earend va*-at,on! Jotherw,!e, we wo-*d a*read. have !o*d them.
O-r 1,na* +ate2or. ,! 6)enera*!4Re*at,ve*. Underva*-ed.F Th,! +ate2or. ha! een 2row,n2 ,n re*at,ve ,m0ortan+e
a! o00ort-n,t,e! ,n the other +ate2or,e! e+ome *e!! 1re8-ent.
Fran"*., o0erat,n2 ,n th,! 1,e*d ,! !omewhat more etherea* than o0erat,n2 ,n the other three +ate2or,e!, and &/m
B-!t not an etherea* !ort. There1ore, & 1ee* a++om0*,!hment! here are *e!! !o*,d and 0erha0! *e!! mean,n21-* 1or
1-t-re 0roBe+t,on! than ,n the other +ate2or,e!. Neverthe*e!!, o-r re!-*t! ,n 1995 were 8-,te 2ood ,n the
ERe*at,ve*. Underva*-edF 2ro-0, 0art*. d-e to ,m0*ementat,on o1 the te+hn,8-e re1erred to ,n *a!t .ear/! *etter
wh,+h !erve! to red-+e r,!" and 0otent,a**. a-2ment 2a,n!. &t !ho-*d red-+e r,!" ,n an. .ear, and ,t de1,n,te*.
a-2mented the 2a,n! ,n 1995. &t ,! ne+e!!ar. to 0o,nt o-t that re!-*t! ,n th,! +ate2or. were 2reat*. a11e+ted 1or the
etter . on*. two ,nve!tment!.
$andor a*!o demand! & 0o,nt o-t that d-r,n2 1995 we had o-r wor!t !,n2*e ,nve!tment e50er,en+e ,n the h,!tor.
o1 B(L on one ,dea ,n th,! 2ro-0.
90
Overa**, we had more than o-r !hare o1 2ood rea"! ,n 1995. We d,d not have a 2reat 8-ant,t. o1 ,dea!, -t the
8-a*,t., w,th the one ,m0ortant e5+e0t,on ment,oned aove, wa! ver. 2ood and +,r+-m!tan+e! deve*o0ed wh,+h
a++e*erated the t,meta*e ,n !evera*. & do not have a 2reat 1*ood o1 2ood ,dea! a! & 2o ,nto 1999, a*tho-2h a2a,n &
e*,eve & have at *ea!t !evera* 0otent,a**. 2ood ,dea! o1 !-!tant,a* !,<e. '-+h de0end! on whether mar"et
+ond,t,on! are 1avora*e 1or ota,n,n2 a *ar2er 0o!,t,on.
A** ,n a**, however, .o- !ho-*d re+o2n,<e that more +ame o-t o1 the 0,0e*,ne ,n 1995 than went ,n.
%,ver!,1,+at,on
La!t .ear ,n +omment,n2 on the ,na,*,t. o1 the overwhe*m,n2 maBor,t. o1 ,nve!tment mana2er! to a+h,eve
0er1orman+e !-0er,or to that o1 0-re +han+e, & a!+r,ed ,t 0r,mar,*. to the 0rod-+t o13 6I1K 2ro-0 de+,!,on! 4 m.
0erha0! Ba-nd,+ed v,ew ,! that ,t ,! +*o!e to ,m0o!!,*e 1or o-t!tand,n2 ,nve!tment mana2ement to +ome 1rom a
2ro-0 o1 an. !,<e w,th a** 0art,e! rea**. 0art,+,0at,n2 ,n de+,!,on!7 I2K a de!,re to +on1orm to the 0o*,+,e! and Ito
an e5tentK the 0ort1o*,o! o1 other *ar2e we**4re2arded or2an,<at,on!7 I:K an ,n!t,t-t,ona* 1ramewor" where.
avera2e ,! 6!a1e6 and the 0er!ona* reward! 1or ,nde0endent a+t,on are ,n no wa. +ommen!-rate w,th the 2enera*
r,!" atta+hed to !-+h a+t,on7 I?K an adheren+e to +erta,n d,ver!,1,+at,on 0ra+t,+e! wh,+h are ,rrat,ona*7 and 1,na**.
and ,m0ortant*., I5K ,nert,a.F
Th,! .ear ,n the mater,a* wh,+h went o-t ,n Novemer, & !0e+,1,+a**. +a**ed .o-r attent,on to a new )ro-nd R-*e
read,n2, 67. We d,ver!,1. !-!tant,a**. *e!! than mo!t ,nve!tment o0erat,on!. We m,2ht ,nve!t -0 to ?0= o1 o-r
net worth ,n a !,n2*e !e+-r,t. -nder +ond,t,on! +o-0*,n2 an e5treme*. h,2h 0roa,*,t. that o-r 1a+t! and
rea!on,n2 are +orre+t w,th a ver. *ow 0roa,*,t. that an.th,n2 +o-*d dra!t,+a**. +han2e the -nder*.,n2 va*-e o1
the ,nve!tment.6
We are ov,o-!*. 1o**ow,n2 a 0o*,+. re2ard,n2 d,ver!,1,+at,on wh,+h d,11er! mar"ed*. 1rom that o1 0ra+t,+a**. a**
0-*,+ ,nve!tment o0erat,on!. Fran"*., there ,! noth,n2 & wo-*d *,"e etter than to have 50 d,11erent ,nve!tment
o00ort-n,t,e!, a** o1 wh,+h have a mathemat,+a* e50e+tat,on Ith,! term re1*e+t! the ran2e o1 a** 0o!!,*e re*at,ve
0er1orman+e!, ,n+*-d,n2 ne2at,ve one!, adB-!ted 1or the 0roa,*,t. o1 ea+h 4 no .awn,n2, 0*ea!eK o1 a+h,ev,n2
0er1orman+e !-r0a!!,n2 the %ow ., !a., 1,1teen 0er+enta2e 0o,nt! 0er ann-m. &1 the 1,1t. ,nd,v,d-a*
e50e+tat,on! were not ,nter+ore*ated Iwhat ha00en! to one ,! a!!o+,ated w,th what ha00en! to the otherK & +o-*d
0-t 2= o1 o-r +a0,ta* ,nto ea+h one and !,t a+" w,th a ver. h,2h de2ree o1 +erta,nt. that o-r overa** re!-*t!
wo-*d e ver. +*o!e to !-+h a 1,1teen 0er+enta2e 0o,nt advanta2e.
&t doe!n/t wor" that wa..
We have to wor" e5treme*. hard to 1,nd B-!t a ver. 1ew attra+t,ve ,nve!tment !,t-at,on!. #-+h a !,t-at,on .
de1,n,t,on ,! one where m. e50e+tat,on Ide1,ned a! aoveK o1 0er1orman+e ,! at *ea!t ten 0er+enta2e 0o,nt! 0er
ann-m !-0er,or to the %ow. Amon2 the 1ew we do 1,nd, the e50e+tat,on! var. !-!tant,a**.. The 8-e!t,on
a*wa.! ,!, E@ow m-+h do & 0-t ,n n-mer one Iran"ed . e50e+tat,on o1 re*at,ve 0er1orman+eK and how m-+h
do & 0-t ,n n-mer e,2htM6 Th,! de0end! to a 2reat de2ree on the w,dene!! o1 the !0read etween the
mathemat,+a* e50e+tat,on o1 n-mer one ver!-! n-mer e,2ht.F &t a*!o de0end! -0on the 0roa,*,t. that n-mer
one +o-*d t-rn ,n a rea**. 0oor re*at,ve 0er1orman+e. Two !e+-r,t,e! +o-*d have e8-a* mathemat,+a*
e50e+tat,on!, -t one m,2ht have .05 +han+e o1 0er1orm,n2 1,1teen 0er+enta2e 0o,nt! or more wor!e than the
%ow, and the !e+ond m,2ht have on*. .01 +han+e o1 !-+h 0er1orman+e. The w,der ran2e o1 e50e+tat,on ,n the
1,r!t +a!e red-+e! the de!,ra,*,t. o1 heav. +on+entrat,on ,n ,t.
The aove ma. ma"e the who*e o0erat,on !o-nd ver. 0re+,!e. &t ,!n/t. Neverthe*e!!, o-r -!,ne!! ,! that o1
a!+erta,n,n2 1a+t! and then a00*.,n2 e50er,en+e and rea!on to !-+h 1a+t! to rea+h e50e+tat,on!. &m0re+,!e and
emot,ona**. ,n1*-en+ed a! o-r attem0t! ma. e, that ,! what the -!,ne!! ,! a** ao-t. The re!-*t! o1 man. .ear!
91
o1 de+,!,on4ma",n2 ,n !e+-r,t,e! w,** demon!trate how we** .o- are do,n2 on ma",n2 !-+h +a*+-*at,on! 4 whether
.o- +on!+,o-!*. rea*,<e .o- are ma",n2 the +a*+-*at,on! or not. & e*,eve the ,nve!tor o0erate! at a d,!t,n+t
advanta2e when he ,! aware o1 what 0ath h,! tho-2ht 0ro+e!! ,! 1o**ow,n2.
There ,! one th,n2 o1 wh,+h & +an a!!-re .o-. &1 2ood 0er1orman+e o1 the 1-nd ,! even a m,nor oBe+t,ve, an.
0ort1o*,o en+om0a!!,n2 one h-ndred !to+"! Iwhether the mana2er ,! hand*,n2 one tho-!and do**ar! or one
,**,on do**ar!K ,! not e,n2 o0erated *o2,+a**.. The add,t,on o1 the one h-ndredth !to+" !,m0*. +an/t red-+e the
0otent,a* var,an+e ,n 0ort1o*,o 0er1orman+e !-11,+,ent*. to +om0en!ate 1or the ne2at,ve e11e+t ,t! ,n+*-!,on ha! on
the overa** 0ort1o*,o e50e+tat,on.
An.one own,n2 !-+h n-mer! o1 !e+-r,t,e! a1ter 0re!-ma*. !t-d.,n2 the,r ,nve!tment mer,t Iand & don/t +are
how 0re!t,2,o-! the,r *ae*!K ,! 1o**ow,n2 what & +a** the Noah #+hoo* o1 &nve!t,n2 4 two o1 ever.th,n2. #-+h
,nve!tor! !ho-*d e 0,*ot,n2 ar"!. Wh,*e Noah ma. have een a+t,n2 ,n a++ord w,th +erta,n t,me4te!ted
,o*o2,+a* 0r,n+,0*e!, the ,nve!tor! have *e1t the tra+" re2ard,n2 mathemat,+a* 0r,n+,0*e!. I& on*. made ,t thro-2h
0*ane 2eometr., -t w,th one e5+e0t,on, & have +are1-**. !+reened o-t the mathemat,+,an! 1rom o-r (artner!h,0.K
O1 +o-r!e, the 1a+t that !omeone e*!e ,! ehav,n2 ,**o2,+a**. ,n own,n2 one h-ndred !e+-r,t,e! doe!n/t 0rove o-r
+a!e. Wh,*e the. ma. e wron2 ,n overd,ver!,1.,n2, we have to a11,rmat,ve*. rea!on thro-2h a 0ro0er
d,ver!,1,+at,on 0o*,+. ,n term! o1 o-r oBe+t,ve!.
The o0t,m-m 0ort1o*,o de0end! on the var,o-! e50e+tat,on! o1 +ho,+e! ava,*a*e and the de2ree o1 var,an+e ,n
0er1orman+e wh,+h ,! to*era*e. The 2reater the n-mer o1 !e*e+t,on!, the *e!! w,** e the avera2e .ear4to4.ear
var,at,on ,n a+t-a* ver!-! e50e+ted re!-*t!. A*!o, the *ower w,** e the e50e+ted re!-*t!, a!!-m,n2 d,11erent
+ho,+e! have d,11erent e50e+tat,on! o1 0er1orman+e.
& am w,**,n2 to 2,ve -0 8-,te a ,t ,n term! o1 *eve*,n2 o1 .ear4to4.ear re!-*t! Irememer when & ta*" o1 Ere!-*t!,F
& am ta*",n2 o1 0er1orman+e re*at,ve to the %owK ,n order to a+h,eve etter overa** *on24term 0er1orman+e.
#,m0*. !tated, th,! mean! & am w,**,n2 to +on+entrate 8-,te heav,*. ,n what & e*,eve to e the e!t ,nve!tment
o00ort-n,t,e! re+o2n,<,n2 ver. we** that th,! ma. +a-!e an o++a!,ona* ver. !o-r .ear 4 one !omewhat more !o-r,
0roa*., than ,1 & had d,ver!,1,ed more. Wh,*e th,! mean! o-r re!-*t! w,** o-n+e aro-nd more, & th,n" ,t a*!o
mean! that o-r *on24term mar2,n o1 !-0er,or,t. !ho-*d e 2reater.
Go- have a*read. !een !ome e5am0*e! o1 th,!. O-r mar2,n ver!-! the %ow ha! ran2ed 1rom 2.? 0er+enta2e
0o,nt! ,n 195; to ::.0 0o,nt! ,n 1995. &1 .o- +he+" th,! a2a,n!t the dev,at,on! o1 the 1-nd! *,!ted on 0a2e three,
.o- w,** 1,nd o-r var,at,on! have a m-+h w,der am0*,t-de. & +o-*d have o0erated ,n !-+h a manner a! to red-+e
o-r am0*,t-de, -t & wo-*d a*!o have red-+ed o-r overa** 0er1orman+e !omewhat a*tho-2h ,t !t,** wo-*d have
!-!tant,a**. e5+eeded that o1 the ,nve!tment +om0an,e!. Loo",n2 a+", and +ont,n-,n2 to th,n" th,! 0ro*em
thro-2h, & 1ee* that ,1 an.th,n2, & !ho-*d have +on+entrated !*,2ht*. more than & have ,n the 0a!t. @en+e, the new
)ro-nd R-*e and th,! *on24w,nded e50*anat,on.
A2a,n *et me !tate that th,! ,! !omewhat -n+onvent,ona* rea!on,n2 Ith,! doe!n/t ma"e ,t r,2ht or wron2 4 ,t doe!
mean .o- have to do .o-r own th,n",n2 on ,tK, and .o- ma. we** have a d,11erent o0,n,on 4 ,1 .o- do, the
(artner!h,0 ,! not the 0*a+e 1or .o-. We are ov,o-!*. on*. 2o,n2 to 2o to ?0= ,n ver. rare !,t-at,on! 4 th,!
rar,t., o1 +o-r!e, ,! what ma"e! ,t ne+e!!ar. that we +on+entrate !o heav,*., when we !ee !-+h an o00ort-n,t..
We 0roa*. have had on*. 1,ve or !,5 !,t-at,on! ,n the n,ne4.ear h,!tor. o1 the (artner!h,0 where we have
e5+eeded 25=. An. !-+h !,t-at,on! are 2o,n2 to have to 0rom,!e ver. !,2n,1,+ant*. !-0er,or 0er1orman+e
re*at,ve to the %ow +om0ared to other o00ort-n,t,e! ava,*a*e at the t,me. The. are a*!o 2o,n2 to have to 0o!!e!!
!-+h !-0er,or 8-a*,tat,ve andPor 8-ant,tat,ve 1a+tor! that the +han+e o1 !er,o-! 0ermanent *o!! ,! m,n,ma*
Ian.th,n2 +an ha00en on a !hort4term 8-otat,ona* a!,! wh,+h 0art,a**. e50*a,n! the 2reater r,!" o1 w,dened .ear4
to4.ear var,at,on ,n re!-*t!K. &n !e*e+t,n2 the *,m,t to wh,+h & w,** 2o ,n an.one ,nve!tment, & attem0t to red-+e to
a t,n. 1,2-re the 0roa,*,t. that the !,n2*e ,nve!tment Ior 2ro-0, ,1 there ,! ,nter+orre*at,onK +an 0rod-+e a re!-*t
92
1or o-r tota* 0ort1o*,o that wo-*d e more than ten 0er+enta2e 0o,nt! 0oorer than the %ow.
We 0re!ent*. have two !,t-at,on! ,n the over 25= +ate2or. 4 one a +ontro**ed +om0an., and the other a *ar2e
+om0an. where we w,** never ta"e an a+t,ve 0art. &t ,! worth 0o,nt,n2 o-t that o-r 0er1orman+e ,n
1995 wa! overwhe*m,n2*. the 0rod-+t o1 1,ve ,nve!tment !,t-at,on!. The 1995 2a,n! I,n !ome +a!e! there were
a*!o 2a,n! a00*,+a*e to the !ame ho*d,n2 ,n 0r,or .ear!K 1rom the!e !,t-at,on! ran2ed 1rom ao-t H;00,000 to
ao-t H: 1P2 m,**,on. &1 .o- !ho-*d ta"e the overa** 0er1orman+e o1 o-r 1,ve !ma**e!t 2enera* ,nve!tment! ,n
1995, the re!-*t! are *a+"*-!ter I& +ho!e a ver. +har,ta*e adBe+t,veK.
&ntere!t,n2*. eno-2h, the *,terat-re o1 ,nve!tment mana2ement ,! v,rt-a**. devo,d o1 mater,a* re*at,ve to
ded-+t,ve +a*+-*at,on o1 o0t,ma* d,ver!,1,+at,on.
A** te5t! +o-n!e* 6ade8-ate6 d,ver!,1,+at,on, -t the one! who 8-ant,1. 6ade8-ate6 v,rt-a**. never e50*a,n how
the. arr,ve at the,r +on+*-!,on. @en+e, 1or o-r !-mmat,on on overd,ver!,1,+at,on, we t-rn to that em,nent
a+adem,+,an B,**. Ro!e, who !a.!, 6Go-/ve 2ot a harem o1 !event. 2,r*!7 .o- don/t 2et to "now an. o1 them ver.
we**.F
',!+e**aneo-!
La!t .ear we o*d*. anno-n+ed an e50an!,on move, en+om0a!!,n2 an add,t,ona* 227 1P? !8-are 1eet. O*der
0artner! !hoo" the,r head!. & 1ee* that o-r 2a,n 1rom o0erat,on! ,n 1995 o1 H12,:0?,090 ,nd,+ate!
that we d,d not overe5tend o-r!e*ve!. Fort-nate*., we d,dn/t !,2n a 0er+enta2e *ea!e. O0erat,ona**., th,n2! have
never een r-nn,n2 more !mooth*., and & th,n" o-r 0re!ent !et-0 -n8-e!t,ona*. *et! me devote a h,2her
0er+enta2e o1 m. t,me to th,n",n2 ao-t the ,nve!tment 0ro+e!! than v,rt-a**. an.one e*!e ,n the mone.
mana2ement -!,ne!!. Th,!, o1 +o-r!e, ,! the re!-*t o1 rea**. o-t!tand,n2 0er!onne* and +oo0erat,ve 0artner!.
>ohn @ard,n2 ha! ta"en +om0*ete +har2e o1 a** adm,n,!trat,ve o0erat,on! w,th !0*end,d re!-*t!. B,** #+ott
+ont,n-e! to deve*o0 deta,*ed ,n1ormat,on on ,nve!tment! wh,+h !-!tant,a**. enhan+e! o-r net 0ro1,t 1,2-re.
Beth Feehan, %onna Wa*ter and E*,<aeth @anon Iwho Bo,ned -! ,n NovemerK have a** hand*ed *ar2e wor"
*oad! I!e+retar./! note 4AmenSK a++-rate*. and e11,+,ent*..
The aove 0eo0*e, the,r !0o-!e! Ione a0,e+eK and +h,*dren have a +om,ned ,nve!tment ,n the (artner!h,0 o1
over H900,000. #-!,e and & have an ,nve!tment o1 H9,;?9,9:9, wh,+h !ho-*d "ee0 me 1rom !*,00,n2 awa. to the
mov,e! ,n the a1ternoon. Th,! re0re!ent! v,rt-a**. o-r ent,re net worth, w,th the e5+e0t,on o1 o-r +ont,n-ed
ho*d,n2 o1 ',d4$ont,nent Ta $ard, a *o+a* +om0an. ,nto wh,+h & o-2ht ,n 1990 when ,t had *e!! than 10
!to+"ho*der!.
Add,t,ona**., m. re*at,ve!, +on!,!t,n2 o1 three +h,*dren, mother, two !,!ter!, two rother!4,n4*aw, 1ather4,n4*aw,
three a-nt!, two -n+*e!, 1,ve +o-!,n!, and !,5 n,e+e! and ne0hew! have ,ntere!t! ,n B(L, d,re+t*. or ,nd,re+t*.,
tota*,n2 H2,70;,2::. #o don/t 2et an. ,dea! ao-t vot,n2 a +han2e ,n the (artner!h,0 name.
(eat, 'arw,+", ',t+he** N $o. ha! done the +-!tomar. e5+e**ent Bo o1 e50ed,t,n2 the a-d,t and ta5 ,n1ormat,on.
Th,! re8-,re! 2reat e11ort and a,*,t., and the. !-00*. oth. Th,! .ear a +om0-ter wa! ro-2ht to ear on o-r
0ro*em!, and nat-ra**., & wa! a *,tt*e worr,ed !omeone e*!e wo-*d +ome o-t a! the 2enera* 0artner. @owever, ,t
a** wor"ed 8-,te !mooth*..
W,th,n the +om,n2 two wee"! .o- w,** re+e,ve3
1. A ta5 *etter 2,v,n2 .o- a** B(L ,n1ormat,on needed 1or .o-r 1995 1edera* ,n+ome ta5 ret-rn. Th,! *etter
,! the on*. ,tem that +o-nt! 1or ta5 0-r0o!e!.
2. An a-d,t 1rom (eat, 'arw,+", ',t+he** N $o. 1or 1995, !ett,n2 1orth the o0erat,on! and 1,nan+,a*
93
0o!,t,on o1 B(L, a! we** a! .o-r own +a0,ta* a++o-nt.
:. A *etter !,2ned . me !ett,n2 1orth the !tat-! o1 .o-r B(L ,ntere!t on 1P1P99. Th,! ,! ,dent,+a* w,th the
1,2-re! deve*o0ed ,n the a-d,t.
Let me "now ,1 an.th,n2 ,n th,! *etter or that o++-r! d-r,n2 the .ear need! +*ar,1.,n2. &t ,! d,11,+-*t to ant,+,0ate
a** o1 the 8-e!t,on! .o- ma. have and ,1 there ,! an.th,n2 that ,! +on1-!,n2, & want to hear ao-t ,t. For ,n!tan+e,
we re+e,ved an e5+e**ent !-22e!t,on *a!t .ear 1rom a 0artner re2ard,n2 the 0re!entat,on o1 the re+on+,*,at,on o1
0er!ona* +a0,ta* a++o-nt!.
'. ne5t *etter w,** e ao-t >-*. 15th, !-mmar,<,n2 the 1,r!t ha11 o1 th,! .ear.
$ord,a**.,
Warren E. B-11ett
94
BUFFETT (ARTNER#@&(. LT%.
910 A&EW&T (LAOA
O'A@A, NEBRA#AA 9;1:1
TELE(@ONE 0?24?110
>-*. 12, 1999
F,r!t @a*1 (er1orman+e
%-r,n2 the 1,r!t ha*1 o1 1999, the %ow4>one! &nd-!tr,a* Avera2e Ihere,na1ter +a**ed the 6%ow6K de+*,ned 1rom
999.29 to ;70.10. &1 one had owned the %ow d-r,n2 th,! 0er,od, d,v,dend! o1 a00ro5,mate*. 1?.70 wo-*d have
een re+e,ved, red-+,n2 the overa** *o!! o1 the %ow to ao-t ;.7=.
&t ,! m. oBe+t,ve and m. ho0e I-t not m. 0red,+t,onSK that we a+h,eve over a *on2 0er,od o1 t,me, an avera2e
.ear*. advanta2e o1 ten 0er+enta2e 0o,nt! re*at,ve to the %ow. %-r,n2 the 1,r!t ha*1 we d,d +on!,dera*. etter
than e50e+ted w,th an overa** 2a,n o1 a00ro5,mate*. ;.2=. #-+h re!-*t! !ho-*d e re2arded a! de+,ded*.
anorma*. & have 0rev,o-!*. +om0*,mented 0artner! on the 2ood4nat-red to*eran+e the. d,!0*a. ,n !hr-22,n2 o11
!-+h -ne50e+ted 0o!,t,ve var,an+e!. The nat-re o1 o-r -!,ne!! ,! !-+h that over the .ear!, we w,** not
d,!a00o,nt the man. o1 .o- who m-!t a*!o de!,re a te!t o1 .o-r +a0a+,t. 1or to*eran+e o1 ne2at,ve var,an+e!.
The 1o**ow,n2 !-mmar,<e! the .ear4.4.ear 0er1orman+e o1 the %ow, the 0er1orman+e o1 the (artner!h,0 e1ore
a**o+at,on to the 2enera* 0artner, and the re!-*t! 1or *,m,ted 0artner!3
Year Overall .esults :ro
Dow /)0
Partnership .esults /10 Liited Partners!
.esults /?0
1957 4;.?= 10.?= 9.:=
195; :;.5= ?0.9= :2.2=
1959 20.0= 25.9= 20.9=
1990 49.2= 22.;= 1;.9=
1991 22.?= ?5.9= :5.9=
1992 47.9= 1:.9= 11.9=
199: 20.9= :;.7= :0.5=
199? 1;.7= 27.;= 22.:=
1995 1?.2= ?7.2= :9.9=
F,r!t ha*1 o1 1999 4;.7= ;.2= 7.7=
"uulative .esults )@).)7 )81A.B7 +@).67
9nnual "opounded
.ate
,.B7 1,.87 1?.67
1. Ba!ed on .ear*. +han2e! ,n the va*-e o1 the %ow 0*-! d,v,dend! that wo-*d have een re+e,ved thro-2h
owner!h,0 o1 the %ow d-r,n2 that .ear. The ta*e ,n+*-de! a** +om0*ete .ear! o1 0artner!h,0 a+t,v,t..
2. For 1957491 +on!,!t! o1 +om,ned re!-*t! o1 a** 0rede+e!!or *,m,ted 0artner!h,0! o0erat,n2 thro-2ho-t
the ent,re .ear a1ter a** e50en!e! -t e1ore d,!tr,-t,on! to 0artner! or a**o+at,on! to the 2enera* 0artner.
:. For 1957491 +om0-ted on the a!,! o1 the 0re+ed,n2 +o*-mn o1 0artner!h,0 re!-*t! a**ow,n2 1or
a**o+at,on to the 2enera* 0artner a!ed -0on the 0re!ent 0artner!h,0 a2reement, -t e1ore month*.
w,thdrawa*! . *,m,ted 0artner!.
Even #am!on 2et! +*,00ed o++a!,ona**.. &1 .o- had ,nve!ted H100.000 on >an-ar. 1 e8-a**. amon2 4
95
a. the wor*d/! *ar2e!t a-to +om0an. I)enera* 'otor!K7
. the wor*d/! *ar2e!t o,* +om0an. I#tandard o1 New >er!e.K7
+. the wor*d/! *ar2e!t reta,*,n2 +om0an. I#ear! Roe-+"K7
d. the wor*d/! *ar2e!t +hem,+a* +om0an. I%-0ontK7
e. the wor*d/! *ar2e!t !tee* +om0an. IU.#. #tee*K7
1. the wor*d/! *ar2e!t !to+"ho*der4owned ,n!-ran+e +om0an. IAetnaK7
2. the wor*dD! *ar2e!t 0-*,+ -t,*,t. IAmer,+an Te*e0hone N Te*e2ra0hK7
h. the wor*d/! *ar2e!t an" IBan" o1 Amer,+aK7
.o-r tota* 0ort1o*,o I,n+*-d,n2 d,v,dend! re+e,vedK wo-*d have een worth H;:,:70 on >-ne :0 1or a *o!! o1
19.9=. The tota* mar"et va*-e on >an-ar. 1 o1 the!e e,2ht 2,ant! wa! we** over H100 ,**,on. Ever.one o1 them
wa! !e**,n2 *ower on >-ne :0.
&nve!tment $om0an,e!
On the ne5t 0a2e we r,n2 -0 to date o-r re2-*ar +om0ar,!on w,th the re!-*t! o1 the two *ar2e!t o0en4end
,nve!tment +om0an,e! Im-t-a* 1-nd!K that 1o**ow a 0o*,+. o1 e,n2, t.0,+a**., 954100= ,nve!ted ,n +ommon
!to+"!, and the two *ar2e!t d,ver!,1,ed +*o!ed4end ,nve!tment +om0an,e!.
GEARLG RE#ULT#
Year #ass. Inv.
&rust /)0
Investors
'toc( /)0
Lehan /10 &ri-"ont
/10
Dow Liited
Partners
1957 411.?= 412.?= 411.?= 42.?= 4;.?= 9.:=
195; ?2.7= ?7.5= ?0.;= ::.2= :;.5= :2.2=
1959 9.0= 10.:= ;.1= ;.?= 20.0= 20.9=
1990 41.0= 40.9= 2.5= 2.;= 49.2= 1;.9=
1991 25.9= 2?.9= 2:.9= 22.5= 22.?= :5.9=
1992 49.;= 41:.?= 41?.?= 410.0= 47.9= 11.9=
199: 20.0= 19.5= 2:.7= 1;.:= 20.9= :0.5=
199? 15.9= 1?.:= 1:.9= 12.9= 1;.7= 22.:=
1995 10.2= 9.;= 19.0= 10.7= 1?.2= :9.9=
F,r!t ha*1
1999
47.9= 47.9= 41.0= 45.2= 4;.7= 7.7=
"uulative
.esults
))A.)7 )8+.?7 )@1.A7 )1+.,7 )@).)7 +@).67
9nnual
"opounded
.ate
A.+7 B.,7 ,.A7 ,.87 ,.B7 1?.67
I1K $om0-ted 1rom +han2e! ,n a!!et va*-e 0*-! an. d,!tr,-t,on! to ho*der! o1 re+ord d-r,n2 .ear.
I2K From 1999 'ood./! Ban" N F,nan+e 'an-a* 1or 195741995. E!t,mated 1or 1,r!t ha*1 o1 1999.
(ro0onent! o1 ,n!t,t-t,ona* ,nve!t,n2 1re8-ent*. +,te ,t! +on!ervat,ve nat-re. &1 E+on!ervat,veF ,! ,nter0reted to
mean 60rod-+t,ve o1 re!-*t! var.,n2 on*. !*,2ht*. 1rom avera2e e50er,en+e6 & e*,eve the +hara+ter,<at,on ,!
0ro0er. #-+h re!-*t! are a*mo!t o-nd to 1*ow 1rom w,de d,ver!,1,+at,on amon2 h,2h 2rade !e+-r,t,e!. #,n+e, over
a *on2 0er,od, 6avera2e e50er,en+e6 ,! *,"e*. to e 2ood e50er,en+e, there ,! noth,n2 wron2 w,th the t.0,+a*
,nve!tor -t,*,<,n2 th,! 1orm o1 ,nve!tment med,-m.
96
@owever, & e*,eve that +on!ervat,!m ,! more 0ro0er*. ,nter0reted to mean 6!-Be+t to !-!tant,a**. *e!!
tem0orar. or 0ermanent !hr,n"a2e ,n va*-e than tota* e50er,en+e6. Th,! !,m0*. ha! not een a+h,eved, a! the
re+ord o1 the 1o-r *ar2e!t 1-nd! I0re!ent*. mana2,n2 over H5 ,**,onK ,**-!trate!. #0e+,1,+a**., the %ow de+*,ned
,n 1957, 1990, 1992 and the 1,r!t ha*1 o1 1999. $-m-*at,n2 the !hr,n"a2e ,n the %ow d-r,n2 the three 1-** .ear
0er,od! 0rod-+e! a de+*,ne o1 20.9=. Fo**ow,n2 a !,m,*ar te+hn,8-e 1or the 1o-r *ar2e!t 1-nd! 0rod-+e! de+*,ne!
o1 9.7=, 20.9=, 22.:= and 2?.9=. &n+*-d,n2 the ,nter,m 0er1orman+e 1or the 1,r!t ha*1 o1 1999 re!-*t! ,n a
de+*,ne ,n the %ow o1 27.5= and 1or the 1-nd! de+*,ne! o1 1?.?=, 2:.1=, 27.1= and :0.9=. #-+h 1-nd! Iand &
e*,eve the,r re!-*t! are 8-,te t.0,+a* o1 ,n!t,t-t,ona* e50er,en+e ,n +ommon !to+"!K !eem to meet the 1,r!t
de1,n,t,on o1 +on!ervat,!m -t not the !e+ond one.
'o!t ,nve!tor! wo-*d +*,m a r-n2 ,nte**e+t-a**. ,1 the. +*ear*. de*,neated etween the aove two ,nter0retat,on!
o1 +on!ervat,!m. The 1,r!t m,2ht e etter *ae*ed 6+onvent,ona*,!m6 4 what ,t rea**. !a.! ,! that Ewhen other!
are ma",n2 mone. ,n the 2enera* r-n o1 !e+-r,t,e!, !o w,** we and to ao-t the !ame de2ree7 when the. are *o!,n2
mone., we/** do ,t at ao-t the !ame rate.6 Th,! ,! not to e e8-ated w,th 6when other! are ma",n2 ,t, we/** ma"e
a! m-+h and when the. are *o!,n2 ,t, we w,** *o!e *e!!.F Ler. 1ew ,nve!tment 0ro2ram! a++om0*,!h the *atter 4
we +erta,n*. don/t 0rom,!e ,t -t we do ,ntend to "ee0 tr.,n2. I& have a*wa.! 1e*t o-r oBe+t,ve! !ho-*d e
!omewhat *o1t,er than tho!e @erman @,+"man art,+-*ated d-r,n2 the de!0erate .ear! when Ga*e wa! *o!,n2 e,2ht
2ame! a !ea!on. #a,d @erman, 6& !ee m. Bo a! one o1 "ee0,n2 the a*-mn, !-**en -t not m-t,no-!.FK
@o+h!+h,*d, Aohn N $o.
%-r,n2 the 1,r!t ha*1 we, and two 10= 0artner!, 0-r+ha!ed a** o1 the !to+" o1 @o+h!+h,*d, Aohn N $o., a
0r,vate*. owned Ba*t,more de0artment !tore. Th,! ,! the 1,r!t t,me ,n the h,!tor. o1 the (artner!h,0 that an ent,re
-!,ne!! ha! een 0-r+ha!ed . ne2ot,at,on, a*tho-2h we have, 1rom t,me to t,me, ne2ot,ated 0-r+ha!e o1
!0e+,1,+ ,m0ortant *o+"! o1 mar"eta*e !e+-r,t,e!. @owever, no new 0r,n+,0*e! are ,nvo*ved. The 8-ant,tat,ve
and 8-a*,tat,ve a!0e+t! o1 the -!,ne!! are eva*-ated and we,2hed a2a,n!t 0r,+e, oth on an a!o*-te a!,! and
re*at,ve to other ,nve!tment o00ort-n,t,e!. @A I*earn to +a** ,t that 4 & d,dn/t 1,nd o-t how to 0rono-n+e ,t -nt,*
the dea* wa! +on+*-dedK !ta+"! -0 1,ne ,n a** re!0e+t!.
We have to0not+h 0eo0*e Ioth 1rom a 0er!ona* and -!,ne!! !tand0o,ntK hand*,n2 the o0erat,on. %e!0,te the
ed2e that m. e5ten!,ve 75 +ent! an ho-r e50er,en+e at the (enne./! !tore ,n Omaha !ome .ear! a+" 2,ve! -! I&
e+ame an a-thor,t. on the ',n,m-m Wa2e A+tK, the. w,** +ont,n-e to r-n the -!,ne!! a! ,n the 0a!t. Even ,1
the 0r,+e had een +hea0er -t the mana2ement had een r-n4o14the4m,**, we wo-*d not have o-2ht the
-!,ne!!.
&t ,! ,m0o!!,*e to avo,d !ome 0-*,+ not,+e when a -!,ne!! w,th !evera* tho-!and em0*o.ee! ,! a+8-,red.
@owever, ,t ,! ,m0ortant that .o- do not ,n1er the de2ree o1 1,nan+,a* ,m0ortan+e to B(L 1rom ,t! new! va*-e to
the 0-*,+. We have !ometh,n2 over H50 m,**,on ,nve!ted, 0r,mar,*. ,n mar"eta*e !e+-r,t,e!, o1 wh,+h on*.
ao-t 10= ,! re0re!ented . o-r net ,nve!tment ,n @A. We have an ,nve!tment o1 over three t,me! th,! m-+h ,n
a mar"eta*e !e+-r,t. where o-r owner!h,0 w,** never +ome to 0-*,+ attent,on. Th,! ,! not to !a. an @A ,! not
,m0ortant 4 a 10= ho*d,n2 de1,n,te*. ,!. @owever, ,t ,! not a! !,2n,1,+ant re*at,ve to o-r tota* o0erat,on a! ,t
wo-*d e ea!. to th,n". & !t,** 0re1er the ,+eer2 a00roa+h toward ,nve!tment d,!+*o!-re.
&t ,! m. ,ntent,on to va*-e @A at .earend at +o!t 0*-! o-r !hare o1 reta,ned earn,n2! !,n+e 0-r+ha!e. Th,! 0o*,+.
w,** e 1o**owed ,n 1-t-re .ear! -n*e!! there ,! a demon!tra*e +han2e ,n o-r 0o!,t,on re*at,ve to other
de0artment !tore! or ,n other oBe+t,ve !tandard! o1 va*-e. Nat-ra**. we wo-*dn/t have 0-r+ha!ed @A -n*e!! we
1e*t the 0r,+e wa! 8-,te attra+t,ve. There1ore, a va*-at,on 0o*,+. a!ed -0on +o!t ma. !omewhat -nderva*-e o-r
ho*d,n2!. Neverthe*e!!, ,t !eem! the mo!t oBe+t,ve 1,2-re to a00*.. A** o1 o-r ,nve!tment! -!-a**. a00ear
-nderva*-ed to me 4 otherw,!e we wo-*dn/t own them.
'ar"et Fore+a!t,n2
97
)ro-nd R-*e No.9 I1rom o-r Novemer 0a+"etK !a.!3 E& am not ,n the -!,ne!! o1 0red,+t,n2 2enera* !to+"
mar"et or -!,ne!! 1*-+t-at,on!. &1 .o- th,n" & +an do th,!, or th,n" ,t ,! e!!ent,a* to an ,nve!tment 0ro2ram, .o-
!ho-*d not e ,n the 0artner!h,0.F
O1 +o-r!e, th,! r-*e +an e atta+"ed a! 1-<<., +om0*e5, am,2-o-!, va2-e, et+. Neverthe*e!!, & th,n" the 0o,nt ,!
we** -nder!tood . the 2reat maBor,t. o1 o-r 0artner!. We don/t -. and !e** !to+"! a!ed -0on what other
0eo0*e th,n" the !to+" mar"et ,! 2o,n2 to do I& never have an o0,n,onK -t rather -0on what we th,n" the
+om0an. ,! 2o,n2 to do. The +o-r!e o1 the !to+" mar"et w,** determ,ne, to a 2reat de2ree, when we w,** e r,2ht,
-t the a++-ra+. o1 o-r ana*.!,! o1 the +om0an. w,** *ar2e*. determ,ne whether we w,** e r,2ht. &n other word!,
we tend to +on+entrate on what !ho-*d ha00en, not when ,t !ho-*d ha00en.
&n o-r de0artment !tore -!,ne!! & +an !a. w,th +on!,dera*e a!!-ran+e that %e+emer w,** e etter than >-*..
INot,+e how !o0h,!t,+ated & have a*read. e+ome ao-t reta,*,n2.K What rea**. +o-nt! ,! whether %e+emer ,!
etter than *a!t %e+emer . a mar2,n 2reater than o-r +om0et,tor!/ and what we are do,n2 to !et the !ta2e 1or
1-t-re %e+emer!. @owever, ,n o-r 0artner!h,0 -!,ne!! & not on*. +an/t !a. whether %e+emer w,** e etter
than >-*., -t & +an/t even !a. that %e+emer won/t 0rod-+e a ver. *ar2e *o!!. &t !omet,me! doe!. O-r
,nve!tment! are !,m0*. not aware that ,t ta"e! :9541P? da.! 1or the earth to ma"e ,t aro-nd the !-n. Even wor!e,
the. are not aware that .o-r +e*e!t,a* or,entat,on Iand that o1 the &R#K re8-,re! that & re0ort to .o- -0on the
+on+*-!,on o1 ea+h or,t Ithe earth/! 4 not o-r!K. There1ore, we have to -!e a !tandard other than the +a*endar to
mea!-re o-r 0ro2re!!. Th,! .ard!t,+" ,! ov,o-!*. the 2enera* e50er,en+e ,n !e+-r,t,e! a! mea!-red . the %ow.
We have a !tron2 1ee*,n2 that th,! +om0et,tor w,** do 8-,te de+ent*. over a 0er,od o1 .ear! I$hr,!tma! w,** +ome
even ,1 ,t/! ,n >-*.K and ,1 we "ee0 eat,n2 o-r +om0et,tor we w,** have to do !ometh,n2 etter than 68-,te
de+ent*.6. &t/! !ometh,n2 *,"e a reta,*er mea!-r,n2 h,! !a*e! 2a,n! and 0ro1,t mar2,n! a2a,n!t #ear!/ 4 eat them
ever. .ear and !omehow .o-/** !ee da.*,2ht.
& re!-rre+t th,! 6mar"et42-e!!,n26 !e+t,on on*. e+a-!e a1ter the %ow de+*,ned 1rom 995 at the 0ea" ,n Fer-ar.
to ao-t ;95 ,n 'a., & re+e,ved a 1ew +a**! 1rom 0artner! !-22e!t,n2 that the. tho-2ht !to+"! were 2o,n2 a *ot
*ower. Th,! a*wa.! ra,!e! two 8-e!t,on! ,n m. m,nd3 I1K ,1 the. "new ,n Fer-ar. that the %ow wa! 2o,n2 to ;95
,n 'a., wh. d,dn/t the. *et me ,n on ,t then7 and, I2K ,1 the. d,dn/t "now what wa! 2o,n2 to ha00en d-r,n2 the
en!-,n2 three month! a+" ,n Fer-ar., how do the. "now ,n 'a.M There ,! a*!o a vo,+e or two a1ter an.
h-ndred 0o,nt or !o de+*,ne !-22e!t,n2 we !e** and wa,t -nt,* the 1-t-re ,! +*earer. Let me a2a,n !-22e!t two
0o,nt!3 I1K the 1-t-re ha! never een +*ear to me I2,ve -! a +a** when the ne5t 1ew month! are ov,o-! to .o- J
or, 1or that matter the ne5t 1ew ho-r!K7 and, I2K no one ever !eem! to +a** a1ter the mar"et ha! 2one -0 one
h-ndred 0o,nt! to 1o+-! m. attent,on on how -n+*ear ever.th,n2 ,!, even tho-2h the v,ew a+" ,n Fer-ar.
doe!n/t *oo" !o +*ear ,n retro!0e+t.
&1 we !tart de+,d,n2, a!ed on 2-e!!e! or emot,on!, whether we w,** or won/t 0art,+,0ate ,n a -!,ne!! where we
!ho-*d have !ome *on2 r-n ed2e, we/re ,n tro-*e. We w,** not !e** o-r ,ntere!t! ,n -!,ne!!e! I!to+"!K when the.
are attra+t,ve*. 0r,+ed B-!t e+a-!e !ome a!tro*o2er th,n"! the 8-otat,on! ma. 2o *ower even tho-2h !-+h
1ore+a!t! are ov,o-!*. 2o,n2 to e r,2ht !ome o1 the t,me. #,m,*ar*., we w,** not -. 1-**. 0r,+ed !e+-r,t,e!
e+a-!e 6e50ert!6 th,n" 0r,+e! are 2o,n2 h,2her. Who wo-*d th,n" o1 -.,n2 or !e**,n2 a 0r,vate -!,ne!!
e+a-!e o1 !omeone/! 2-e!! on the !to+" mar"etM The ava,*a,*,t. o1 a 8-e!t,on 1or .o-r -!,ne!! ,ntere!t I!to+"K
!ho-*d a*wa.! e an a!!et to e -t,*,<ed ,1 de!,red. &1 ,t 2et! !,**. eno-2h ,n e,ther d,re+t,on, .o- ta"e advanta2e
o1 ,t. &t! ava,*a,*,t. !ho-*d never e t-rned ,nto a *,a,*,t. where. ,t! 0er,od,+ aerrat,on! ,n t-rn 1orm-*ate
.o-r B-d2ment!. A marve*o-! art,+-*at,on o1 th,! ,dea ,! +onta,ned ,n +ha0ter two IThe &nve!tor and #to+"
'ar"et F*-+t-at,on!K o1 BenBam,n )raham/! 6The &nte**,2ent &nve!tor6. &n m. o0,n,on, th,! +ha0ter ha! more
,nve!tment ,m0ortan+e than an.th,n2 e*!e that ha! een wr,tten.
We w,** have a *etter o-t ao-t Novemer 1 w,th the $omm,tment Letter 1or 1997 and an e!t,mate o1 the 1999
ta5 !,t-at,on.
98
$ord,a**.,
Warren B-11ett
WEB eh
99
BUFFETT (ARTNER#@&(. LT%.
910 A&EW&T (LAOA
O'A@A, NEBRA#AA 9;1:1
TELE(@ONE 0?24?110
>an-ar. 25, 1997
The F,r!t %e+ade
The (artner!h,0 had ,t! tenth ann,ver!ar. d-r,n2 1999. The +e*erat,on wa! a00ro0r,ate 4an a**4t,me re+ord Ioth
0a!t and 1-t-reK wa! e!ta*,!hed 1or o-r 0er1orman+e mar2,n re*at,ve to the %ow. O-r advanta2e wa! :9 0o,nt!
wh,+h re!-*ted 1rom a 0*-! 20.?= 1or the (artner!h,0 and a m,n-! 15.9= 1or the %ow.
Th,! 0*ea!ant -t non4re0eata*e e50er,en+e wa! 0art,a**. d-e to a *a+"*-!ter 0er1orman+e . the %ow. L,rt-a**.
a** ,nve!tment mana2er! o-t0er1ormed ,t d-r,n2 the .ear. The %ow ,! we,2hted . the do**ar 0r,+e o1 the th,rt.
!to+"! ,nvo*ved. #evera* o1 the h,2he!t 0r,+ed +om0onent!, wh,+h there. +arr. d,!0ro0ort,onate we,2ht
I%-0ont, )enera* 'otor!K, were 0art,+-*ar*. 0oor 0er1ormer! ,n 1999. Th,!, +o-0*ed w,th the 2enera* aver!,on to
+onvent,ona* *-e +h,0!, +a-!ed the %ow to !-11er re*at,ve to 2enera* ,nve!tment e50er,en+e, 0art,+-*ar*. d-r,n2
the *a!t 8-arter.
The 1o**ow,n2 !-mmar,<e! the .ear4.4.ear 0er1orman+e o1 the %ow, the 0er1orman+e o1 the (artner!h,0 e1ore
a**o+at,on Ione 8-arter o1 the e5+e!! over 9=K to the 2enera* 0artner, and the re!-*t! 1or *,m,ted 0artner!3
Year Overall .esults :ro
Dow /)0
Partnership .esults /10 Liited Partners!
.esults /?0
1957 4;.?= 10.?= 9.:=
195; :;.5= ?0.9= :2.2=
1959 20.0= 25.9= 20.9=
1990 49.2= 22.;= 1;.9=
1991 22.?= ?5.9= :5.9=
1992 47.9= 1:.9= 11.9=
199: 20.9= :;.7= :0.5=
199? 1;.7= 27.;= 22.:=
1995 1?.2= ?7.2= :9.9=
1999 415.9= 20.?= 19.;=
"uulative .esults )@).)7 )81A.B7 +@).67
9nnual "opounded
.ate
,.B7 1,.87 1?.67
I1K Ba!ed on .ear*. +han2e! ,n the va*-e o1 the %ow 0*-! d,v,dend! that wo-*d have een re+e,ved thro-2h
owner!h,0 o1 the %ow d-r,n2 that .ear. The ta*e ,n+*-de! a** +om0*ete .ear! o1 0artner!h,0 a+t,v,t..
I2K For 1957491 +on!,!t! o1 +om,ned re!-*t! o1 a** 0rede+e!!or *,m,ted 0artner!h,0! o0erat,n2 thro-2ho-t
the ent,re .ear a1ter a** e50en!e!, -t e1ore d,!tr,-t,on! to 0artner! or a**o+at,on! to the 2enera*
0artner.
I:K For 1957491 +om0-ted on the a!,! o1 the 0re+ed,n2 +o*-mn o1 0artner!h,0 re!-*t! a**ow,n2 1or
a**o+at,on to the 2enera* 0artner a!ed -0on the 0re!ent 0artner!h,0 a2reement. -t e1ore month*.
w,thdrawa*! . *,m,ted 0artner!.
100
On a +-m-*at,ve or +om0o-nded a!,!, the re!-*t! are3
Year Overall .esults :ro
Dow
Partnership .esults Liited Partners!
.esults
1957 4;.?= 10.?= 9.:=
1957 J 5; 29.9= 55.9= ??.5=
1957 J 59 52.:= 95.9= 7?.7=
1957 J 90 ?2.9= 1?0.9= 107.2=
1957 J 91 7?.9= 251.0= 1;1.9=
1957 J 92 91.9= 299.;= 215.1=
1957 J 9: 95.1= ?5?.5= :11.2=
1957 J 9? 1:1.:= 90;.7= ?02.9=
1957 J 95 19?.1= 9?:.2= 5;;.5=
1957 J 99 122.9= 1159.0= 70?.2=
9nnual "opounded
.ate
)).@7 1,.A7 1?.,7
&nve!tment $om0an,e!
On the 1o**ow,n2 0a2e ,! the -!-a* ta-*at,on !how,n2 the re!-*t! o1 the two *ar2e!t o0en4end ,nve!tment
+om0an,e! Im-t-a* 1-nd!K that 1o**ow a 0o*,+. o1 e,n2, t.0,+a**., 954100= ,nve!ted ,n +ommon !to+"!, and the
two *ar2e!t d,ver!,1,ed +*o!ed4end ,nve!tment +om0an,e!.
Year #ass. Inv.
&rust /)0
Investors
'toc( /)0
Lehan /10 &ri-"ont
/10
Dow Liited
Partners
1957 411.?= 412.?= 411.?= 42.?= 4;.?= 9.:=
195; ?2.7= ?7.5= ?0.;= ::.2= :;.5= :2.2=
1959 9.0= 10.:= ;.1= ;.?= 20.0= 20.9=
1990 41.0= 40.9= 2.5= 2.;= 49.2= 1;.9=
1991 25.9= 2?.9= 2:.9= 22.5= 22.?= :5.9=
1992 49.;= 41:.?= 41?.?= 410.0= 47.9= 11.9=
199: 20.0= 19.5= 2:.7= 1;.:= 20.9= :0.5=
199? 15.9= 1?.:= 1:.9= 12.9= 1;.7= 22.:=
1995 10.2= 9.;= 19.0= 10.7= 1?.2= :9.9=
1999 47.7= 410.0= 42.9= 49.9= 415.9= 19.;=
"uulative
.esults
))A.)7 )8+.?7 )@1.A7 )1+.,7 )@).)7 +@).67
9nnual
"opounded
.ate
A.+7 B.,7 ,.A7 ,.87 ,.B7 1?.67
I1K $om0-ted 1rom +han2e! ,n a!!et va*-e 0*-! an. d,!tr,-t,on! to ho*der! o1 re+ord d-r,n2 .ear.
I2K From 1999 'ood./! Ban" N F,nan+e 'an-a* 1or 195741995. E!t,mated 1or 1999.
The!e ,nve!tment +om0an. 0er1orman+e 1,2-re! have een re2-*ar*. re0orted here to !how that the now ,! no
0at!. a! an ,nve!tment !tandard. &t !ho-*d a2a,n e em0ha!,<ed that the +om0an,e! were not !e*e+ted on the
a!,! o1 +om0ara,*,t. to B-11ett (artner!h,0, Ltd. There are ,m0ortant d,11eren+e! ,n+*-d,n23 I1K ,nve!tment
+om0an,e! o0erate -nder oth ,nterna**. and e5terna**. ,m0o!ed re!tr,+t,on! on the,r ,nve!tment a+t,on! that are
not a00*,+a*e to -!7 I2K ,nve!tment +om0an,e! d,ver!,1. 1ar more than we do and, ,n a** 0roa,*,t., there.
101
have *e!! +han+e 1or a rea**. ad 0er1orman+e re*at,ve to the now ,n a !,n2*e .ear7 and I:K the,r mana2er! have
+on!,dera*. *e!! ,n+ent,ve 1or anorma* 0er1orman+e and 2reater ,n+ent,ve 1or +onvent,ona*,t..
@owever, the re+ord! aove do revea* what we**4re2arded, h,2h*. 0a,d, 1-**4t,me 0ro1e!!,ona* ,nve!tment
mana2er! have een a*e to a++om0*,!h wh,*e wor",n2 w,th +ommon !to+"!. The!e mana2er! have een
1avor,te! o1 Amer,+an ,nve!tor! Imore than 900,000K ma",n2 1ree +ho,+e! amon2 man. a*ternat,ve! ,n the
,nve!tment mana2ement 1,e*d. &t ,! 0roa*e that the,r re!-*t! are t.0,+a* o1 the overwhe*m,n2 maBor,t. o1
0ro1e!!,ona* ,nve!tment mana2er!.
&t ,! not tr-e, however, that the!e are the e!t re+ord! a+h,eved ,n the ,nve!tment 1,e*d. A 1ew m-t-a* 1-nd! and
!ome 0r,vate ,nve!tment o0erat,on! have +om0,*ed re+ord! va!t*. !-0er,or to the %ow and, ,n !ome +a!e!,
!-!tant,a**. !-0er,or to B-11ett (artner!h,0, Ltd. The,r ,nve!tment te+hn,8-e! are -!-a**. ver. d,!!,m,*ar to o-r!
and not w,th,n m. +a0a,*,t,e!. @owever, the. are 2enera**. mana2ed . ver. r,2ht, mot,vated 0eo0*e and ,t ,!
on*. 1a,r that & ment,on the e5,!ten+e o1 !-+h !-0er,or re!-*t! ,n th,! 2enera* d,!+-!!,on o1 the re+ord o1
0ro1e!!,ona* ,nve!tment mana2ement.
Trend! ,n O-r B-!,ne!!
A "een m,nd wor",n2 d,*,2ent*. at ,nter0ret,n2 the 1,2-re! on 0a2e one +o-*d +ome to a *ot o1 wron2
+on+*-!,on!.
The re!-*t! o1 the 1,r!t ten .ear! have a!o*-te*. no +han+e o1 e,n2 d-0*,+ated or even remote*. a00ro5,mated
d-r,n2 the ne5t de+ade. The. ma. we** e a+h,eved . !ome h-n2r. twent.41,ve .ear o*d wor",n2 w,th
H105,100 ,n,t,a* 0artner!h,0 +a0,ta* and o0erat,n2 d-r,n2 a ten .ear -!,ne!! and mar"et env,ronment wh,+h ,!
1re8-ent*. +ond-+,ve to !-++e!!1-* ,m0*ementat,on o1 h,! ,nve!tment 0h,*o!o0h..
The. w,** not e a+h,eved . a etter 1ed th,rt.4!,5 .ear o*d wor",n2 w,th o-r H5?,095,:?5 +-rrent 0artner!h,0
+a0,ta* who 0re!ent*. 1,nd! 0erha0! one41,1th to one4tenth a! man. rea**. 2ood ,dea! a! 0rev,o-!*. to ,m0*ement
h,! ,nve!tment 0h,*o!o0h..
B-11ett A!!o+,ate!. Ltd. I0rede+e!!or to B-11ett (artner!h,0. Ltd.K wa! 1o-nded on the we!t an"! o1 the
',!!o-r,. 'a. 5. 1959 . a hard. *,tt*e and +on!,!t,n2 o1 1o-r 1am,*. memer!, three +*o!e 1r,end! and
H105,100. I& tr,ed to 1,nd !ome r,**,ant 1*a!h o1 ,n!,2ht re2ard,n2 o-r 1-t-re or 0re!ent +ond,t,on! 1rom m. 1,r!t
0a2e and a ha*1 ann-a* *etter o1 >an-ar., 1957 to ,n!ert a! a 8-ote here. @owever, !omeone ev,dent*. do+tored
m. 1,*e +o0. !o a! to remove the 0er+e0t,ve remar"! & m-!t have made.K
At that t,me, and 1or !ome .ear! !-!e8-ent*., there were !-!tant,a* n-mer! o1 !e+-r,t,e! !e**,n2 at we** e*ow
the 6va*-e to a 0r,vate owner6 +r,ter,on we -t,*,<ed 1or !e*e+t,on o1 2enera* mar"et ,nve!tment!. We a*!o
e50er,en+ed a 1*ow o1 Ewor"o-tF o00ort-n,t,e! where the 0er+enta2e! were ver. m-+h to o-r *,",n2. The
0ro*em wa! a*wa.! wh,+h, not what. A++ord,n2*., we were a*e to own 1,1teen to twent.41,ve ,!!-e! and e
enth-!,a!t,+ ao-t the 0roa,*,t,e! ,nherent ,n a** ho*d,n2!.
&n the *a!t 1ew .ear! th,! !,t-at,on ha! +han2ed dramat,+a**.. We now 1,nd ver. 1ew !e+-r,t,e! that are
-nder!tanda*e to me, ava,*a*e ,n de+ent !,<e, and wh,+h o11er the e50e+tat,on o1 ,nve!tment 0er1orman+e
meet,n2 o-r .ard!t,+" o1 ten 0er+enta2e 0o,nt! 0er ann-m !-0er,or to the %ow. &n the *a!t three .ear! we have
+ome -0 w,th on*. two or three new ,dea! a .ear that have had !-+h an e50e+tan+. o1 !-0er,or 0er1orman+e.
Fort-nate*., ,n !ome +a!e!, we have made the mo!t o1 them. @owever, ,n ear*,er .ear!, a *e!!er e11ort 0rod-+ed
*,tera**. do<en! o1 +om0ara*e o00ort-n,t,e!. &t ,! d,11,+-*t to e oBe+t,ve ao-t the +a-!e! 1or !-+h d,m,n-t,on
o1 one/! own 0rod-+t,v,t.. Three 1a+tor! that !eem a00arent are3 I1K a !omewhat +han2ed mar"et env,ronment7
I2K o-r ,n+rea!ed !,<e7 and I:K !-!tant,a**. more +om0et,t,on.
102
&t ,! ov,o-! that a -!,ne!! a!ed -0on on*. a tr,+"*e o1 1,ne ,dea! ha! 0oorer 0ro!0e+t! than one a!ed -0on a
!tead. 1*ow o1 !-+h ,dea!. To date the tr,+"*e ha! 0rov,ded a! m-+h 1,nan+,a* no-r,!hment a! the 1*ow. Th,! ,!
tr-e e+a-!e there ,! on*. !o m-+h one +an d,2e!t Im,**,on do**ar ,dea! are o1 no 2reat ene1,t to tho-!and do**ar
an" a++o-nt! 4 th,! wa! ,m0re!!ed on me ,n m. ear*. da.!K and e+a-!e a *,m,ted n-mer o1 ,dea! +a-!e! one
to -t,*,<e tho!e ava,*a*e more ,nten!,ve*.. The *atter 1a+tor ha! de1,n,te*. een o0erat,ve w,th -! ,n re+ent .ear!.
@owever, a tr,+"*e ha! +on!,dera*. more +han+e o1 dr.,n2 -0 +om0*ete*. than a 1*ow.
The!e +ond,t,on! w,** not +a-!e me to attem0t ,nve!tment de+,!,on! o-t!,de m. !0here o1 -nder!tand,n2 I& don/t
2o 1or the 6&1 .o- +an/t *,+" /em, Bo,n /emF 0h,*o!o0h. 4 m. own *ean,n2 ,! toward 6&1 .o- +an/t Bo,n Cem, *,+"
/emFK. We w,** not 2o ,nto -!,ne!!e! where te+hno*o2. wh,+h ,! awa. over m. head ,! +r-+,a* to the ,nve!tment
de+,!,on. & "now ao-t a! m-+h ao-t !em,4+ond-+tor! or ,nte2rated +,r+-,t! a! & do o1 the mat,n2 ha,t! o1 the
+hr<a!<+<. IThat/! a (o*,!h 'a. -2, !t-dent! 4 ,1 .o- have tro-*e 0rono-n+,n2 ,t, rh.me ,t w,th thr<a!<+<.K
F-rthermore, we w,** not 1o**ow the 1re8-ent*. 0reva*ent a00roa+h o1 ,nve!t,n2 ,n !e+-r,t,e! where an attem0t to
ant,+,0ate mar"et a+t,on overr,de! -!,ne!! va*-at,on!. #-+h !o4+a**ed 61a!h,on6 ,nve!t,n2 ha! 1re8-ent*.
0rod-+ed ver. !-!tant,a* and 8-,+" 0ro1,t! ,n re+ent .ear! Iand +-rrent*. a! & wr,te th,! ,n >an-ar.K. &t re0re!ent!
an ,nve!tment te+hn,8-e who!e !o-ndne!! & +an ne,ther a11,rm nor den.. &t doe! not +om0*ete*. !at,!1. m.
,nte**e+t Ior 0erha0! m. 0reB-d,+e!K, and mo!t de1,n,te*. doe! not 1,t m. tem0erament. & w,** not ,nve!t m. own
mone. a!ed -0on !-+h an a00roa+h hen+e, & w,** mo!t +erta,n*. not do !o w,th .o-r mone..
F,na**., we w,** not !ee" o-t a+t,v,t. ,n ,nve!tment o0erat,on!, even ,1 o11er,n2 !0*end,d 0ro1,t e50e+tat,on!,
where maBor h-man 0ro*em! a00ear to have a !-!tant,a* +han+e o1 deve*o0,n2.
What & do 0rom,!e .o-, a! 0artner!, ,! that & w,** wor" hard to ma,nta,n the tr,+"*e o1 ,dea! and tr. to 2et the
mo!t o-t o1 ,t that ,! 0o!!,*e J -t ,1 ,t !ho-*d dr. -0 +om0*ete*., .o- w,** e ,n1ormed hone!t*. and 0rom0t*.
!o that we ma. a** ta"e a*ternat,ve a+t,on.
Ana*.!,! o1 1999 Re!-*t!
A** 1o-r ma,n +ate2or,e! o1 o-r ,nve!tment o0erat,on wor"ed o-t we** ,n 1999. #0e+,1,+a**., we had a tota*
overa** 2a,n o1 H;,909,701 der,ved a! 1o**ow!3
"ategor2 9verage Investent Overall Gain
$ontro*! H17,259,:?2 H1,599,:02
)enera*! J (r,vate Owner H1,:59,:?0 H1,00?,:92
)enera*! J Re*at,ve*.
Underva*-ed
H21,;?7,0?5 H5,12?25?
Wor"o-t! H7,999:1? H1,71?,1;1
',!+e**aneo-!, ,n+*-d,n2 U#
Trea!-r. B,**!
H1,::2,909 HI1;,?22K
Tota* &n+ome H9,:90,977
Le!!3 )enera* E50en!e H?;:,979
Overa** )a,n H;,909,701
A 1ew +aveat! are ne+e!!ar. e1ore we 2et on w,th the ma,n d,!+-!!,on3
1. An e50*anat,on o1 the var,o-! +ate2or,e! *,!ted aove wa! made ,n the >an-ar. 1;, 1995 *etter. &1 .o-r
memor. need! re1re!h,n2 and .o-r 1avor,te new!!tand doe! not have the 0o+"etoo" ed,t,on. we/** e
2*ad to 2,ve .o- a +o0..
103
2. The +*a!!,1,+at,on! are not ,ron4+*ad. Noth,n2 ,! +han2ed retroa+t,ve*. -t the ,n,t,a* de+,!,on a! to
+ate2or. ,! !omet,me! ar,trar..
:. (er+enta2e ret-rn! +a*+-*ated on the avera2e ,nve!tment a!e . +ate2or. wo-*d e -nder!tated re*at,ve
to 0artner!h,0 0er+enta2e ret-rn! wh,+h are +a*+-*ated on a e2,nn,n2 ,nve!tment a!e. &n the aove
1,2-re!, a !e+-r,t. 0-r+ha!ed . -! at 100 on >an-ar. 1 wh,+h a00re+,ated at an even rate to 150 on
%e+emer :1 wo-*d have an avera2e ,nve!tment o1 125 0rod-+,n2 a ?0= re!-*t +ontra!ted to a 50=
re!-*t . the +-!tomar. a00roa+h. &n other word!, the aove 1,2-re! -!e a month*. avera2e o1 mar"et
va*-e! ,n +a*+-*at,n2 the avera2e ,nve!tment.
?. A** re!-*t! are a!ed on a 100= owner!h,0, non4*evera2e, a!,!. &ntere!t and other 2enera* e50en!e! are
ded-+ted 1rom tota* 0er1orman+e and not !e2re2ated . +ate2or.. E50en!e! d,re+t*. re*ated to !0e+,1,+
,nve!tment o0erat,on!, !-+h a! d,v,dend! 0a,d on !hort !to+", are ded-+ted . +ate2or.. When !e+-r,t,e!
are orrowed d,re+t*. and !o*d !hort, the net ,nve!tment I*on2! m,n-! !hort!K ,! !hown 1or the a00*,+a*e
avera2e ,nve!tment +ate2or..
5. The aove ta*e ha! on*. *,m,ted -!e. The re!-*t! a00*,+a*e to ea+h +ate2or. are dom,nated . one or
two ,nve!tment!. The. do not re0re!ent a +o**e+t,on o1 2reat 8-ant,t,e! o1 !ta*e data Imorta*,t. rate! o1
a** Amer,+an ma*e! or !ometh,n2 o1 the !ortK 1rom wh,+h +on+*-!,on! +an e drawn and 0roBe+t,on!
made. &n!tead, the. re0re!ent ,n1re8-ent, non4homo2eneo-! 0henomena *ead,n2 to ver. tentat,ve
!-22e!t,on! re2ard,n2 var,o-! +o-r!e! o1 a+t,on and are !o -!ed . -!.
9. F,na**., the!e +a*+-*at,on! are not made w,th the !ame *ov,n2 +are we a00*. to +o-nt,n2 the mone. and
are !-Be+t to 0o!!,*e +*er,+a* or mathemat,+a* error !,n+e the. are not ent,re*. !e*14+he+",n2.
$ontro*!
There were three ma,n !o-r+e! o1 2a,n d-r,n2 1999 ,n re!0e+t to +ontro**ed +om0an,e!. The!e aro!e thro-2h3 I1K
reta,ned -!,ne!! earn,n2! a00*,+a*e to o-r ho*d,n2! ,n 19997 I2K o0en mar"et 0-r+ha!e! o1 add,t,ona* !to+"
e*ow o-r +ontro**,n2 ,ntere!t va*-at,on and7 I:K -nrea*,<ed a00re+,at,on ,n mar"eta*e !e+-r,t,e! he*d . the
+ontro**ed +om0an,e!. The tota* o1 a** 0o!,t,ve ,tem! +ame to H2,900,;:; ,n 1999.
@owever, d-e to 1a+tor! ment,oned ,n m. Novemer 1, 1999 *etter, !0e+,1,+ ,nd-!tr. +ond,t,on!, and other
re*evant va*-at,on ,tem!, th,! 2a,n wa! red-+ed . H1,0:?,7;0 ,n arr,v,n2 at o-r 1a,r va*-at,on a00*,+a*e to
+ontro**,n2 ,ntere!t! a! o1 %e+emer :1, 1999. Th-! the overa** 2a,n ,n the +ontro* +ate2or. wa! red-+ed to
H1,599,05; 1or the .ear.
We were -ndo-ted*. 1ort-nate that we had a re*at,ve*. h,2h 0er+enta2e o1 net a!!et! ,nve!ted ,n -!,ne!!e! and
not !to+"! d-r,n2 1999. The !ame mone. ,n 2enera* mar"et ho*d,n2! wo-*d 0roa*. have 0rod-+ed a *o!!,
0erha0! !-!tant,a*, d-r,n2 the .ear. Th,! wa! not 0*anned and ,1 the !to+" mar"et had advan+ed !-!tant,a**.
d-r,n2 the .ear, th,! +ate2or. wo-*d have een an ,m0ortant dra2 on overa** 0er1orman+e. The !ame !,t-at,on
w,** 0reva,* d-r,n2 1997.
)enera*! 4(r,vate Owner
O-r 0er1orman+e here 1a**! ,n the 6twent.4one do**ar! a da., on+e a month6 +ate2or.. &n the m,dd*e o1 1995 we
!tarted 0-r+ha!,n2 a ver. attra+t,ve w,de*. he*d !e+-r,t. wh,+h wa! !e**,n2 1ar e*ow ,t! va*-e to a 0r,vate
owner. O-r ho0e wa! that over a two or three .ear 0er,od we +o-*d 2et H10 m,**,on or more ,nve!ted at the
1avora*e 0r,+e! 0reva,*,n2. The var,o-! -!,ne!!e! that the +om0an. o0erated were -nder!tanda*e and we
+o-*d +he+" o-t +om0et,t,ve !tren2th! and wea"ne!!e! thoro-2h*. w,th +om0et,tor!, d,!tr,-tor!, +-!tomer!,
104
!-00*,er!, e54em0*o.ee!, et+. 'ar"et +ond,t,on! 0e+-*,ar to the !to+" 2ave -! ho0e that, w,th 0at,en+e, we +o-*d
-. !-!tant,a* 8-ant,t,e! o1 the !to+" w,tho-t d,!t-r,n2 the 0r,+e.
At .earend 1995 we had ,nve!ted H1,959,9;0 and the mar"et va*-e o1 o-r ho*d,n2 wa! H2,:5;,?12 !o that
H?01,?:2 wa! +ontr,-ted to 0er1orman+e *-r,n2 1995. We wo-*d have 0re1erred, o1 +o-r!e, to have !een the
mar"et e*ow +o!t !,n+e o-r ,ntere!t wa! ,n add,t,ona* -.,n2, not ,n !e**,n2. Th,! wo-*d have dam0ened B-11ett
(artner!h,0! Ltd.D! 1995 0er1orman+e and 0erha0! red-+ed the e-0hor,a e50er,en+ed . *,m,ted 0artner!
I0!.+h,+a**., the net re!-*t to a** 0artner! wo-*d have een a !tando11 !,n+e the 2enera* 0artner wo-*d have een
1*oat,n2K -t wo-*d have enhan+ed *on2 term 0er1orman+e. The 1a+t that the !to+" had r,!en !omewhat aove o-r
+o!t had a*read. !*owed down o-r -.,n2 0ro2ram and there. red-+ed -*t,mate 0ro1,t.
An even more dramat,+ e5am0*e o1 the +on1*,+t etween !hort term 0er1orman+e and the ma5,m,<at,on o1 *on2
term re!-*t! o++-rred ,n 1999. Another 0art., 0rev,o-!*. +om0*ete*. -n"nown to me, ,!!-ed a tender o11er wh,+h
1ore+*o!ed o00ort-n,t,e! 1or 1-t-re advanta2eo-! -.,n2. & made the de+,!,on that the w,!e!t +o-r!e I,t ma. not
have eenK 1or -! to 1o**ow wa! to d,!0o!e o1 o-r ho*d,n2! and we th-! rea*,<ed a tota* 0ro1,t o1 H1,299,1;1 ,n
Fer-ar., o1 wh,+h H;97,7?9 wa! a00*,+a*e to 1999.
Wh,*e an. 2a,n! *oo"ed 0art,+-*ar*. 2ood ,n the mar"et env,ronment that ,nt,mate*. deve*o0ed ,n 1999, .o- +an
e !-re & don/t de*,2ht ,n 2o,n2 ro-nd ma",n2 mo*eh,**! o-t o1 mo-nta,n!. The mo*eh,**, o1 +o-r!e, wa! re1*e+ted
,n 1999 re!-*t!. @owever, we wo-*d have een m-+h etter o11 1rom a *on2 ran2e !tand0o,nt ,1 1999 re!-*t! had
een 1,ve 0er+enta2e 0o,nt! wor!e and we were +ont,n-,n2 to -. !-!tant,a* 8-ant,t,e! o1 the !to+" at the
de0re!!ed 0r,+e! that m,2ht have een e50e+ted to 0reva,* ,n th,! .ear/! mar"et env,ronment.
)ood ,dea! were a d,me a do<en, !-+h a 0remat-re end,n2 wo-*d not e -n0*ea!ant. There ,! !ometh,n2 to e
!a,d, o1 +o-r!e, 1or a -!,ne!! o0erat,on where !ome o1 the 1a,*-re! 0rod-+e moderate 0ro1,t!. @owever, .o- +an
!ee how hard ,t ,! to deve*o0 re0*a+ement ,dea! . e5am,n,n2 o-r avera2e ,nve!tment ,n the (r,vate Owner
+ate2or. 4 we +ame -0 w,th noth,n2 d-r,n2 the rema,nder o1 the .ear de!0,te *ower !to+" 0r,+e!, wh,+h !ho-*d
have een +ond-+,ve to 1,nd,n2 !-+h o00ort-n,t,e!.
)enera*! 4 Re*at,ve*. Underva*-ed
O-r re*at,ve 0er1orman+e ,n th,! +ate2or. wa! the e!t we have ever had 4 d-e to one ho*d,n2 wh,+h wa! o-r
*ar2e!t ,nve!tment at .earend 1995 and a*!o .earend 1999. Th,! ,nve!tment ha! !-!tant,a**. o-t40er1ormed the
2enera* mar"et 1or -! d-r,n2 ea+h .ear I199?, 1995, 1999K that we have he*d ,t. Wh,*e an. !,n2*e .ear/!
0er1orman+e +an e 8-,te errat,+, we th,n" the 0roa,*,t,e! are h,2h*. 1avora*e 1or !-0er,or 1-t-re 0er1orman+e
over a three or 1o-r .ear 0er,od. The attra+t,vene!! and re*at,ve +erta,nt. o1 th,! 0art,+-*ar !e+-r,t. are what
+a-!ed me to ,ntrod-+e )ro-nd R-*e 7 ,n Novemer, 1995 to a**ow ,nd,v,d-a* ho*d,n2! o1 -0 to ?0= o1 o-r net
a!!et!. We !0end +on!,dera*e e11ort +ont,n-o-!*. eva*-at,n2 ever. 1a+et o1 the +om0an. and +on!tant*. te!t,n2
o-r h.0othe!,! that th,! !e+-r,t. ,! !-0er,or to a*ternat,ve ,nve!tment +ho,+e!. #-+h +on!tant eva*-at,on and
+om0ar,!on at !h,1t,n2 0r,+e! ,! a!o*-te*. e!!ent,a* to o-r ,nve!tment o0erat,on.
&t wo-*d e m-+h more 0*ea!ant Iand ,nd,+ate a more 1avora*e 1-t-reK to re0ort that o-r re!-*t! ,n the )enera*!
4Re*at,ve*. Underva*-ed +ate2or. re0re!ented 1,1teen !e+-r,t,e! ,n ten ,nd-!tr,e!, 0ra+t,+a**. a** o1 wh,+h
o-t0er1ormed the mar"et. We !,m0*. don/t have that man. 2ood ,dea!. A! ment,oned aove, new ,dea! are
+ont,n-a**. mea!-red a2a,n!t 0re!ent ,dea! and we w,** not ma"e !h,1t! ,1 the e11e+t ,! to down2rade e50e+ta*e
0er1orman+e. Th,! 0o*,+. ha! re!-*ted ,n *,m,ted a+t,v,t. ,n re+ent .ear! when we have 1e*t !o !tron2*. ao-t the
re*at,ve mer,t! o1 o-r *ar2e!t ho*d,n2. #-+h a +ond,t,on ha! meant that rea*,<ed 2a,n! have een a m-+h !ma**er
0ort,on o1 tota* 0er1orman+e than ,n ear*,er .ear! when the 1*ow o1 2ood ,dea! wa! more !-!tant,a*.
The !ort o1 +on+entrat,on we have ,n th,! +ate2or. ,! o-nd to 0rod-+e w,de !w,n2! ,n !hort term 0er1orman+e J
!ome, mo!t +erta,n*., -n0*ea!ant. There have a*read. een !ome o1 the!e a00*,+a*e to !horter t,me !0an! than &
105
-!e ,n re0ort,n2 to 0artner!. Th,! ,! one rea!on & th,n" 1re8-ent re0ort,n2 to e 1oo*,!h and 0otent,a**. m,!*ead,n2
,n a *on2 term or,ented -!,ne!! !-+h a! o-r!.
(er!ona**., w,th,n the *,m,t! e50re!!ed ,n *a!t .ear/! *etter on d,ver!,1,+at,on, & am w,**,n2 to trade the 0a,n!
I1or2et ao-t the 0*ea!-re!K o1 !-!tant,a* !hort term var,an+e ,n e5+han2e 1or ma5,m,<at,on o1 *on2 term
0er1orman+e. @owever, & am not w,**,n2 to ,n+-r r,!" o1 !-!tant,a* 0ermanent +a0,ta* *o!! ,n !ee",n2 to etter
*on2 term 0er1orman+e. To e 0er1e+t*. +*ear 4 -nder o-r 0o*,+. o1 +on+entrat,on o1 ho*d,n2!, 0artner! !ho-*d e
+om0*ete*. 0re0ared 1or 0er,od! o1 !-!tant,a* -nder0er1orman+e I1ar more *,"e*. ,n !har0*. r,!,n2 mar"et!K to
o11!et the o++a!,ona* over 0er1orman+e !-+h a! we have e50er,en+ed ,n 1995 and 1999, and a! a 0r,+e we 0a. 1or
ho0ed41or 2ood *on2 term 0er1orman+e.
A** th,! ta*" ao-t the *on2 0-** ha! +a-!ed one 0artner to o!erve that Eeven 1,ve m,n-te! ,! a *on2 t,me ,1 one/!
head ,! e,n2 he*d -nder water.6 Th,! ,! the rea!on, o1 +o-r!e, that we -!e orrowed mone. ver. !0ar,n2*. ,n o-r
o0erat,on. Avera2e an" orrow,n2! d-r,n2 1999 were we** -nder 10= o1 avera2e net worth.
One 1,na* word ao-t the )enera*! 4 Re*at,ve*. Underva*-ed +ate2or.. &n th,! !e+t,on we a*!o had an e50er,en+e
wh,+h he*0ed re!-*t! ,n 1999 -t h-rt o-r *on2 term 0ro!0e+t!. We had B-!t one rea**. ,m0ortant new ,dea ,n th,!
+ate2or. ,n 1999. O-r 0-r+ha!,n2 !tarted ,n *ate !0r,n2 -t had on*. +ome to ao-t H1.9 m,**,on I,t +o-*d e
o-2ht !tead,*. -t at on*. a moderate 0a+eK when o-t!,de +ond,t,on! drove the !to+" 0r,+e -0 to a 0o,nt where ,t
wa! not re*at,ve*. attra+t,ve. Tho-2h o-r overa** 2a,n wa! H72;,1?1 on an avera2e ho*d,n2 0er,od o1 !,5 and a
ha*1 month! ,n 1999, ,t wo-*d have een m-+h more de!,ra*e had the !to+" done noth,n2 1or a *on2 0er,od o1
t,me wh,*e we a++-m-*ated a rea**. !-!tant,a* 0o!,t,on.
Wor"o-t!
&n *a!t .ear/! *etter & 1ore+a!t red-+ed ,m0ortan+e 1or wor"o-t!. Wh,*e the. were not o1 the ,m0ortan+e o1 !ome
0a!t .ear!. & wa! 0*ea!ant*. !-r0r,!ed . o-r e50er,en+e ,n 1999 d-r,n2 wh,+h we "e0t an avera2e o1 H7,999,:1?
em0*o.ed ,n th,! +ate2or.. F-rthermore, we tend to a!+r,e orrow,n2! to the wor"o-t !e+t,on !o that o-r net
e8-,t. +a0,ta* em0*o.ed wa! rea**. !ometh,n2 -nder th,! 1,2-re and o-r ret-rn wa! !omewhat etter than the
22.?= ,nd,+ated on 0a2e !,5. @ere, too, we ran ,nto !-!tant,a* var,at,on. At >-ne :0, o-r overa** 0ro1,t on th,!
+ate2or. wa! H19,112 on an avera2e ,nve!tment o1 H7,;70,151 !o that we rea**. had a +a!e o1 an e5traord,nar,*.
2ood !e+ond ha*1 o11!ett,n2 a 0oor 1,r!t ha*1.
&n 0a!t .ear!, !omet,me! a! m-+h a! :04?0= o1 o-r net worth ha! een ,nve!ted ,n wor"o-t!, -t ,t ,! h,2h*.
-n*,"e*. that th,! +ond,t,on w,** 0reva,* ,n the 1-t-re. Neverthe*e!!, the. ma. +ont,n-e to 0rod-+e !ome de+ent
ret-rn! on the moderate amo-nt o1 +a0,ta* em0*o.ed.
',!+e**aneo-!
O0erat,ona**., we +ont,n-e to 1-n+t,on we** aove rated +a0a+,t. w,th B,**, >ohn, E*,<aeth and %onna a**
+ontr,-t,n2 e5+e**ent 0er1orman+e!. At B-11ett (artner!h,0. Ltd. we have never had to d,vert ,nve!tment e11ort
to o11!et or2an,<at,ona* !hort+om,n2! and th,! ha! een an ,m0ortant ,n2red,ent ,n the 0er1orman+e over the
.ear!.
(eat, 'arw,+", ',t+he** N $o., a,ded 1or the !e+ond .ear . the,r +om0-ter, t-rned ,n the -!-a* !0eed., e11,+,ent
and +om0rehen!,ve Bo.
We a** +ont,n-e to ma,nta,n more than an a+adem,+ ,ntere!t ,n the (artner!h,0. The em0*o.ee! and &, o-r !0o-!e!
and +h,*dren, have a tota* o1 over H10 m,**,on ,nve!ted at >an-ar. 1, 1997. &n the +a!e o1 m. 1am,*., o-r B-11ett
(artner!h,0, Ltd. ,nve!tment re0re!ent! we** over 90= o1 o-r net worth.
106
W,th,n the +om,n2 two wee"! .o- w,** re+e,ve3
1. A ta5 *etter 2,v,n2 .o- a** B(L ,n1ormat,on needed 1or .o-r 1999 1edera* ,n+ome ta5 ret-rn. Th,! *etter
,! the on*. ,tem that +o-nt! 1or ta5 0-r0o!e!.
2. An a-d,t 1rom (eat, 'arw,+", ',t+he** N $o. 1or 1999, !ett,n2 1orth the o0erat,on! and 1,nan+,a*
0o!,t,on o1 B(L, a! we** a! .o-r own +a0,ta* a++o-nt.
:. A *etter !,2ned . me !ett,n2 1orth the !tat-! o1 .o-r B(L ,ntere!t on >an-ar. 1, 1997. Th,! ,! ,dent,+a*
w,th the 1,2-re! deve*o0ed ,n the a-d,t.
Let me "now ,1 an.th,n2 ,n th,! *etter or that o++-r! d-r,n2 the .ear need! +*ar,1.,n2. '. ne5t *etter w,** e
ao-t >-*. 15 !-mmar,<,n2 the 1,r!t ha*1 o1 th,! .ear.
$ord,a**.,
Warren E. B-11ett
WEB eh
107
BUFFETT (ARTNER#@&(. LT%.
910 A&EW&T (LAOA
O'A@A, NEBRA#AA 9;1:1
TELE(@ONE 0?24?110
>-*. 12, 1997
F,r!t @a*1 (er1orman+e
A2a,n, th,! ,! e,n2 ,wr,tten ,n *ate >-ne 0r,or to the 1am,*./! tr,0 to $a*,1orn,a. To ma,nta,n the -!-a*
+hrono*o2,+a* !.mmetr. I& tr. to !-*,mate m. ae!thet,+ -r2e! when ,t +ome! to +reat,n2 !.mmetr. ,n the 0ro1,t
and *o!! !tatementK, & w,** *eave a 1ew *an"! and tr-!t that the +on+*-!,on! *oo" a00ro0r,ate when the 1,2-re! are
entered.
We e2an 1997 on a tra-mat,+ note w,th >an-ar. t-rn,n2 o-t to e one o1 the wor!t month! we have e50er,en+ed
w,th a 0*-! :.:= 1or B(L ver!-! a 0*-! ;.5= 1or the %ow. %e!0,te th,! !o-r !tart, we 1,n,!hed the ha*1 ao-t 0*-!
21= 1or an ed2e o1 9.9 0er+enta2e 0o,nt! over the %ow. A2a,n, a! thro-2ho-t 1999, the %ow wa! a re*at,ve*.
ea!. +om0et,tor I,t won/t e ever. .ear, 0reva,*,n2 th,n",n2 to the +ontrar. notw,th!tand,n2K and a *ar2e maBor,t.
o1 ,nve!tment mana2er! o-td,d th,! .ard!t,+". The 1o**ow,n2 ta*e !-mmar,<e! 0er1orman+e to date on the -!-a*
a!,!3
Year Overall .esults :ro
Dow /)0
Partnership .esults /10 Liited Partners!
.esults /?0
1957 4;.?= 10.?= 9.:=
195; :;.5= ?0.9= :2.2=
1959 20.0= 25.9= 20.9=
1990 49.2= 22.;= 1;.9=
1991 22.?= ?5.9= :5.9=
1992 47.9= 1:.9= 11.9=
199: 20.9= :;.7= :0.5=
199? 1;.7= 27.;= 22.:=
1995 1?.2= ?7.2= :9.9=
1999 415.9= 20.?= 19.;=
F,r!t ha*1 1997 11.?= 21.0= 17.:=
"uulative .esults )@A.?7 )@),.A7 A@?.?7
9nnual "opounded
.ate
,.)7 1,.+7 1?.A7
I1K Ba!ed on .ear*. +han2e! ,n the va*-e o1 the %ow 0*-! d,v,dend! that wo-*d have een re+e,ved thro-2h
owner!h,0 o1 the %ow d-r,n2 that .ear. The ta*e ,n+*-de! a** +om0*ete .ear! o1 0artner!h,0 a+t,v,t..
I2K For 1957491 +on!,!t! o1 +om,ned re!-*t! o1 a** 0rede+e!!or *,m,ted 0artner!h,0! o0erat,n2 thro-2ho-t
the ent,re .ear a1ter a** e50en!e! -t e1ore d,!tr,-t,on! to 0artner! or a**o+at,on! to the 2enera* 0artner.
I:K For 1957491 +om0-ted on the a!,! o1 the 0re+ed,n2 +o*-mn o1 0artner!h,0 re!-*t! a**ow,n2 1or
a**o+at,on to the 2enera* 0artner a!ed -0on the 0re!ent 0artner!h,0 a2reement, -t e1ore month*.
w,thdrawa*! . *,m,ted 0artner!.
B(L/! 0er1orman+e d-r,n2 the 1,r!t ha** re1*e+t! no +han2e ,n va*-at,on o1 o-r +ontro**ed +om0an,e! and wa! th-!
a+h,eved !o*e*. . the 9:.:= o1 o-r net a!!et! ,nve!ted ,n mar"eta*e !e+-r,t,e! at the e2,nn,n2 o1 the .ear.
108
An. reva*-at,on o1 %,ver!,1,ed Reta,*,n2 $om0an. I%R$K and Ber"!h,re @athawa. &n+. IB4@K w,** e made ,n
%e+emer 0r,or to the t,me the +omm,tment *etter! e+ome 1,na* and w,** e a!ed -0on a** re*evant +r,ter,a
I,n+*-d,n2 +-rrent o0erat,n2. mar"et and +red,t +ond,t,on!K at that t,me.
Both %R$ and B4@ made ,m0ortant a+8-,!,t,on! d-r,n2 the 1,r!t ha*1. The overa** 0ro2re!! o1 %R$ I;0=
ownedK and oth o1 ,t! !-!,d,ar,e! I@o+h!+h,*d Aohn and A!!o+,ated $otton #ho0!K ,! h,2h*. !at,!1a+tor..
@owever, B4@ ,! e50er,en+,n2 and 1a+e! rea* d,11,+-*t,e! ,n the te5t,*e -!,ne!!, wh,*e & don/t 0re!ent*. 1ore!ee
an. *o!! ,n -nder*.,n2 va*-e!. & !,m,*ar*. !ee no 0ro!0e+t o1 a 2ood ret-rn on the a!!et! em0*o.ed ,n the te5t,*e
-!,ne!!. There1ore, th,! !e2ment o1 o-r 0ort1o*,o w,** e a !-!tant,a* dra2 on o-r re*at,ve 0er1orman+e Ia! ,t
ha! een d-r,n2 the 1,r!t ha*1K ,1 the %ow +ont,n-e! to advan+e. #-+h re*at,ve 0er1orman+e w,th +ontro**ed
+om0an,e! ,! e50e+ted ,n a !tron2*. advan+,n2 mar"et, -t ,! a++ent-ated when the -!,ne!! ,! ma",n2 no
0ro2re!!. A! a 1r,end o1 m,ne !a.!. EE50er,en+e ,! what .o- 1,nd when .o-/re *oo",n2 1or !ometh,n2 e*!e.F
&nve!tment $om0an,e!
The -!-a* +om0ar,!on 1o**ow! !how,n2 the re!-*t! o1 the two *ar2e!t o0en4end and two *ar2e!t +*o!ed4end
,nve!tment +om0an,e! wh,+h 0-r!-e a 0o*,+. o1 954100= ,nve!tment ,n +ommon !to+"!.
Year #ass. Inv.
&rust /)0
Investors
'toc( /)0
Lehan /10 &ri-"ont
/10
Dow Liited
Partners
1957 411.?= 412.?= 411.?= 42.?= 4;.?= 9.:=
195; ?2.7= ?7.5= ?0.;= ::.2= :;.5= :2.2=
1959 9.0= 10.:= ;.1= ;.?= 20.0= 20.9=
1990 41.0= 40.9= 2.5= 2.;= 49.2= 1;.9=
1991 25.9= 2?.9= 2:.9= 22.5= 22.?= :5.9=
1992 49.;= 41:.?= 41?.?= 410.0= 47.9= 11.9=
199: 20.0= 19.5= 2:.7= 1;.:= 20.9= :0.5=
199? 15.9= 1?.:= 1:.9= 12.9= 1;.7= 22.:=
1995 10.2= 9.;= 19.0= 10.7= 1?.2= :9.9=
1999 47.7= 410.0= 42.9= 49.9= 415.9= 19.;=
F,r!t ha*1
1997
11.:= 12.:= 19.:= 1?.?= 11.?= 17.:=
"uulative
.esults
)@?.?7 )1+.@7 )A6.@7 )6+.A7 )@A.?7 A@?.?7
9nnual
"opounded
.ate
A.,7 A.)7 )8.67 ,.@7 ,.)7 1?.A7
I1K $om0-ted 1rom +han2e! ,n a!!et va*-e 0*-! an. d,!tr,-t,on! to ho*der! o1 re+ord d-r,n2 .ear.
I2K From 1997 'ood./! Ban" N F,nan+e 'an-a* 1or 195741999. E!t,mated 1or 1,r!t ha*1 o1 1997.
The t,de +ont,n-e! to e 1ar more ,m0ortant than the !w,mmer!.
Ta5e!
We entered 1997 w,th -nrea*,<ed 2a,n! o1 H19,:91,97?. Thro-2h >-ne :0 we have rea*,<ed net +a0,ta* 2a,n! o1
H7,0;?,10? !o ,t a00ear! *,"e*. that we w,** rea*,<e ,n 1997 a 1a,r*. !-!tant,a* 0ort,on o1 the -nrea*,<ed 2a,n
attr,-ta*e to .o-r ,ntere!t at the e2,nn,n2 o1 the .ear. Th,! amo-nt wa! re0orted to .o- a! &tem : o1 o-r
Fer-ar. 2, 1997 *etter. A +o0. o1 that *etter, a*on2 w,th a ta5 *etter, w,** e ma,*ed to .o- ,n Novemer 2,v,n2 a
ro-2h ,dea o1 the ta5 !,t-at,on at that t,me.
109
A! & re2-*ar*. !-22e!t, the !a1e +o-r!e to 1o**ow on ,nter,m e!t,mate! ,! to 0a. the !ame e!t,mated ta5 1or 1997
a! .o-r a+t-a* ta5 wa! 1or 1999. There +an e no 0ena*t,e! ,1 .o- 1o**ow th,! 0ro+ed-re.
Whatever o-r 1,na* 1,2-re, ,t *oo"! now a! ,1 ,t w,** e ver. *ar2e*. *on2 term +a0,ta* 2a,n w,th on*. m,nor
amo-nt!, ,1 an., o1 !hort term 2a,n and ord,nar. ,n+ome. I& +on!,der the who*e &n+ome4(r,n+,0a* '.th 1a,r 2ame
1or one o1 m. !o1t4!0o"en 2ent*. worded +r,t,8-e!. A! & to*d #-!,e ,n the ear*. da.! o1 o-r marr,a2e, E%on/t
worr. ao-t the ,n+ome7 B-!t the o-t+ome.FK
',!+e**aneo-!
%-r,n2 the 1,r!t ha*1, #tan (er,meter re!,2ned 1rom the %,!!o*-t,on $omm,ttee e+a-!e o1 h,! 0re!ent 1-**4t,me
,nvo*vement ,n ,nve!tment mana2ement. Fred #tana+", >r., a *on2 t,me 0artner and e50er,en+ed ,nve!tor, wa!
e*e+ted . the rema,n,n2 memer! to 1,** the va+an+..
A! ,n 0a!t .ear!, we w,** have a re0ort o-t ao-t Novemer 11 a*on2 w,th the $omm,tment Letter, and the ro-2h
e!t,mate o1 the 1997 ta5 !,t-at,on, et+.
@owever, there w,** e a !0e+,a* *etter Ito 1o+-! .o-r attent,on -0on ,tK ,n O+toer. The !-Be+t matter w,** not
re*ate to +han2e ,n the (artner!h,0 A2reement, -t w,** ,nvo*ve !ome evo*-t,onar. +han2e! ,n !evera* 6)ro-nd
R-*e!6 wh,+h & want .o- to have am0*e t,me to +ontem0*ate e1ore ma",n2 .o-r 0*an! 1or 199;. Wherea! the
(artner!h,0 A2reement re0re!ent! the *e2a* -nder!tand,n2 amon2 -!, the 6)ro-nd R-*e!6 re0re!ent the 0er!ona*
-nder!tand,n2 and ,n !ome wa.! ,! the more ,m0ortant do+-ment. & +on!,der ,t e!!ent,a* that an. +han2e! e
+*ear*. !et 1orth and e50*a,ned 0r,or to the,r e11e+t on 0artner!h,0 a+t,v,t. or 0er1orman+e J hen+e, the O+toer
*etter.
$ord,a**.,
Warren E. B-11ett
WEBeh
110
BUFFETT (ARTNER#@&(. LT%.
910 A&EW&T (LAOA
O'A@A, NEBRA#AA 9;1:1
TELE(@ONE 0?24?110
O+toer 9, 1997
To '. (artner!3
Over the 0a!t e*even .ear!, & have +on!,!tent*. !et 1orth a! the B(L ,nve!tment 2oa* an avera2e advanta2e ,n o-r
0er1orman+e o1 ten 0er+enta2e 0o,nt! 0er ann-m ,n +om0ar,!on w,th the %ow >one! &nd-!tr,a* Avera2e. Under
the env,ronment that e5,!ted d-r,n2 that 0er,od. & have +on!,dered !-+h an oBe+t,ve d,11,+-*t -t ota,na*e.
The 1o**ow,n2 +ond,t,on! now ma"e a +han2e ,n .ard!t,+"! a00ro0r,ate3
1. The mar"et env,ronment ha! +han2ed 0ro2re!!,ve*. over the 0a!t de+ade, re!-*t,n2 ,n a !har0 d,m,n-t,on
,n the n-mer o1 ov,o-! 8-ant,tat,ve*. a!ed ,nve!tment ar2a,n! ava,*a*e7
2. '-!hroom,n2 ,ntere!t ,n ,nve!tment 0er1orman+e Iwh,+h ha! ,t! ,ron,+a* a!0e+t! !,n+e & wa! amon2 a
*one*. 1ew 0rea+h,n2 the ,m0ortan+e o1 th,! !ome .ear! a2oK ha! +reated a h.0er4rea+t,ve 0attern o1
mar"et ehav,or a2a,n!t wh,+h m. ana*.t,+a* te+hn,8-e! have *,m,ted va*-e7
:. The en*ar2ement o1 o-r +a0,ta* a!e to ao-t H95 m,**,on when a00*,ed a2a,n!t a d,m,n,!h,n2 tr,+"*e o1
2ood ,nve!tment ,dea! ha! +ont,n-ed to 0re!ent the 0ro*em! ment,oned ,n the >an-ar., 1997 *etter7 and
?. '. own 0er!ona* ,ntere!t! d,+tate a *e!! +om0-*!,ve a00roa+h to !-0er,or ,nve!tment re!-*t! than when &
wa! .o-n2er and *eaner.
Let/! *oo" at ea+h o1 the!e 1a+tor! ,n more deta,*.
The eva*-at,on o1 !e+-r,t,e! and -!,ne!!e! 1or ,nve!tment 0-r0o!e! ha! a*wa.! ,nvo*ved a m,5t-re o1 8-a*,tat,ve
and 8-ant,tat,ve 1a+tor!. At the one e5treme, the ana*.!t e5+*-!,ve*. or,ented to 8-a*,tat,ve 1a+tor! wo-*d !a..
6B-. the r,2ht +om0an. Iw,th the r,2ht 0ro!0e+t!, ,nherent ,nd-!tr. +ond,t,on!, mana2ement, et+.K and the 0r,+e
w,** ta"e +are o1 ,t!e*1.F On the other hand, the 8-ant,tat,ve !0o"e!man wo-*d !a., EB-. at the r,2ht 0r,+e and
the +om0an. Iand !to+"K w,** ta"e +are o1 ,t!e*1.F A! ,! !o o1ten the 0*ea!ant re!-*t ,n the !e+-r,t,e! wor*d, mone.
+an e made w,th e,ther a00roa+h. And, o1 +o-r!e, an. ana*.!t +om,ne! the two to !ome e5tent 4 h,!
+*a!!,1,+at,on ,n e,ther !+hoo* wo-*d de0end on the re*at,ve we,2ht he a!!,2n! to the var,o-! 1a+tor! and not to
h,! +on!,derat,on o1 one 2ro-0 o1 1a+tor! to the e5+*-!,on o1 the other 2ro-0.
&ntere!t,n2*. eno-2h, a*tho-2h & +on!,der m.!e*1 to e 0r,mar,*. ,n the 8-ant,tat,ve !+hoo* Iand a! & wr,te th,! no
one ha! +ome a+" 1rom re+e!! 4 & ma. e the on*. one *e1t ,n the +*a!!K, the rea**. !en!at,ona* ,dea! & have had
over the .ear! have een heav,*. we,2hted toward the 8-a*,tat,ve !,de where & have had a 6h,2h40roa,*,t.
,n!,2ht6. Th,! ,! what +a-!e! the +a!h re2,!ter to rea**. !,n2. @owever, ,t ,! an ,n1re8-ent o++-rren+e, a! ,n!,2ht!
-!-a**. are, and, o1 +o-r!e, no ,n!,2ht ,! re8-,red on the 8-ant,tat,ve !,de 4 the 1,2-re! !ho-*d h,t .o- over the
head w,th a a!ea** at. #o the rea**. ,2 mone. tend! to e made . ,nve!tor! who are r,2ht on 8-a*,tat,ve
de+,!,on! -t, at *ea!t ,n m. o0,n,on, the more !-re mone. tend! to e made on the ov,o-! 8-ant,tat,ve
de+,!,on!.
#-+h !tat,!t,+a* ar2a,n! have tended to d,!a00ear over the .ear!. Th,! ma. e d-e to the +on!tant +om,n2 and
re+om,n2 o1 ,nve!tment! that ha! o++-rred d-r,n2 the 0a!t twent. .ear!, w,tho-t an e+onom,+ +onv-*!,on !-+h
a! that o1 the C:0! to +reate a ne2at,ve ,a! toward e8-,t,e! and !0awn h-ndred! o1 new ar2a,n !e+-r,t,e!. &t ma.
111
e d-e to the new 2row,n2 !o+,a* a++e0tan+e, and there1ore -!a2e Ior ma.e ,t/! v,+e ver!a 4 &/** *et the
ehav,or,!t! 1,2-re ,t o-tK o1 ta"eover ,d! wh,+h have a nat-ra* tenden+. to 1o+-! on ar2a,n ,!!-e!. &t ma. e
d-e to the e50*od,n2 ran"! o1 !e+-r,t. ana*.!t! r,n2,n2 1orth an ,nten!,1,ed !+r-t,n. o1 ,!!-e! 1ar e.ond what
e5,!ted !ome .ear! a2o. Whatever the +a-!e, the re!-*t ha! een the v,rt-a* d,!a00earan+e o1 the ar2a,n ,!!-e a!
determ,ned 8-ant,tat,ve*. 4 and there. o1 o-r read and -tter. There !t,** ma. e a 1ew 1rom t,me to t,me.
There w,** a*!o e the o++a!,ona* !e+-r,t. where & am rea**. +om0etent to ma"e an ,m0ortant 8-a*,tat,ve
B-d2ment. Th,! w,** o11er o-r e!t +han+e 1or *ar2e 0ro1,t!. #-+h ,n!tan+e! w,**. however, e rare. '-+h o1 o-r
2ood 0er1orman+e d-r,n2 the 0a!t three .ear! ha! een d-e to a !,n2*e ,dea o1 th,! !ort.
The ne5t 0o,nt o1 d,11,+-*t. ,! the ,nten!,1,ed ,ntere!t ,n ,nve!tment 0er1orman+e. For .ear! & have 0rea+hed the
,m0ortan+e o1 mea!-rement. $on!,!tent*. & have to*d 0artner! that -n*e!! o-r 0er1orman+e wa! etter than
avera2e, the mone. !ho-*d 2o e*!ewhere. &n re+ent .ear! th,! ,dea ha! 2a,ned moment-m thro-2ho-t the
,nve!tment Ior more ,m0ortant*., the ,nve!t,n2K +omm-n,t.. &n the *a!t .ear or two ,t ha! !tarted to *oo" a ,t
*,"e a t,da* wave. & th,n" we are w,tne!!,n2 the d,!tort,on o1 a !o-nd ,dea.
& have a*wa.! +a-t,oned 0artner! that & +on!,dered three .ear! a m,n,m-m ,n determ,n,n2 whether we were
60er1orm,n26. Nat-ra**., a! the ,nve!tment 0-*,+ ha! ta"en the ,t ,n ,t! teeth, the t,me !0an o1 e50e+tat,on! ha!
een +on!,!tent*. red-+ed to the 0o,nt where ,nve!tment 0er1orman+e .
*ar2e a22re2ate! o1 mone. ,! e,n2 mea!-red .ear*., 8-arter*., month*., and 0erha0! !omet,me! even more
1re8-ent*. I*ead,n2 to what ,! "nown a! 6,n!tant re!ear+h6K. The 0a.o11 1or !-0er,or !hort term 0er1orman+e ha!
e+ome enormo-!, not on*. ,n +om0en!at,on 1or re!-*t! a+t-a**. a+h,eved, -t ,n the attra+t,on o1 new mone. 1or
the ne5t ro-nd. Th-! a !e*142enerat,n2 t.0e o1 a+t,v,t. ha! !et ,n wh,+h *ead! to *ar2er and *ar2er amo-nt! o1
mone. 0art,+,0at,n2 on a !horter and !horter t,me !0an. A d,!t-r,n2 +oro**ar. ,! that the veh,+*e 1or
0art,+,0at,on Ithe 0art,+-*ar +om0an,e! or !to+"!K e+ome! 0ro2re!!,ve*. *e!! ,m0ortant 4 at t,me! v,rt-a**.
,n+,denta* 4 a! the a+t,v,t. a++e*erate!.
&n m. o0,n,on what ,! re!-*t,n2 ,! !0e+-*at,on on an ,n+rea!,n2 !+a*e. Th,! ,! hard*. a new 0henomenon7
however, a d,men!,on ha! een added . the 2row,n2 ran"! o1 0ro1e!!,ona* I,n man. +a!e! 1ormer*. 8-,te
do+,*eK ,nve!tor! who 1ee* the. m-!t E2et aoardF. The 2ame ,! d,2n,1,ed, o1 +o-r!e, . a00ro0r,ate +eremon,e!,
0er!ona2e! and *e5,+on. To date ,t ha! een h,2h*. 0ro1,ta*e. &t ma. a*!o e that th,! ,! 2o,n2 to e the !tandard
nat-re o1 the mar"et ,n the 1-t-re. Neverthe*e!!, ,t ,! an a+t,v,t. at wh,+h & am !-re & wo-*d not do 0art,+-*ar*.
we**. A! & !a,d on 0a2e 1,ve o1 m. *a!t ann-a* *etter,
6F-rthermore, we w,** not 1o**ow the 1re8-ent*. 0reva*ent a00roa+h o1 ,nve!t,n2 ,n !e+-r,t,e! where an
attem0t to ant,+,0ate mar"et a+t,on overr,de! -!,ne!! va*-at,on!. #-+h !o4+a**ed /1a!h,on/ ,nve!t,n2 ha!
1re8-ent*. 0rod-+ed ver. !-!tant,a* and 8-,+" 0ro1,t! ,n re+ent .ear! Iand +-rrent*. a! & wr,te th,! ,n
>an-ar.K. &t re0re!ent! an ,nve!tment te+hn,8-e who!e !o-ndne!! & +an ne,ther a11,rm nor den.. &t doe!
not +om0*ete*. !at,!1. m. ,nte**e+t Ior 0erha0! m. 0reB-d,+e!K, and mo!t de1,n,te*. doe! not 1,t m.
tem0erament. & w,** not ,nve!t m. own mone. a!ed -0on !-+h an a00roa+h J hen+e, & w,** mo!t
+erta,n*. not do !o w,th .o-r mone..F
An. 1orm o1 h.0er4a+t,v,t. w,th *ar2e amo-nt! o1 mone. ,n !e+-r,t,e! mar"et! +an +reate 0ro*em! 1or a**
0art,+,0ant!. & ma"e no attem0t to 2-e!! the a+t,on o1 the !to+" mar"et and haven/t the 1o22,e!t not,on a! to
whether the %ow w,** e at 900, 900 or 1200 a .ear 1rom now. Even ,1 there are !er,o-! +on!e8-en+e! re!-*t,n2
1rom 0re!ent and 1-t-re !0e+-*at,ve a+t,v,t., e50er,en+e !-22e!t! e!t,mate! o1 t,m,n2 are mean,n2*e!!. @owever,
& do e*,eve +erta,n +ond,t,on! that now e5,!t are *,"e*. to ma"e a+t,v,t. ,n mar"et! more d,11,+-*t 1or -! 1or the
,ntermed,ate 1-t-re.
The aove ma. !,m0*. e 6o*d41o2e.,!m6 Ia1ter a**, & am :7K. When the 2ame ,! no *on2er e,n2 0*a.ed .o-r
wa., ,t ,! on*. h-man to !a. the new a00roa+h ,! a** wron2, o-nd to *ead to tro-*e, et+. & have een !+orn1-* o1
!-+h ehav,or . other! ,n the 0a!t. & have a*!o !een the 0ena*t,e! ,n+-rred . tho!e who eva*-ate +ond,t,on! a!
112
the. were 4 not a! the. are. E!!ent,a**. & am o-t o1 !te0 w,th 0re!ent +ond,t,on!. On one 0o,nt, however, & am
+*ear. & w,** not aandon a 0rev,o-! a00roa+h who!e *o2,+ & -nder!tand Ia*tho-2h & 1,nd ,t d,11,+-*t to a00*.K even
tho-2h ,t ma. mean 1ore2o,n2 *ar2e and a00arent*. ea!., 0ro1,t! to emra+e an a00roa+h wh,+h & donDt 1-**.
-nder!tand, have not 0ra+t,+ed !-++e!!1-**. and wh,+h, 0o!!,*., +o-*d *ead to !-!tant,a* 0ermanent *o!! o1
+a0,ta*.
The th,rd 0o,nt o1 d,11,+-*t. ,nvo*ve! o-r m-+h 2reater a!e o1 +a0,ta*. For .ear! m. ,nve!tment ,dea! were
an.where 1rom 110= to 1000= o1 o-r +a0,ta*. &t wa! d,11,+-*t 1or me to +on+e,ve that a d,11erent +ond,t,on +o-*d
ever e5,!t. & 0rom,!ed to te** 0artner! when ,t d,d and ,n m. >an-ar., 1997 *etter had to ma"e 2ood on that
0rom,!e. Lar2e*. e+a-!e o1 the two +ond,t,on! 0rev,o-!*. ment,oned, o-r 2reater +a0,ta* ,! now !ometh,n2 o1 a
dra2 on 0er1orman+e. & e*,eve ,t ,! the *ea!t !,2n,1,+ant 1a+tor o1 the 1o-r ment,oned, and that ,1 we were
o0erat,n2 w,th one4tenth o1 o-r 0re!ent +a0,ta* o-r 0er1orman+e wo-*d e *,tt*e etter. @owever, ,n+rea!ed 1-nd!
are 0re!ent*. a moderate*. ne2at,ve 1a+tor.
The 1,na*, and mo!t ,m0ortant, +on!,derat,on +on+ern! 0er!ona* mot,vat,on. When & !tarted the 0artner!h,0 & !et
the motor that re2-*ated the treadm,** at 6ten 0o,nt! etter than the %OW6. & wa! .o-n2er, 0oorer and 0roa*.
more +om0et,t,ve. Even w,tho-t the three 0rev,o-!*. d,!+-!!ed e5terna* 1a+tor! ma",n2 1or 0oorer 0er1orman+e.
& wo-*d !t,** 1ee* that +han2ed 0er!ona* +ond,t,on! ma"e ,t adv,!a*e to red-+e the !0eed o1 the treadm,**. & have
o!erved man. +a!e! o1 ha,t 0attern! ,n a** a+t,v,t,e! o1 *,1e, 0art,+-*ar*. -!,ne!!, +ont,n-,n2 Iand e+om,n2
a++ent-ated a! .ear! 0a!!K *on2 a1ter the. +ea!ed ma",n2 !en!e. Bertrand R-!!e** ha! re*ated the !tor. o1 two
L,th-an,an 2,r*! who *,ved at h,! manor !-!e8-ent to Wor*d War &. Re2-*ar*. ea+h even,n2 a1ter the ho-!e wa!
dar", the. wo-*d !nea" o-t and !tea* ve2eta*e! 1rom the ne,2hor! 1or hoard,n2 ,n the,r room!7 th,! de!0,te the
1a+t that 1ood wa! o-nt,1-* at the R-!!e** ta*e. Lord R-!!e** e50*a,ned to the 2,r*! that wh,*e !-+h ehav,or
ma. have made a 2reat dea* o1 !en!e ,n L,th-an,a d-r,n2 the war, ,t wa! !omewhat o-t o1 0*a+e ,n the En2*,!h
+o-ntr.!,de. @e re+e,ved a!!ent,n2 nod! and +ont,n-ed !tea*,n2.
@e 1,na**. +ontented h,m!e*1 w,th the o!ervat,on that the,r ehav,or, !tran2e a! ,t m,2ht !eem to the ne,2hor!,
wa! rea**. not !o d,11erent 1rom that o1 the e*der Ro+"e1e**er.
E*ementar. !e*14ana*.!,! te**! me that & w,** not e +a0a*e o1 *e!! than a**4o-t e11ort to a+h,eve a 0-*,+*.
0ro+*a,med 2oa* to 0eo0*e who have entr-!ted the,r +a0,ta* to me. A**4o-t e11ort ma"e! 0ro2re!!,ve*. *e!! !en!e.
& wo-*d *,"e to have an e+onom,+ 2oa* wh,+h a**ow! 1or +on!,dera*e non4e+onom,+ a+t,v,t.. Th,! ma. mean
a+t,v,t. o-t!,de the 1,e*d o1 ,nve!tment! or ,t !,m0*. ma. mean 0-r!-,n2 *,ne! w,th,n the ,nve!tment 1,e*d that do
not 0rom,!e the 2reate!t e+onom,+ reward. An e5am0*e o1 the *atter m,2ht e the +ont,n-ed ,nve!tment ,n a
!at,!1a+tor. I-t 1ar 1rom !0e+ta+-*arK +ontro**ed -!,ne!! where & *,"ed the 0eo0*e and the nat-re o1 the -!,ne!!
even tho-2h a*ternat,ve ,nve!tment! o11ered an e50e+ta*e h,2her rate o1 ret-rn. 'ore mone. wo-*d e made
-.,n2 -!,ne!!e! at attra+t,ve 0r,+e!, then re!e**,n2 them. @owever, ,t ma. e more enBo.a*e I0art,+-*ar*.
when the 0er!ona* va*-e o1 ,n+rementa* +a0,ta* ,! *e!!K to +ont,n-e to own them and ho0e1-**. ,m0rove the,r
0er1orman+e, -!-a**. ,n a m,nor wa., thro-2h !ome de+,!,on! ,nvo*v,n2 1,nan+,a* !trate2..
Th-!, & am *,"e*. to *,m,t m.!e*1 to th,n2! wh,+h are rea!ona*. ea!., !a1e, 0ro1,ta*e and 0*ea!ant. Th,! w,** not
ma"e o-r o0erat,on more +on!ervat,ve than ,n the 0a!t !,n+e & e*,eve, -ndo-ted*. w,th !ome ,a!, that we have
a*wa.! o0erated w,th +on!,dera*e +on!ervat,!m. The *on24term down!,de r,!" w,** not e *e!!7 the -0!,de
0otent,a* w,** mere*. e *e!!.
#0e+,1,+a**., o-r *on2er term 2oa* w,** e to a+h,eve the *e!!er o1 9= 0er ann-m or a 1,ve 0er+enta2e 0o,nt
advanta2e over the %ow. Th-!, ,1 the %ow avera2e! 42= over the ne5t 1,ve .ear!, & wo-*d ho0e to avera2e V:=
-t ,1 the %ow avera2e! V12=, & w,** ho0e to a+h,eve an avera2e o1 on*. V9=. The!e ma. e *,m,ted oBe+t,ve!,
-t & +on!,der ,t no more *,"e*. that we w,** a+h,eve even the!e more mode!t re!-*t! -nder 0re!ent +ond,t,on!
than & 1ormer*. d,d that we wo-*d a+h,eve o-r 0rev,o-! 2oa* o1 a ten 0er+enta2e 0o,nt avera2e ann-a* ed2e over
the %ow. F-rthermore, & ho0e *,m,ted oBe+t,ve! w,** ma"e 1or more *,m,ted e11ort I&/m 8-,te !-re the +onver!e ,!
113
tr-eK.
& w,** ,n+or0orate th,! new 2oa* ,nto the )ro-nd R-*e! to e ma,*ed .o- ao-t Novemer 1, a*on2 w,th the 199;
$omm,tment Letter. & wanted to 2et th,! *etter o11 to .o- 0r,or to that ma,*,n2 !o .o- wo-*d have am0*e t,me to
+on!,der .o-r 0er!ona* !,t-at,on, and ,1 ne+e!!ar. 2et ,n to-+h w,th me to +*ear -0 !ome o1 the en+*o!ed, e1ore
ma",n2 a de+,!,on on 199;. A! a*wa.!, & ,ntend to +ont,n-e to *eave v,rt-a**. a** o1 m. +a0,ta* Ie5+*-d,n2 %ata
%o+-ment! !to+"K, a*on2 w,th that o1 m. 1am,*., ,n B(L. What & +on!,der !at,!1a+tor. and a+h,eva*e ma. we**
e d,11erent 1rom what .o- +on!,der !o. (artner! w,th attra+t,ve a*ternat,ve ,nve!tment o00ort-n,t,e! ma.
*o2,+a**. de+,de that the,r 1-nd! +an e etter em0*o.ed e*!ewhere, and .o- +an e !-re & w,** e who**. ,n
!.m0ath. w,th !-+h a de+,!,on.
& have a*wa.! 1o-nd ehav,or mo!t d,!ta!te1-* wh,+h 0-*,+*. anno-n+e! one !et o1 2oa*! and mot,vat,on! when
a+t-a**. an ent,re*. d,11erent !et o1 1a+tor! 0reva,*!. There1ore, & have a*wa.! tr,ed to e *00= +and,d w,th .o-
ao-t m. 2oa*! and 0er!ona* 1ee*,n2! !o .o- aren/t ma",n2 ,m0ortant de+,!,on! 0-r!-ant to 0hon. 0ro+*amat,on!
I&/ve r-n ,nto a 1ew o1 the!e ,n o-r ,nve!tment e50er,en+eK. Ov,o-!*. a** the +ond,t,on! en-merated ,n th,! *etter
haven/t a00eared overn,2ht. & have een th,n",n2 ao-t !ome o1 the 0o,nt! ,nvo*ved 1or a *on2 0er,od o1 t,me.
Go- +an -nder!tand, & am !-re, that & wanted to 0,+" a t,me when 0a!t 2oa*! had een a+h,eved to !et 1orth a
red-+t,on ,n 1-t-re 2oa*!. & wo-*d not want to red-+e the !0eed o1 the treadm,** -n*e!! & had 1-*1,**ed m.
oBe+t,ve! to th,! 0o,nt.
(*ea!e *et me "now ,1 & +an e o1 an. he*0 ,n de+,0her,n2 an. 0ort,on o1 th,! *etter.
$ord,a**.,
Warren E. B-11ett
WEB eh
114
BUFFETT (ARTNER#@&(. LT%.
910 A&EW&T (LAOA
O'A@A, NEBRA#AA 9;1:1
TELE(@ONE 0?24?110
>an-ar. 2?, 199;
O-r (er1orman+e ,n 1997
B. mo!t !tandard!, we had a 2ood .ear ,n 1997. O-r overa** 0er1orman+e wa! 0*-! :5.9= +om0ared to 0*-!
19.0= 1or the %ow, th-! !-r0a!!,n2 o-r 0rev,o-! oBe+t,ve o1 0er1orman+e ten 0o,nt! !-0er,or to the %ow. O-r
overa** 2a,n wa! H19,:;?,250 wh,+h, even -nder a++e*erat,n2 ,n1*at,on, w,** -. a *ot o1 (e0!,. And, d-e to the
!a*e o1 !ome *on2!tand,n2 *ar2e 0o!,t,on! ,n mar"eta*e !e+-r,t,e!, we had rea*,<ed ta5a*e ,n+ome o1
H27,:79,997 wh,+h ha! noth,n2 to do w,th 1997 0er1orman+e -t !ho-*d 2,ve a** o1 .o- a 1ee*,n2 o1 v,2oro-!
0art,+,0at,on ,n The )reat #o+,et. on A0r,* 15th.
The m,nor thr,**! de!+r,ed aove are tem0ered . an. +*o!e o!ervat,on o1 what rea**. too" 0*a+e ,n the !to+"
mar"et d-r,n2 1997. (roa*. a 2reater 0er+enta2e o1 0art,+,0ant! ,n the !e+-r,t,e! mar"et! d,d !-!tant,a**.
etter than the %ow *a!t .ear than ,n v,rt-a**. an. .ear ,n h,!tor.. &n 1997, 1or man., ,t ra,ned 2o*d and ,t 0a,d to
e o-t 0*a.,n2 the a!! t-a. & don/t have a 1,na* ta-*at,on at th,! t,me -t m. 2-e!! ,! that at *ea!t 95= o1
,nve!tment +om0an,e! 1o**ow,n2 a +ommon !to+" 0ro2ram a+h,eved etter re!-*t! than the %ow 4 ,n man. +a!e!
. ver. !-!tant,a* amo-nt!. &t wa! a .ear when 0ro1,t! a+h,eved were ,n ,nver!e 0ro0ort,on to a2e 4 and & am ,n
the 2er,atr,+ ward, 0h,*o!o0h,+a**..
The 1o**ow,n2 !-mmar,<e! the .ear4.4.ear 0er1orman+e o1 the %ow, the (artner!h,0 e1ore a**o+at,on Ione
8-arter o1 the e5+e!! over 9=K to the 2enera* 0artner, and the re!-*t! 1or *,m,ted 0artner!3
Year Overall .esults
:ro Dow /)0
Partnership .esults
/10
Liited Partners!
.esults /?0
1957 4;.?= 10.?= 9.:=
195; :;.5= ?0.9= :2.2=
1959 20.0= 25.9= 20.9=
1990 49.2= 22.;= 1;.9=
1991 22.?= ?5.9= :5.9=
1992 47.9= 1:.9= 11.9=
199: 20.9= :;.7= :0.5=
199? 1;.7= 27.;= 22.:=
1995 1?.2= ?7.2= :9.9=
1999 415.9= 20.?= 19.;=
1997 19.0= :5.9= 2;.?=
I1K Ba!ed on .ear*. +han2e! ,n the va*-e o1 the %ow 0*-! d,v,dend! that wo-*d have een re+e,ved thro-2h
owner!h,0 o1 the %ow d-r,n2 that .ear. The ta*e ,n+*-de! a** +om0*ete .ear! o1 0artner!h,0 a+t,v,t..
I2K For 1957491 +on!,!t! o1 +om,ned re!-*t! o1 a** 0rede+e!!or *,m,ted 0artner!h,0! o0erat,n2 thro-2ho-t
the ent,re .ear a1ter a** e50en!e!, -t e1ore d,!tr,-t,on! to 0artner! or a**o+at,on! to the 2enera*
0artner.
I:K For 1957491 +om0-ted on the a!,! o1 the 0re+ed,n2 +o*-mn o1 0artner!h,0 re!-*t! a**ow,n2 1or
a**o+at,on to the 2enera* 0artner a!ed -0on the 0re!ent 0artner!h,0 a2reement, -t e1ore month*.
115
w,thdrawa*! . *,m,ted 0artner!.
On a +-m-*at,ve or +om0o-nded a!,!, the re!-*t! are3
Year Overall .esults :ro
Dow
Partnership .esults Liited Partners!
.esults
1957 4;.?= 10.?= 9.:=
1957 J 5; 29.9= 55.9= ??.5=
1957 J 59 52.:= 95.9= 7?.7=
1957 J 90 ?2.9= 1?0.9= 107.2=
1957 J 91 7?.9= 251.0= 1;1.9=
1957 J 92 91.9= 299.;= 215.1=
1957 J 9: 95.1= ?5?.5= :11.2=
1957 J 9? 1:1.:= 90;.7= ?02.9=
1957 J 95 19?.1= 9?:.2= 5;;.5=
1957 J 99 122.9= 1159.0= 70?.2=
1957 J 97 195.:= 1909.9= 9:2.9=
9nnual "opounded
.ate
,.?7 1,.@7 1?.+7
&nve!tment $om0an,e!
On the 1o**ow,n2 0a2e ,! the -!-a* ta-*at,on !how,n2 the re!-*t! o1 what were the two *ar2e!t m-t-a* 1-nd!
Ithe. have !tood at the to0 ,n !,<e !,n+e B(L wa! 1ormed 4 th,! .ear, however, %re.1-! F-nd overtoo" themK that
1o**ow a 0o*,+. o1 e,n2, t.0,+a**., 954100= ,nve!ted ,n +ommon !to+"!, and the two *ar2e!t d,ver!,1,ed +*o!ed4
end ,nve!tment +om0an,e!.
Year #ass. Inv.
&rust /)0
Investors
'toc( /)0
Lehan /10 &ri-"ont
/10
Dow Liited
Partners
1957 411.?= 412.?= 411.?= 42.?= 4;.?= 9.:=
195; ?2.7= ?7.5= ?0.;= ::.2= :;.5= :2.2=
1959 9.0= 10.:= ;.1= ;.?= 20.0= 20.9=
1990 41.0= 40.9= 2.5= 2.;= 49.2= 1;.9=
1991 25.9= 2?.9= 2:.9= 22.5= 22.?= :5.9=
1992 49.;= 41:.?= 41?.?= 410.0= 47.9= 11.9=
199: 20.0= 19.5= 2:.7= 1;.:= 20.9= :0.5=
199? 15.9= 1?.:= 1:.9= 12.9= 1;.7= 22.:=
1995 10.2= 9.;= 19.0= 10.7= 1?.2= :9.9=
1999 47.7= 410.0= 42.9= 49.9= 415.9= 19.;=
1997 20.0= 22.;= 2;.0= 25.?= 19.0= 2;.?=
"uulative
.esults
)+1.?7 )@B.+7 18+.17 )A).67 )+6.?7 ,?1.+7
9nnual
"opounded
.ate
,.17 A.+7 )8.B7 ,.,7 ,.?7 1?.+7
I1K $om0-ted 1rom +han2e! ,n a!!et va*-e 0*-! an. d,!tr,-t,on! to ho*der! o1 re+ord d-r,n2 .ear.
I2K From 1997 'ood./! Ban" N F,nan+e 'an-a* 1or 195741999. E!t,mated 1or 1997.
La!t .ear & !a,d3
116
EA 1ew m-t-a* 1-nd! and !ome 0r,vate ,nve!tment o0erat,on! have +om0,*ed re+ord! va!t*. !-0er,or to
the %ow and, ,n !ome +a!e!, !-!tant,a**. !-0er,or to B-11ett (artner!h,0, Ltd. The,r ,nve!tment
te+hn,8-e! are -!-a**. ver. d,!!,m,*ar to o-r! and not w,th,n m. +a0a,*,t,e!.F
&n 1997 th,! +ond,t,on ,nten!,1,ed. 'an. ,nve!tment or2an,<at,on! 0er1ormed !-!tant,a**. etter than B(L, w,th
2a,n! ran2,n2 to over 100=. Be+a-!e o1 the!e !0e+ta+-*ar re!-*t!, mone., ta*ent and ener2. are +onver2,n2 ,n a
ma5,m-m e11ort 1or the a+h,evement o1 *ar2e and 8-,+" !to+" mar"et 0ro1,t!. &t *oo"! to me *,"e 2reat*.
,nten!,1,ed !0e+-*at,on w,th +on+om,tant r,!"! 4-t man. o1 the advo+ate! ,n!,!t otherw,!e.
'. mentor, Ben )raham, -!ed to !a.. E#0e+-*at,on ,! ne,ther ,**e2a*, ,mmora* nor 1atten,n2 I1,nan+,a**.K.F
%-r,n2 the 0a!t .ear, ,t wa! 0o!!,*e to e+ome 1,!+a**. 1*a. thro-2h a !tead. d,et o1 !0e+-*at,ve onon!. We
+ont,n-e to eat oatmea* -t ,1 ,nd,2e!t,on !ho-*d !et ,n 2enera**., ,t ,! -nrea*,!t,+ to e50e+t that we wonDt have
!ome d,!+om1ort.
Ana*.!,! o1 1997 Re!-*t!
The overa** 1,2-re! 2,ven ear*,er +on+ea* va!t d,11eren+e! ,n 0ro1,ta,*,t. . 0ort1o*,o +ate2or. d-r,n2 1997.
We had o-r wor!t 0er1orman+e ,n h,!tor. ,n the EWor"o-tF !e+t,on. &n the 1995 *etter, th,! +ate2or. wa! de1,ned
a!,
E...!e+-r,t,e! w,th a t,meta*e. The. ar,!e 1rom +or0orate a+t,v,t. 44 !e**4o-t!, mer2er!, reor2an,<at,on!,
!0,n4o11!, et+. &n th,! +ate2or., we are not ta*",n2 ao-t r-mor! or ,n!,de ,n1ormat,on 0erta,n,n2 to !-+h
deve*o0ment!, -t to 0-*,+*. anno-n+ed a+t,v,t,e! o1 th,! !ort. We wa,t -nt,* we +an read ,t ,n the 0a0er.
The r,!" doe! not 0erta,n 0r,mar,*. to 2enera* mar"et ehav,or Ia*tho-2h that ,! !omet,me! t,ed ,n. to a
de2reeK. -t ,n!tead to !ometh,n2 -0!ett,n2 the a00*e+art !o that the e50e+ted +or0orate deve*o0ment
doe! not mater,a*,<e.F
The !treet! were 1,**ed w,th -0!et a00*e+art! 4 o-r a00*e+art! 4 d-r,n2 1997. Th-!, on an avera2e ,nve!tment o1
H17,2?9,;79, o-r overa** 2a,n wa! H15:,27:. For tho!e o1 .o- who!e !*,de r-*e doe! not 2o to !-+h ,n!-*t,n2
de0th!, th,! re0re!ent! a ret-rn o1 .;9 o1 1=. Wh,*e & don/t have +om0*ete 1,2-re!. & do-t that we have een
e*ow 10= ,n an. 0a!t .ear. A! ,n other +ate2or,e!, we tend to +on+entrate o-r ,nve!tment! ,n the wor"o-t
+ate2or. ,n B-!t a 1ew !,t-at,on! 0er .ear. Th,! te+hn,8-e 2,ve! more var,at,on ,n .ear*. re!-*t! than wo-*d e the
+a!e ,1 we -!ed an a+ro!!4the4oard a00roa+h. & e*,eve o-r a00roa+h w,** re!-*t ,n a! 2reat Ior 2reaterK
0ro1,ta,*,t. on a *on24term a!,!, -t .o- +an/t 0rove ,t . 1997.
O-r ,nve!tment ,n +ontro**ed +om0an,e! wa! a !,m,*ar dra2 on re*at,ve 0er1orman+e ,n 1997, -t th,! ,! to e
e50e+ted ,n !tron2 mar"et!. On an avera2e ,nve!tment o1 H20,192,779 we had an overa** 2a,n o1 H2,;9?,571. &
am 0*ea!ed w,th th,! !ort o1 0er1orman+e, even tho-2h th,! +ate2or. w,** +ont,n-e to -nder0er1orm ,1 the mar"et
+ont,n-e! !tron2 d-r,n2 199;. Thro-2h o-r two +ontro**ed +om0an,e! I%,ver!,1,ed Reta,*,n2 and Ber"!h,re
@athawa.K, we a+8-,red two new enter0r,!e! ,n 1997. A!!o+,ated $otton #ho0! and Nat,ona* &ndemn,t. Ia*on2
w,th Nat,ona* F,re N 'ar,ne, an a11,*,ated +om0an.K. The!e a+8-,!,t,on! +o-*dn/t e more 2rat,1.,n2. Ever.th,n2
wa! a! advert,!ed or etter. The 0r,n+,0a* !e**,n2 e5e+-t,ve!, Ben Ro!ner and >a+" R,n2wa*t, have +ont,n-ed to
do a !-0er Bo Ithe on*. ",nd the. "nowK, and ,n ever. re!0e+t have 1ar more than *,ved -0 to the,r end o1 the
ar2a,n.
The !at,!1.,n2 nat-re o1 o-r a+t,v,t. ,n +ontro**ed +om0an,e! ,! a m,nor rea!on 1or the moderated ,nve!tment
oBe+t,ve! d,!+-!!ed ,n the O+toer 9th *etter. When & am dea*,n2 w,th 0eo0*e & *,"e, ,n -!,ne!!e! & 1,nd
!t,m-*at,n2 Iwhat -!,ne!! ,!n/t MK, and a+h,ev,n2 worthwh,*e overa** ret-rn! on +a0,ta* em0*o.ed I!a., 10
412=K, ,t !eem! 1oo*,!h to r-!h 1rom !,t-at,on to !,t-at,on to earn a 1ew more 0er+enta2e 0o,nt!. &t a*!o doe! not
!eem !en!,*e to me to trade "nown 0*ea!ant 0er!ona* re*at,on!h,0! w,th h,2h 2rade 0eo0*e, at a de+ent rate o1
117
ret-rn, 1or 0o!!,*e ,rr,tat,on, a22ravat,on or wor!e at 0otent,a**. h,2her ret-rn!. @en+e, we w,** +ont,n-e to "ee0
a 0ort,on o1 o-r +a0,ta* I-t not over ?0= e+a-!e o1 the 0o!!,*e *,8-,d,t. re8-,rement! ar,!,n2 1rom the nat-re
o1 o-r 0artner!h,0 a2reementK ,nve!ted ,n +ontro**ed o0erat,n2 -!,ne!!e! at an e50e+ted rate o1 ret-rn e*ow
that ,nherent ,n an a22re!!,ve !to+" mar"et o0erat,on.
W,th a +om,ned tota* o1 H:7,?:9,955 ,n wor"o-t! and +ontro*! 0rod-+,n2 an overa** 2a,n o1 on*. H:,0?7,;??,
the more a*ert memer! o1 the +*a!! w,** have a*read. +on+*-ded we had a wha*e o1 a .ear ,n the 6)enera*! 4
Re*at,ve*. Underva*-ed6 +ate2or.. On a net avera2e ,nve!tment o1 H19,?;7,999, we had an overa** 2a,n o1
H1?,099,59:, or 72=. La!t .ear & re1erred to one ,nve!tment wh,+h !-!tant,a**. o-t0er1ormed the 2enera*
mar"et ,n 199?, 1995 and 1999 and e+a-!e o1 ,t! !,<e Ithe *ar2e!t 0ro0ort,on we have ever had ,n an.th,n2 4 we
h,t o-r ?0= *,m,tK had a ver. mater,a* ,m0a+t on o-r overa** re!-*t! and, even more !o, th,! +ate2or.. Th,!
e5+e**ent 0er1orman+e +ont,n-ed thro-2ho-t 1997 and a *ar2e 0ort,on o1 tota* 2a,n wa! a2a,n a++o-nted 1or .
th,! !,n2*e !e+-r,t.. O-r ho*d,n2! o1 th,! !e+-r,t. have een ver. !-!tant,a**. red-+ed and we have noth,n2 ,n
th,! 2ro-0 remote*. a00roa+h,n2 the !,<e or 0otent,a* wh,+h 1ormer*. e5,!ted ,n th,! ,nve!tment.
The 6)enera*! 4 (r,vate Owner6 !e+t,on 0rod-+ed 2ood re!-*t! *a!t .ear IH1,297,215 on H5,1?1,710 avera2e
,nve!tmentK, and we have !ome m,*d*. ,ntere!t,n2 0o!!,,*,t,e! ,n th,! area at 0re!ent.
',!+e**aneo-!
We e2,n the new .ear w,th net a!!et! o1 H9;,10;,0;;. We had 0artner! w,th +a0,ta* o1 ao-t H1,900,000
w,thdraw at .earend, 0r,mar,*. e+a-!e o1 the red-+ed oBe+t,ve! anno-n+ed ,n the O+toer 9th *etter. Th,!
ma"e! 2ood !en!e 1or them, !,n+e mo!t o1 them have the a,*,t. and mot,vat,on to !-r0a!! o-r oBe+t,ve! and &
am re*,eved 1rom 0-!h,n2 1or re!-*t! that & 0roa*. +an/t atta,n -nder 0re!ent +ond,t,on!.
#ome o1 tho!e who w,thdrew Iand man. who d,dn/tK a!"ed me, 6What do .o- rea**. meanM6 a1ter re+e,v,n2 the
O+toer 9th *etter. Th,! !ort o1 a 8-e!t,on ,! a *,tt*e r-,!,n2 to an. a-thor, -t & a!!-red them & meant e5a+t*.
what & had !a,d. & wa! a*!o a!"ed whether th,! wa! an ,n,t,a* !ta2e ,n the 0ha!,n2 o-t o1 the 0artner!h,0. The
an!wer to th,! ,!, E%e1,n,te*., noF. A! *on2 a! 0artner! want to 0-t -0 the,r +a0,ta* a*on2!,de o1 m,ne and the
-!,ne!! ,! o0erat,ona**. 0*ea!ant Iand ,t +o-*dn/t e etterK, & ,ntend to +ont,n-e to do -!,ne!! w,th tho!e who
have a+"ed me !,n+e tenn,! !hoe!.
)*ad.! Aa,!er ha! Bo,ned -! and ,! do,n2 the !ame !ort o1 to04not+h Bo that we have *on2 re+e,ved 1rom %onna,
B,** and >ohn. The o11,+e 2ro-0, !0o-!e! and +h,*dren have over H15 m,**,on ,nve!ted ,n B(L on >an-ar. 1,
199;, !o we have not had a need 1or No%o< d-r,n2 -!,ne!! ho-r!.
W,th,n a 1ew da.!, .o- w,** re+e,ve3
1. A ta5 *etter 2,v,n2 .o- a** B(L ,n1ormat,on needed 1or .o-r 1997 1edera* ,n+ome ta5 ret-rn. Th,! *etter
,! the on*. ,tem that +o-nt! 1or ta5 0-r0o!e!.
2. An a-d,t 1rom (eat, 'arw,+", ',t+he** N $o. Ithe. have a2a,n done an e5+e**ent BoK 1or 1997, !ett,n2
1orth the o0erat,on! and 1,nan+,a* 0o!,t,on o1 B(L, a! we** a! .o-r own +a0,ta* a++o-nt.
:. A *etter !,2ned . me !ett,n2 1orth the !tat-! o1 .o-r B(L ,ntere!t on >an-ar. 1, 199;. Th,! ,! ,dent,+a*
w,th the 1,2-re! deve*o0ed ,n the a-d,t.
Let me "now ,1 an.th,n2 ,n th,! *etter or that o++-r! d-r,n2 the .ear need! +*ar,1.,n2. '. ne5t *etter w,** e
ao-t >-*.15th, !-mmar,<,n2 the 1,r!t ha*1 o1 th,! .ear.
$ord,a**.,
118
Warren E. B-11ett
119
BUFFETT (ARTNER#@&(. LT%.
910 A&EW&T (LAOA
O'A@A, NEBRA#AA 9;1:1
TELE(@ONE 0?24?110
>-*. 11th, 199;
F,r!t @a*1 (er1orman+e
%-r,n2 the 1,r!t ha*1 o1 199;, the %ow4>one! &nd-!tr,a* Avera2e de+*,ned 1ra+t,ona**. 1rom 905 to ;9;.
Owner!h,0 o1 the %ow wo-*d a*!o have 0rod-+ed d,v,dend! o1 ao-t H15 d-r,n2 the ha*1, re!-*t,n2 ,n an overa**
2a,n o1 0.9= 1or that Avera2e. The %ow, on+e a2a,n, wa! an anem,+ +om0et,tor 1or mo!t ,nve!tment mana2er!,
a*tho-2h ,t wa! not !-r0a!!ed . an.th,n2 *,"e the mar2,n! o1 1997.
O-r own 0er1orman+e wa! -n-!-a**. 2ood d-r,n2 the 1,r!t ha*1, w,th an overa** 2a,n o1 19= e5+*-d,n2 an.
+han2e ,n va*-at,on 1or +ontro**ed +om0an,e! Iwh,+h re0re!ented !*,2ht*. over one4th,rd o1 net a!!et! at the
e2,nn,n2 o1 the .earK. @owever, an. re*ea!e o1 adrena*,n ,! -nwarranted. O-r mar"eta*e !e+-r,t. ,nve!tment!
are heav,*. +on+entrated ,n a 1ew !,t-at,on!, ma",n2 re*at,ve 0er1orman+e 0otent,a**. more vo*at,*e than ,n
w,de*. d,ver!,1,ed ,nve!tment veh,+*e!. O-r *on2 term 0er1orman+e 2oa*! are a! !tated ,n the rev,!ed 6)ro-nd
R-*e!6 and & w,** e 8-,te ha00. ,1 we a+h,eve tho!e *,m,ted oBe+t,ve! over a 0er,od o1 .ear!. The 1o**ow,n2
ta*e !-mmar,<e! 0er1orman+e to date on the -!-a* a!,!3
Year Overall .esults
:ro Dow /)0
Partnership .esults
/10
Liited Partners!
.esults /?0
1957 4;.?= 10.?= 9.:=
195; :;.5= ?0.9= :2.2=
1959 20.0= 25.9= 20.9=
1990 49.2= 22.;= 1;.9=
1991 22.?= ?5.9= :5.9=
1992 47.9= 1:.9= 11.9=
199: 20.9= :;.7= :0.5=
199? 1;.7= 27.;= 22.:=
1995 1?.2= ?7.2= :9.9=
1999 415.9= 20.?= 19.;=
1997 19.0= :5.9= 2;.?=
F,r!t @a*1 199; 0.9= 19.0= 1:.5=
$-m-*at,ve Re!-*t! 197.7= 1;;0.0= 1072.0=
Ann-a* $om0o-nded
Rate
;.9= 29.9= 2:.;=
I1K Ba!ed on .ear*. +han2e! ,n the va*-e o1 the %ow 0*-! d,v,dend! that wo-*d have een re+e,ved thro-2h
owner!h,0 o1 the %ow d-r,n2 that .ear. The ta*e ,n+*-de! a** +om0*ete .ear! o1 0artner!h,0 a+t,v,t..
I2K For 1957491 +on!,!t! o1 +om,ned re!-*t! o1 a** 0rede+e!!or *,m,ted 0artner!h,0! o0erat,n2 thro-2ho-t
the ent,re .ear a1ter a** e50en!e! -t e1ore d,!tr,-t,on! to 0artner! or a**o+at,on! to the 2enera* 0artner.
I:K For 1957491 +om0-ted on the a!,! o1 the 0re+ed,n2 +o*-mn o1 0artner!h,0 re!-*t! a**ow,n2 1or
a**o+at,on to the 2enera* 0artner a!ed -0on the 0re!ent 0artner!h,0 a2reement, -t e1ore month*.
w,thdrawa*! . *,m,ted 0artner!.
120
A*tho-2h we rev,!e va*-at,on! o1 o-r +ontro**ed +om0an,e! on*. at .earend, ,t 0re!ent*. a00ear! that o-r !hare o1
the,r 199; earn,n2! w,** e !ometh,n2 over H: m,**,on. Tho!e w,th 0r,mar. re!0on!,,*,t. 1or the,r o0erat,on!,
Aen $ha+e at Ber"!h,re @athawa., Lo-,! Aohn at @o+h!+h,*d Aohn, >a+" R,n2wa*t at Nat,ona* &ndemn,t. and
Ben Ro!ner at A!!o+,ated $otton #ho0!, +ont,n-e to me*d e11ort and a,*,t. ,nto re!-*t!.
Th,! .ear, %,ver!,1,ed Reta,*,n2 $om0an. Iowner o1 @o+h!+h,*d Aohn and A!!o+,ated $otton #ho0!K ,!!-ed ,t!
1,r!t 0-*,!hed ann-a* re0ort. Th,! wa! o++a!,oned . the 0-*,+ !a*e o1 deent-re! to a00ro5,mate*. 1,000
,nve!tor! *a!t %e+emer. Th-!, %R$ ,! ,n the rather -n-!-a* 0o!,t,on o1 e,n2 a 0-*,+ +om0an. 1rom a
+red,tor!/ v,ew0o,nt, -t a 0r,vate one Ithere are three !to+"ho*der! 4B(L own! ;0=K 1or owner!h,0 0-r0o!e!. &
am en+*o!,n2 the %R$ re0ort w,th th,! *etter Ie5+e0t where d-0*,+ate! 2o to one ho-!e ho*dK and 0*an to
+ont,n-e to !end them a*on2 w,th 1-t-re m,d4.ear *etter!.
A! & have ment,oned e1ore, we +annot ma"e the !ame !ort o1 mone. o-t o1 0ermanent owner!h,0 o1 +ontro**ed
-!,ne!!e! that +an e made 1rom -.,n2 and re!e**,n2 !-+h -!,ne!!e!, or 1rom !",**ed ,nve!tment ,n
mar"eta*e !e+-r,t,e!. Neverthe*e!!, the. o11er a 0*ea!ant *on2 term 1orm o1 a+t,v,t. Iwhen +ond-+ted ,n
+onB-n+t,on w,th h,2h 2rade, a*e 0eo0*eK at !at,!1a+tor. rate! o1 ret-rn.
&nve!tment $om0an,e!
On the 1o**ow,n2 0a2e ,! the 1orm !heet on the -!-a* ,nve!tment +om0an,e!3
Year #ass. Inv.
&rust /)0
Investors
'toc( /)0
Lehan /10 &ri-"ont
/10
Dow Liited
Partners
1957 411.?= 412.?= 411.?= 42.?= 4;.?= 9.:=
195; ?2.7= ?7.5= ?0.;= ::.2= :;.5= :2.2=
1959 9.0= 10.:= ;.1= ;.?= 20.0= 20.9=
1990 41.0= 40.9= 2.5= 2.;= 49.2= 1;.9=
1991 25.9= 2?.9= 2:.9= 22.5= 22.?= :5.9=
1992 49.;= 41:.?= 41?.?= 410.0= 47.9= 11.9=
199: 20.0= 19.5= 2:.7= 1;.:= 20.9= :0.5=
199? 15.9= 1?.:= 1:.9= 12.9= 1;.7= 22.:=
1995 10.2= 9.;= 19.0= 10.7= 1?.2= :9.9=
1999 47.7= 410.0= 42.9= 49.9= 415.9= 19.;=
1997 20.0= 22.;= 2;.0= 25.?= 19.0= 2;.?=
F,r!t @a*1
199;
5.1= 2.;= ?.?= 2.0= 0.9= 1:.5=
"uulative
.esults
)B6.B7 )6@.67 1)A.+7 )A+.B7 )+B.B7 )8B1.87
9nnual
"opounded
.ate
,.17 A.67 )8.+7 ,.+7 A.,7 1?.A7
I1K $om0-ted 1rom +han2e! ,n a!!et va*-e 0*-! an. d,!tr,-t,on! to ho*der! o1 re+ord d-r,n2 .ear.
I2K From 199; 'ood./! Ban" N F,nan+e 'an-a* 1or 1957 41997. E!t,mated 1or 1,r!t ha*1 o1 199;.
%-e to a !*-22,!h 0er1orman+e . the %ow ,n the *a!t 1ew .ear!, the 1o-r ,2 1-nd! now have, on avera2e, ao-t
a one4ha*1 0o,nt 0er ann-m advanta2e over the %ow 1or the 1-** 0er,od.
The (re!ent Env,ronment
121
& ma"e no e11ort to 0red,+t the +o-r!e o1 2enera* -!,ne!! or the !to+" mar"et. (er,od. @owever, +-rrent*. there
are 0ra+t,+e! !nowa**,n2 ,n the !e+-r,t. mar"et! and -!,ne!! wor*d wh,+h, wh,*e devo,d o1 !hort term
0red,+t,ve va*-e, other me a! to 0o!!,*e *on2 term +on!e8-en+e!.
& "now that !ome o1 .o- are not 0art,+-*ar*. ,ntere!ted Iand !ho-*dn/t eK ,n what ,! ta",n2 0*a+e on the 1,nan+,a*
!ta2e. For tho!e who are, & am en+*o!,n2 a re0r,nt o1 an -n-!-a**. +*ear and !,m0*e art,+*e wh,+h *a.! are B-!t
what ,! o++-rr,n2 on a m-!hroom,n2 !+a*e. #0e+ta+-*ar amo-nt! o1 mone. are e,n2 made . tho!e 0art,+,0at,n2
Iwhether a! or,2,nator!, to0 em0*o.ee!. 0ro1e!!,ona* adv,!or!, ,nve!tment an"er!, !to+" !0e+-*ator!, et+Y K ,n
the +ha,n4*etter t.0e !to+"40romot,on vo2-e. The 2ame ,! e,n2 0*a.ed . the 2-**,*e, the !e*14h.0not,<ed, and
the +.n,+a*. To +reate the 0ro0er ,**-!,on!, ,t 1re8-ent*. re8-,re! a++o-nt,n2 d,!tort,on! Ione 0art,+-*ar*.
0ro2re!!,ve entre0rene-r to*d me he e*,eved ,n 6o*d, ,ma2,nat,ve a++o-nt,n26K, tr,+"! o1 +a0,ta*,<at,on and
+amo-1*a2e o1 the tr-e nat-re o1 the o0erat,n2 -!,ne!!e! ,nvo*ved. The end 0rod-+t ,! 0o0-*ar, re!0e+ta*e and
,mmen!e*. 0ro1,ta*e I&/** *et the 0h,*o!o0her! 1,2-re ,n wh,+h order tho!e adBe+t,ve! !ho-*d e 0*a+edK.
R-,te +and,d*., o-r own 0er1orman+e ha! een !-!tant,a**. ,m0roved on an ,nd,re+t a!,! e+a-!e o1 the 1a**4
o-t 1rom !-+h a+t,v,t,e!. To +reate an ever w,den,n2 +,r+*e o1 +ha,n *etter! re8-,re! ,n+rea!,n2 amo-nt! o1
+or0orate raw mater,a* and th,! ha! +a-!ed man. ,ntr,n!,+a**. +hea0 Iand not !o +hea0K !to+"! to +ome to *,1e.
When we have een the owner! o1 !-+h !to+"!, we have rea0ed mar"et reward! m-+h more 0rom0t*. than m,2ht
otherw,!e have een the +a!e. The a00et,te 1or !-+h +om0an,e!, however, tend! to !-!tant,a**. d,m,n,!h the
n-mer o1 1-ndamenta**. attra+t,ve ,nve!tment! wh,+h rema,n.
& e*,eve the odd! are 2ood that, when the !to+" mar"et and -!,ne!! h,!tor. o1 th,! 0er,od ,! e,n2 wr,tten, the
0henomenon de!+r,ed ,n 'r. 'a./! art,+*e w,** e re2arded a! o1 maBor ,m0ortan+e, and 0erha0! +hara+ter,<ed
a! a man,a. Go- !ho-*d rea*,<e, however, that h,! 6The Em0eror @a! No $*othe!6 a00roa+h ,! at odd! Ior
d,!m,!!ed w,th a E#O WhatMF or an 6EnBo., EnBo.FK w,th the v,ew! o1 mo!t ,nve!tment an",n2 ho-!e! and
+-rrent*. !-++e!!1-* ,nve!tment mana2er!. We *,ve ,n an ,nve!tment wor*d, 0o0-*ated not . tho!e who m-!t e
*o2,+a**. 0er!-aded to e*,eve, -t . the ho0e1-*, +red-*o-! and 2reed., 2ra!0,n2 1or an e5+-!e to e*,eve.
F,na**., 1or a ma2n,1,+ent a++o-nt o1 the +-rrent 1,nan+,a* !+ene, .o- !ho-*d h-rr. o-t and 2et a +o0. o1 EThe
'one. )ameF . Adam #m,th. &t ,! *oaded w,th ,n!,2ht! and !-0reme w,t. INote3 %e!0,te m. +-rrent E#-00ort
Go-r Lo+a* (o!tma!terF dr,ve, & am not en+*o!,n2 the oo" w,th th,! *etter 4 ,t reta,*! 1or H9.95.K
Ta5e!
#evera* -n-!-a* 1a+tor! ma"e the ta5 1,2-re even more d,11,+-*t than -!-a* to e!t,mate th,! .ear. We w,**
-ndo-ted*. have an aove avera2e amo-nt o1 ord,nar. ,n+ome. The 0,+t-re on !hort term and *on2 term +a0,ta*
2a,n ,! !-Be+t to -n-!-a**. !-!tant,a* var,an+e. At the e2,nn,n2 o1 the .ear, & !-22e!ted that .o- -!e an ;=
ord,nar. ,n+ome 1a+tor I,t won/t +ome ,n th,! manner -t th,! 1,2-re emod,e! an adB-!tment 1or *on2 term
+a0,ta* 2a,nK a00*,ed to .o-r B(L +a0,ta* a++o-nt on an ,nter,m a!,! to +om0-te 8-arter*. ta5 e!t,mate!. &1 a
1,2-re d,11erent 1rom ;= !eem! more a00ro0r,ate 1or .o-r #e0temer 15th 8-arter*. e!t,mate. & w,** *et .o-
"now . #e0temer 5th. &1 no +han2e ,! ne+e!!ar., .o- w,** ne5t hear 1rom me on Novemer 1!t w,th the
$omm,tment Letter 1or 1999.
$ord,a**.,
Warren E. B-11ett
WEBP2*"
122
BUFFETT (ARTNER#@&(. LT%.
910 A&EW&T (LAOA
O'A@A, NEBRA#AA 9;1:1
TELE(@ONE 0?24?110
>an-ar. 22nd, 1999
O-r (er1orman+e ,n 199;
Ever.one ma"e! m,!ta"e!.
At the e2,nn,n2 o1 199;, & 1e*t 0ro!0e+t! 1or B(L 0er1orman+e *oo"ed 0oorer than at an. t,me ,n o-r h,!tor..
@owever, d-e ,n +on!,dera*e mea!-re to one !,m0*e -t !o-nd ,dea who!e t,me had +ome I,nve!tment ,dea!,
*,"e women are o1ten more e5+,t,n2 than 0-n+t-a*K, we re+orded an overa** 2a,n o1 H?0,0:2,991.
Nat-ra**., .o- a** 0o!!e!! !-11,+,ent ,nte**e+t-a* 0-r,t. to d,!m,!! the do**ar re!-*t and demand an a++o-nt,n2 o1
0er1orman+e re*at,ve to the %ow4>one! &nd-!tr,a* Avera2e. We e!ta*,!hed a new mar" at 0*-! 5;.;= ver!-! an
overa** 0*-! 7.7 = 1or the %ow, ,n+*-d,n2 d,v,dend! wh,+h wo-*d have een re+e,ved thro-2h owner!h,0 o1 the
Avera2e thro-2ho-t the .ear. Th,! re!-*t !ho-*d e treated a! a 1rea" *,"e 0,+",n2 -0 th,rteen !0ade! ,n a r,d2e
2ame. Go- ,d the !*am, ma"e ,t *oo" mode!t, 0o+"et the mone. and then 2et a+" to wor" on the 0art !+ore!.
We w,** a*!o have o-r !hare o1 hand! when we 2o !et.
The 1o**ow,n2 !-mmar,<e! the .ear4.4.ear 0er1orman+e o1 the %ow, the (artner!h,0 e1ore a**o+at,on Ione
8-arter o1 the e5+e!! over 9=K to the )enera* (artner and the re!-*t! 1or *,m,ted 0artner!3
Year Overall .esults
:ro Dow /)0
Partnership .esults
/10
Liited Partners!
.esults /?0
1957 4;.?= 10.?= 9.:=
195; :;.5= ?0.9= :2.2=
1959 20.0= 25.9= 20.9=
1990 49.2= 22.;= 1;.9=
1991 22.?= ?5.9= :5.9=
1992 47.9= 1:.9= 11.9=
199: 20.9= :;.7= :0.5=
199? 1;.7= 27.;= 22.:=
1995 1?.2= ?7.2= :9.9=
1999 415.9= 20.?= 19.;=
1997 19.0= :5.9= 2;.?=
199; 7.7= 5;.;= ?5.9=
I1K Ba!ed on .ear*. +han2e! ,n the va*-e o1 the %ow 0*-! d,v,dend! that wo-*d have een re+e,ved thro-2h
owner!h,0 o1 the %ow d-r,n2 that .ear. The ta*e ,n+*-de! a** +om0*ete .ear! o1 (artner!h,0 a+t,v,t..
I2K For 1957491 +on!,!t! o1 +om,ned re!-*t! o1 a** 0rede+e!!or *,m,ted 0artner!h,0! o0erat,n2 thro-2ho-t
the ent,re .ear a1ter a** e50en!e!, -t e1ore d,!tr,-t,on! to 0artner! or a**o+at,on! to the )enera*
(artner.
I:K For 1957491 +om0-ted on the a!,! o1 the 0re+ed,n2 +o*-mn o1 (artner!h,0 re!-*t! a**ow,n2 1or
a**o+at,on to the )enera* (artner a!ed -0on the 0re!ent (artner!h,0 A2reement, -t e1ore month*.
w,thdrawa*! . *,m,ted 0artner!.
123
On a +-m-*at,ve or +om0o-nded a!,!, the re!-*t! are3
Year Overall .esults :ro
Dow
Partnership .esults Liited Partners!
.esults
1957 4;.?= 10.?= 9.:=
1957 J 5; 29.9= 55.9= ??.5=
1957 J 59 52.:= 95.9= 7?.7=
1957 J 90 ?2.9= 1?0.9= 107.2=
1957 J 91 7?.9= 251.0= 1;1.9=
1957 J 92 91.9= 299.;= 215.1=
1957 J 9: 95.1= ?5?.5= :11.2=
1957 J 9? 1:1.:= 90;.7= ?02.9=
1957 J 95 19?.1= 9?:.2= 5;;.5=
1957 J 99 122.9= 1159.0= 70?.2=
1957 J 97 195.:= 1909.9= 9:2.9=
1957 J 9; 1;5.7= 2910.9= 1?0:.5=
9nnual "opounded
.ate
,.)7 ?).+7 16.?7
&nve!tment $om0an,e!
On the 1o**ow,n2 0a2e ,! the -!-a* ta-*at,on !how,n2 the re!-*t! o1 what were the two *ar2e!t m-t-a* 1-nd!
Ithe. !tood at the to0 ,n !,<e 1rom 1957 thro-2h 1999 4 the. are !t,** n-mer two and threeK that 1o**ow a 0o*,+.
o1 e,n2, t.0,+a**., 95 4100= ,nve!ted ,n +ommon !to+"!, and the two *ar2e!t d,ver!,1,ed +*o!ed4end ,nve!tment
+om0an,e!.
Year #ass. Inv.
&rust /)0
Investors
'toc( /)0
Lehan /10 &ri-"ont
/10
Dow Liited
Partners
1957 411.?= 412.?= 411.?= 42.?= 4;.?= 9.:=
195; ?2.7= ?7.5= ?0.;= ::.2= :;.5= :2.2=
1959 9.0= 10.:= ;.1= ;.?= 20.0= 20.9=
1990 41.0= 40.9= 2.5= 2.;= 49.2= 1;.9=
1991 25.9= 2?.9= 2:.9= 22.5= 22.?= :5.9=
1992 49.;= 41:.?= 41?.?= 410.0= 47.9= 11.9=
199: 20.0= 19.5= 2:.7= 1;.:= 20.9= :0.5=
199? 15.9= 1?.:= 1:.9= 12.9= 1;.7= 22.:=
1995 10.2= 9.;= 19.0= 10.7= 1?.2= :9.9=
1999 47.7= 410.0= 42.9= 49.9= 415.9= 19.;=
1997 20.0= 22.;= 2;.0= 25.?= 19.0= 2;.?=
199; 10.:= ;.1= 9.7= 9.;= 7.7= ?5.9=
"uulative
.esults
)A,.?7 )+B.B7 116.+7 188.17 )A6.B7 )@8?.67
9nnual
"opounded
.ate
,.?7 A.+7 )8.?7 ,.+7 ,.)7 16.?7
I1K $om0-ted 1rom +han2e! ,n a!!et va*-e 0*-! an. d,!tr,-t,on! to ho*der! o1 re+ord d-r,n2 .ear.
I2K From 199; 'ood./! Ban" N F,nan+e 'an-a* 1or 195741997. E!t,mated 1or 199;.
124
&t ,! ,ntere!t,n2 that a1ter twe*ve .ear! the!e 1o-r 1-nd! Iwh,+h 0re!ent*. a22re2ate we** over H5 ,**,on and
a++o-nt 1or over 10= o1 the ,nve!tment +om0an. ,nd-!tr.K have avera2ed on*. a 1ra+t,on o1 one 0er+enta2e
0o,nt ann-a**. etter than the %ow.
#ome o1 the !o4+a**ed E2o42oF 1-nd! have re+ent*. een re4+hr,!tened Eno42oF 1-nd!. For e5am0*e, )era*d T!a,/!
'anhattan F-nd, 0erha0! the wor*d/! e!t4"nown a22re!!,ve ,nve!tment veh,+*e, +ame ,n at m,n-! 9.9= 1or
199;. 'an. !ma**er ,nve!tment ent,t,e! +ont,n-ed to !-!tant,a**. o-t0er1orm the 2enera* mar"et ,n 199;, -t ,n
noth,n2 *,"e the 8-ant,t,e! o1 1999 and 1997.
The ,nve!tment mana2ement -!,ne!!, wh,+h & -!ed to !evere*. +ha!t,!e ,n th,! !e+t,on 1or e5+e!!,ve *ethar2.,
ha! now !w-n2 ,n man. 8-arter! to a+-te h.0erten!,on. One ,nve!tment mana2er, re0re!ent,n2 an or2an,<at,on
Iw,th an o*d e!ta*,!hed name .o- wo-*d re+o2n,<eK hand*,n2 m-t-a* 1-nd! a22re2at,n2 we** over H1 ,**,on,
!a,d -0on *a-n+h,n2 a new adv,!or. !erv,+e ,n 199;3
EThe +om0*e5,t,e! o1 nat,ona* and ,nternat,ona* e+onom,+! ma"e mone. mana2ement a 1-**4t,me Bo. A
2ood mone. mana2er +annot ma,nta,n a !t-d. o1 !e+-r,t,e! on a wee"4.4wee" or even a da.4.4da.
a!,!. #e+-r,t,e! m-!t e !t-d,ed ,n a m,n-te4.4m,n-te 0ro2ram.F
WowS
Th,! !ort o1 !t-11 ma"e! me 1ee* 2-,*t. when & 2o o-t 1or a (e0!,. When 0ra+t,+ed . *ar2e and ,n+rea!,n2
n-mer! o1 h,2h*. mot,vated 0eo0*e w,th h-2e amo-nt! o1 mone. on a *,m,ted 8-ant,t. o1 !-,ta*e !e+-r,t,e!,
the re!-*t e+ome! h,2h*. -n0red,+ta*e. &n !ome wa.! ,t ,! 1a!+,nat,n2 to wat+h and ,n other wa.! ,t ,!
a00a**,n2.
Ana*.!,! o1 199; Re!-*t!
A** 1o-r ma,n +ate2or,e! o1 o-r ,nve!tment o0erat,on wor"ed o-t we** ,n 199;. O-r tota* overa** 2a,n o1
H?0,0:2,991 wa! d,v,ded a! 1o**ow!3
"ategor2 9verage Investent Overall Gain
$ontro*! H2?,999,99; H5,;;9,109
)enera*! J (r,vate Owner H19,:9:,100 H21,99?,7:9
)enera*! J Re*at,ve*.
Underva*-ed
H;,799,;7; H?,271,;25
Wor"o-t! H1;,9;0,902 H7,:17,12;
',!+e**aneo-!, 0r,mar,*. U#
Trea!-r. B,**!
H12,7??,97: H;:9,?99
Tota* &n+ome H?0,:09,29?
Le!! J )enera* E50en!e,
,n+*-d,n2 &ntere!t
H279,90:
Overa** )a,n H?0,0:2,991
A 1ew +aveat!, a! ment,oned ,n m. *etter two .ear! a2o, are a2a,n ,n order Inon4do+tora* +and,date! ma.
0ro+eed to ne5t !e+t,onK3
1. An e50*anat,on o1 the var,o-! +ate2or,e! *,!ted aove wa! made ,n the >an-ar. 1;, 1995 *etter. &1 .o-r
memor. need! re1re!h,n2 and .o-r 1avor,te new!!tand doe! not have the 0o+"etoo" ed,t,on. We/** e
2*ad to 2,ve .o- a +o0..
2. The +*a!!,1,+at,on! are not ,ron +*ad. Noth,n2 ,! +han2ed retroa+t,ve*., -t the ,n,t,a* de+,!,on a! to
125
+ate2or. ,! !omet,me! ar,trar.. #omet,me! *ater +*a!!,1,+at,on 0rove! d,11,+-*t7 e.2. a wor"o-t that 1a**!
thro-2h -t that & +ont,n-e to ho*d 1or rea!on! -nre*ated or on*. 0art,a**. re*ated to the or,2,na* de+,!,on
I*,"e !t-ornne!!K.
:. (er+enta2e ret-rn! +a*+-*ated on the avera2e ,nve!tment a!e . +ate2or. wo-*d e !,2n,1,+ant*.
-nder!tated re*at,ve to (artner!h,0 0er+enta2e ret-rn! wh,+h are +a*+-*ated on a e2,nn,n2 ,nve!tment
a!e. &n the 1ore2o,n2 1,2-re!, a !e+-r,t. 0-r+ha!ed . -! at 100 on >an-ar. 1 wh,+h a00re+,ated at an
even rate to 200 on %e+emer :1 wo-*d have an avera2e ,nve!tment o1 150 0rod-+,n2 a 9942P:= re!-*t
+ontra!ted to a 100= re!-*t . the +-!tomar. a00roa+h. &n other word!, the 1ore2o,n2 1,2-re! -!e a
month*. avera2e o1 mar"et va*-e! ,n +a*+-*at,n2 the avera2e ,nve!tment.
?. A** re!-*t! are a!ed on a 100= owner!h,0, non4*evera2e a!,!. &ntere!t and other 2enera* e50en!e! are
ded-+ted 1rom tota* 0er1orman+e and not !e2re2ated . +ate2or.. E50en!e! d,re+t*. re*ated to !0e+,1,+
,nve!tment o0erat,on!, !-+h a! d,v,dend! 0a,d on !hort !to+", are ded-+ted . +ate2or.. When !e+-r,t,e!
are orrowed d,re+t*. and !o*d !hort, the net ,nve!tment I*on2! m,n-! !hort!K ,! !hown 1or the a00*,+a*e
+ate2or./! avera2e ,nve!tment.
5. The 1ore2o,n2 ta*e ha! on*. *,m,ted -!e. The re!-*t! a00*,+a*e to ea+h +ate2or. are dom,nated . one
or two ,nve!tment!. The. do not re0re!ent a +o**e+t,on o1 2reat 8-ant,t,e! o1 !ta*e data Imorta*,t. rate!
o1 a** Amer,+an ma*e! or !ometh,n2 o1 the !ortK 1rom wh,+h +on+*-!,on! +an e drawn and 0roBe+t,on!
made. &n!tead, the. re0re!ent ,n1re8-ent, non4homo2eneo-! 0henomena *ead,n2 to ver. tentat,ve
!-22e!t,on! re2ard,n2 var,o-! +o-r!e! o1 a+t,on and are !o -!ed . -!.
9. F,na**., the!e +a*+-*at,on! are not made w,th the !ame *ov,n2 +are we a00*. to +o-nt,n2 the mone. and
are !-Be+t to 0o!!,*e +*er,+a* or mathemat,+a* error !,n+e the. are not ent,re*. !e114+he+",n2.
$ontro*!
Overa**, the +ontro**ed +om0an,e! t-rned ,n a de+ent 0er1orman+e d-r,n2 199;. %,ver!,1,ed Reta,*,n2 $om0an.
&n+. I;0= ownedK and Ber"!h,re @athawa. &n+. I70= ownedK had +om,ned a1ter4ta5 earn,n2! o1 over H5
m,**,on.
(art,+-*ar*. o-t!tand,n2 0er1orman+e! were t-rned ,n . A!!o+,ated $otton #ho0!, a !-!,d,ar. o1 %R$ r-n .
Ben Ro!ner, and Nat,ona* &ndemn,t. $om0an., a !-!,d,ar. o1 B4@ r-n . >a+" R,n2wa*t. Both o1 the!e
+om0an,e! earned ao-t 20= on +a0,ta* em0*o.ed ,n the,r -!,ne!!e!. Amon2 Fort-ne/! E500F Ithe *ar2e!t
man-1a+t-r,n2 ent,t,e! ,n the +o-ntr., !tart,n2 w,th )enera* 'otor!K, on*. :7 +om0an,e! a+h,eved th,! 1,2-re ,n
1997, and o-r o.! o-t!hone !-+h m,*d*. etter4"nown I-t not etter a00re+,atedK +om0an,e! a! &B', )enera*
E*e+tr,+, )enera* 'otor!, (ro+ter N )am*e, %-(ont, $ontro* %ata, @ew*ett4(a+"ard, et+...
& !t,** !omet,me! 2et +omment! 1rom 0artner! *,"e3 6#a., Ber"!h,re ,! -0 1o-r 0o,nt! 4 that/! 2reatS6 or 6What/!
ha00en,n2 to -!, Ber"!h,re wa! down three *a!t wee"M6 'ar"et 0r,+e ,! ,rre*evant to -! ,n the va*-at,on o1 o-r
+ontro**,n2 ,ntere!t!. We va*-ed B4@ at 25 at .earend 1997 when the mar"et wa! ao-t 20 and :1 at .earend
199; when the mar"et wa! ao-t :7. We wo-*d have done the !ame th,n2 ,1 the mar"et! had een 15 and 50
re!0e+t,ve*.. I6(r,+e ,! what .o- 0a.. va*-e ,! what .o- 2et6K. We w,** 0ro!0er or !-11er ,n +ontro**ed
,nve!tment! ,n re*at,on to the o0erat,n2 0er1orman+e! o1 o-r -!,ne!!e! 4 we w,** not attem0t to 0ro1,t . 0*a.,n2
var,o-! 2ame! ,n the !e+-r,t,e! mar"et!.
)enera*! 4(r,vate Owner
Over the .ear! th,! ha! een o-r e!t +ate2or., mea!-red . avera2e ret-rn, and ha! a*!o ma,nta,ned . 1ar the
e!t 0er+enta2e o1 0ro1,ta*e tran!a+t,on!. Th,! a00roa+h wa! the wa. & wa! ta-2ht the -!,ne!!, and ,t 1ormer*.
126
a++o-nted 1or a *ar2e 0ro0ort,on o1 a** o-r ,nve!tment ,dea!. O-r tota* ,nd,v,d-a* 0ro1,t! ,n th,! +ate2or. d-r,n2
the twe*ve .ear B(L h,!tor. are 0roa*. 1,1t. t,me! or more o-r tota* *o!!e!. The +a!h re2,!ter rea**. ran2 on
one !,m0*e ,nd-!tr. ,dea I,m0*emented ,n !evera* wa.!K ,n th,! area ,n 199;. We even re+e,ved a !-!tant,a* 1ee
I,n+*-ded ,n Other &n+ome ,n the a-d,tK 1or !ome wor" ,n th,! 1,e*d.
O-r tota* ,nve!tment ,n th,! +ate2or. Iwh,+h ,! where & 1ee* . 1ar the 2reate!t +erta,nt. re2ard,n2 +on!,!tent*.
de+ent re!-*t!K ,! 0re!ent*. -nder H2 m,**,on and & have noth,n2 at a** ,n the ho00er to o*!ter th,!. What +ame
thro-2h *,"e the >ohn!town 1*ood ,n 199; *oo"! more *,"e a *ea". 1a-+et ,n A*toona 1or 1999.
)enera*! 4 Re*at,ve*. Underva*-ed
Th,! +ate2or. 0rod-+ed ao-t two4th,rd! o1 the overa** 2a,n ,n 1999 and 1997 +om,ned. & ment,oned *a!t .ear
that the 2reat two4.ear 0er1orman+e here had *ar2e*. +ome 1rom one ,dea. & a*!o !a,d, 6We have noth,n2 ,n th,!
2ro-0 remote*. a00roa+h,n2 the !,<e or 0otent,a* wh,+h 1ormer*. e5,!ted ,n th,! ,nve!tment.F &t 2,ve! me 2reat
0*ea!-re to anno-n+e that th,! !tatement wa! a!o*-te*. +orre+t. &t 2,ve! me !omewhat *e!! 0*ea!-re to anno-n+e
that ,t m-!t e re0eated th,! .ear.
Wor"o-t!
Th,! +ate2or., wh,+h wa! a d,!a!ter ,n 1997, d,d we** d-r,n2 199;. O-r re*at,ve*. heav. +on+entrat,on ,n B-!t a
1ew !,t-at,on! 0er .ear I!ome o1 the *ar2e ar,tra2e ho-!e! ma. e+ome ,nvo*ved ,n 1,1t. or more wor"o-t! 0er
ann-mK 2,ve! more var,at,on ,n .ear*. re!-*t! than an a+ro!!4the4oard a00roa+h. & 1ee* the avera2e 0ro1,ta,*,t.
w,** e a! 2ood w,th o-r 0o*,+. and 199; ma"e! me 1ee* etter ao-t that +on+*-!,on than 1997 d,d.
&t !ho-*d a2a,n e !tated that o-r re!-*t! ,n the Wor"o-t area Ia! we** a! ,n other +ate2or,e!K are !omewhat
-nder!tated +om0ared to the more +ommon method o1 determ,n,n2 re!-*t! +om0-ted on an ,n,t,a* a!e 1,2-re
and -t,*,<,n2 orrowed mone. Iwh,+h ,! o1ten a !en!,*e 0art o1 the Wor"o-t -!,ne!!K.
QQQQQQQQQQQQQQQQQQQQQQQQQQQQQQ
& +an/t em0ha!,<e too !tron2*. that the 8-a*,t. and 8-ant,t. o1 ,dea! ,! 0re!ent*. at an a** t,me *ow 4 the 0rod-+t
o1 the 1a+tor! ment,oned ,n m. O+toer 9th, 1997 *etter, wh,+h have *ar2e*. een ,nten!,1,ed !,n+e then.
#omet,me! & 1ee* we !ho-*d have a 0*a8-e ,n o-r o11,+e *,"e the one at the head8-arter! o1 Te5a! &n!tr-ment! ,n
%a**a! wh,+h read!3 EWe don/t e*,eve ,n m,ra+*e!, we re*. on them.F &t ,! 0o!!,*e 1or an o*d, overwe,2ht a**
0*a.er, who!e *e2! and att,n2 e.e are 2one, to ta2 a 1a!t a** on the no!e 1or a 0,n+h4h,t home r-n, -t .o- don/t
+han2e .o-r *,ne4-0 e+a-!e o1 ,t.
We have a n-mer o1 ,m0ortant ne2at,ve! o0erat,n2 on o-r 1-t-re and, wh,*e the. !ho-*dn/t add -0 to 1-t,*,t.,
the. +erta,n*. don/t add -0 to more than an avera2e o1 8-,te moderate 0ro1,ta,*,t..
'emora,*,a
A! one o1 m. o*der 1r,end! !a.!, ENo!ta*2,a B-!t ,!n/t what ,t -!ed to e.F Let/! ta"e a !ta at ,t, an.wa..
B-11ett A!!o+,ate!, Ltd., the ,n,t,a* 0rede+e!!or 0artner!h,0, wa! 1ormed 'a. 5, 1959 w,th !even *,m,ted
0artner! I1o-r 1am,*., three +*o!e 1r,end!K, +ontr,-t,n2 H105,000, and the )enera* (artner 0-tt,n2 h,! mone.
where h,! mo-th wa! . ,nve!t,n2 H100. Two add,t,ona* !,n2*e41am,*. *,m,ted 0artner!h,0! were 1ormed d-r,n2
1959, !o that on >an-ar. 1, 1957 +om,ned net a!!et! were H:0:,729. %-r,n2 1957, we had a 2a,n o1 H:1,915.97,
*ead,n2 to the 10.?= 1,2-re !hown on 0a2e one. %-r,n2 199; & wo-*d 2-e!! that the New Gor" #to+" E5+han2e
127
wa! o0en aro-nd 1,200 ho-r!, 2,v,n2 -! a 2a,n o1 ao-t H::,000 0er ho-r I!ort o1 ma"e! .o- w,!h the. had
!ta.ed w,th the 541P2 ho-r, 5 da. wee", doe!n/t ,tK, or ro-2h*. the !ame a! the 1-** .ear 2a,n ,n 1957.
On >an-ar. 1, 1992 we +on!o*,dated the 0rede+e!!or *,m,ted 0artner!h,0! moved o-t o1 the edroom and h,red
o-r 1,r!t 1-**4t,me em0*o.ee!. Net a!!et! at that t,me were H7,17;,500. From that 0o,nt to o-r 0re!ent net a!!et!
o1 H10?,?29,?:1 we have added one 0er!on to the 0a.ro**. #,n+e 199: IA!!et! H9,?05,?00K rent ha! 2one 1rom
H:,9?7 to H5,;2: IBen Ro!ner wo-*d never have 1or2,ven me ,1 & had !,2ned a 0er+enta2e *ea!eK trave* 1rom
H:,209 to H:,90:, and d-e! and !-!+r,0t,on! 1rom H900 to H99?. &1 one o1 (ar",n!on/! Law! ,! o0erat,n2, at
*ea!t the !,t-at,on ha!n/t 2otten +om0*ete*. o-t o1 +ontro*.
&n ma",n2 o-r retro!0e+t,ve !-rve. o1 o-r 1,nan+,a* a!!et!, o-r +on+*-!,on need not 0ara**e* that o1 ).0!. Ro!e
Lee who o0,ned, when rev,ew,n2 her 0h.!,+a* a!!et! on her 1,1t.41,1th ,rthda.3 E& have ever.th,n2 & had twent.
.ear! a2o 4 ,t/! B-!t that ,t/! a** *ower.F
',!+e**aneo-!
A*tho-2h the ,nve!tment env,ronment ,! d,11,+-*t, the o11,+e env,ronment ,! !-0er. W,th %onna, )*ad.!, B,**
and >ohn, we have an or2an,<at,on that 1-n+t,on! !0eed,*., e11,+,ent*. and 0*ea!ant*.. The. are the e!t.
The o11,+e 2ro-0, a*on2 w,th !0o-!e! Ione a0,e+e 4 & !t,** haven/t 1,2-red o-t how & !ho-*d hand*e that 0*-ra*K and
+h,*dren have over H27 m,**,on ,nve!ted ,n B(L on >an-ar. 1, 1999. A!!orted !,<e! and !ha0e! o1 a-nt!, -n+*e!,
0arent!, ,n4*aw!, rother!, !,!ter! and +o-!,n! ma"e the B(L memer!h,0 *,!t read *,"e EO-r $rowdF 4 wh,+h, !o
1ar a! & am +on+erned, ,! e5a+t*. what ,t ,!.
W,th,n a 1ew da.!, .o- w,** re+e,ve3
1. A ta5 *etter 2,v,n2 .o- a** B(L ,n1ormat,on needed 1or .o-r 199; 1edera* ,n+ome ta5 ret-rn. Th,! *etter
,! the on*. ,tem that +o-nt! 1or ta5 0-r0o!e!.
2. An a-d,t 1rom (eat 'arw,+". ',t+he** N $o. Ithe. have a2a,n done an e5+e**ent BoK 1or 199;, !ett,n2
1orth the o0erat,on! and 1,nan+,a* 0o!,t,on o1 B(L, a! we** a! .o-r own +a0,ta* a++o-nt.
:. A *etter !,2ned . me !ett,n2 1orth the !tat-! o1 .o-r B(L ,ntere!t on >an-ar. 1, 1999. Th,! ,! ,dent,+a*
w,th the 1,2-re! deve*o0ed ,n the a-d,t.
Let me "now ,1 an.th,n2 ,n th,! *etter or that o++-r! d-r,n2 the .ear need! +*ar,1.,n2. '. ne5t *etter w,** e
ao-t >-*. 10
th
, !-mmar,<,n2 the 1,r!t ha*1 o1 th,! .ear.
$ord,a**.,
Warren E. B-11ett
WEBP2*"
128
BUFFETT (ARTNER#@&(. LT%.
910 A&EW&T (LAOA
O'A@A, NEBRA#AA 9;1:1
TELE(@ONE 0?24?110
'a. 29th, 1999
To '. (artner!3
Ao-t e,2hteen month! a2o & wrote to .o- re2ard,n2 +han2ed env,ronmenta* and 0er!ona* 1a+tor! +a-!,n2 me to
mod,1. o-r 1-t-re 0er1orman+e oBe+t,ve!.
The ,nve!t,n2 env,ronment & d,!+-!!ed at that t,me Iand on wh,+h & have +ommented ,n var,o-! other *etter! ha!
2enera**. e+ome more ne2at,ve and 1r-!trat,n2 a! t,me ha! 0a!!ed. 'a.e & am mere*. !-11er,n2 1rom a *a+" o1
menta* 1*e5,,*,t.. IOne o!erver +omment,n2 on !e+-r,t. ana*.!t! over 1ort. !tated3 EThe. "now too man.
th,n2! that are no *on2er tr-e.FK
@owever, ,t !eem! to me that3 I1K o00ort-n,t,e! 1or ,nve!tment that are o0en to the ana*.!t who !tre!!e!
8-ant,tat,ve 1a+tor! have v,rt-a**. d,!a00eared, a1ter rather !tead,*. dr.,n2 -0 over the 0a!t twent. .ear!7 I2K o-r
H100 m,**,on o1 a!!et! 1-rther e*,m,nate! a *ar2e 0ort,on o1 th,! !eem,n2*. arren ,nve!tment wor*d, !,n+e
+omm,tment! o1 *e!! than ao-t H: m,**,on +annot have a rea* ,m0a+t on o-r overa** 0er1orman+e, and th,!
v,rt-a**. r-*e! o-t +om0an,e! w,th *e!! than ao-t H100 m,**,on o1 +ommon !to+" at mar"et va*-e7 and I:K a
!we**,n2 ,ntere!t ,n ,nve!tment 0er1orman+e ha! +reated an ,n+rea!,n2*. !hort4term or,ented and I,n m. o0,n,onK
more !0e+-*at,ve mar"et.
The O+toer 9
th
, 1997 *etter !tated that 0er!ona* +on!,derat,on! were the mo!t ,m0ortant 1a+tor amon2 tho!e
+a-!,n2 me to mod,1. o-r oBe+t,ve!. & e50re!!ed a de!,re to e re*,eved o1 the I!e*14,m0o!edK ne+e!!,t. o1
1o+-!,n2 100= on B(L. & have 1*-n"ed th,! te!t +om0*ete*. d-r,n2 the *a!t e,2hteen month!. The *etter !a,d3 &
ho0e *,m,ted oBe+t,ve! w,** ma"e 1or more *,m,ted e11ort. &t ha!n/t wor"ed o-t that wa.. A! *on2 a! & am Eon
!ta2eF, 0-*,!h,n2 a re2-*ar re+ord and a!!-m,n2 re!0on!,,*,t. 1or mana2ement o1 what amo-nt! to v,rt-a**.
100= o1 the net worth o1 man. 0artner!, & w,** never e a*e to 0-t !-!ta,ned e11ort ,nto an. non4B(L a+t,v,t.. &1
& am 2o,n2 to 0art,+,0ate 0-*,+*.. & +an/t he*0 e,n2 +om0et,t,ve. & "now & don/t want to e tota**. o++-0,ed w,th
o-t40a+,n2 an ,nve!tment ra,t a** m. *,1e. The on*. wa. to !*ow down ,! to !to0.
There1ore, e1ore .earend. & ,ntend to 2,ve a** *,m,ted 0artner! the re8-,red 1orma* not,+e o1 m. ,ntent,on to
ret,re. There are, o1 +o-r!e, a n-mer o1 ta5 and *e2a* 0ro*em! ,n +onne+t,on w,th *,8-,dat,n2 the (artner!h,0,
-t overa**, & am +on+erned w,th wor",n2 o-t a 0*an that atta,n! the 1o**ow,n2 oBe+t,ve!3
1. The mo!t ,m0ortant ,tem ,! that & have an a*ternat,ve re2ard,n2 mone. mana2ement to !-22e!t to the
man. 0artner! who do not want to hand*e th,! them!e*ve!. #ome 0artner! o1 +o-r!e, have a*ternat,ve! o1
the,r own ,n wh,+h the. have +on1,den+e and 1,nd 8-,te a++e0ta*e. To the other!, however, & w,** not
hand over the,r mone. w,th a 62ood *-+"6. & ,ntend to !-22e!t an a*ternat,ve mone. mana2er to whom &
w,** entr-!t 1-nd! o1 m. re*at,ve! and other! 1or whom & have *,1et,me 1,nan+,a* re!0on!,,*,t.. Th,!
mana2er ha! ,nte2r,t. and a,*,t. and w,** 0roa*. 0er1orm a! we** or etter than & wo-*d ,n the 1-t-re
Ia*tho-2h nowhere +*o!e to what he or & have a+h,eved ,n the 0a!tK. @e w,** e ava,*a*e to an. 0artner,
!o that no m,n,m-m !,<e 1or a++o-nt! w,** +a-!e an. o1 .o- a 0ro*em. & ,ntend, ,n the 1-t-re, to "ee0 ,n
2enera* to-+h w,th what he ,! do,n2, -t on*. on an ,n1re8-ent a!,! w,th an. adv,+e on m. 0art *ar2e*.
*,m,ted to a ne2at,ve t.0e.
2. & want a** 0artner! to have the o0t,on o1 re+e,v,n2 +a!h and 0o!!,*. read,*. mar"eta*e !e+-r,t,e! Ithere
w,** 0roa*. e on*. one where th,! w,** a00*.K where & *,"e oth the 0ro!0e+t! and 0r,+e -t wh,+h
129
0artner! w,** e a*e to 1ree*. +onvert to +a!h ,1 the. w,!h.
:. @owever, & a*!o want a** 0artner! to have the o0t,on o1 ma,nta,n,n2 the,r 0ro0ort,ona* ,ntere!t! ,n o-r
two +ontro**ed +om0an,e! I%,ver!,1,ed Reta,*,n2 $om0an. &n+. and Ber"!h,re @athawa. &n+.K and one
other !ma** 6re!tr,+ted6 ho*d,n2. Be+a-!e the!e !e+-r,t,e! w,** e va*-ed -n,*atera**. . me at 1a,r va*-e,
& 1ee* ,t ,! e!!ent,a* that, ,1 .o- w,!h, .o- +an ma,nta,n .o-r 0ro0ort,onate ,ntere!t at !-+h va*-at,on.
@owever, the!e !e+-r,t,e! are not 1ree*. mar"eta*e Ivar,o-! #E$ re!tr,+t,on! a00*. to E+ontro*F
!to+" and non4re2,!tered !to+"K and the. w,** 0roa*. e oth non4tran!1era*e and non4,n+ome
40rod-+,n2 1or a +on!,dera*e 0er,od o1 t,me. There1ore, & want .o- to e a*e to 2o e,ther wa. ,n o-r
*,8-,dat,on 4 e,ther !t,+" w,th the re!tr,+ted !e+-r,t,e! or ta"e +a!h e8-,va*ent. & !tron2*. *,"e a** o1 the
0eo0*e r-nn,n2 o-r +ontro**ed -!,ne!!e! IBo,ned now . the &**,no,! Nat,ona* Ban" and Tr-!t $om0an.
o1 Ro+"1ord, &**,no,!, a H100 m,**,on 0*-!, e5treme*. we**4r-n an", 0-r+ha!ed . Ber"!h,re @athawa.
ear*,er th,! .earK, and want the re*at,on!h,0 to e *,1e *on2. & +erta,n*. have no de!,re to !e** a 2ood
+ontro**ed -!,ne!! r-n . 0eo0*e & *,"e and adm,re, mere*. to ota,n a 1an+. 0r,+e. @owever, !0e+,1,+
+ond,t,on! ma. +a-!e the !a*e o1 one o0erat,n2 -n,t at !ome 0o,nt.
& e*,eve we w,** have a *,8-,dat,on 0ro2ram wh,+h w,** a++om0*,!h the aove oBe+t,ve!. O-r a+t,v,t,e! ,n th,!
re2ard !ho-*d +a-!e no +han2e ,n .o-r ta5 0*ann,n2 1or 1999.
One 1,na* oBe+t,ve, & wo-*d *,"e ver. m-+h to a+h,eve I-t wh,+h B-!t ,!n/t 2o,n2 to ha00enK ,! to 2o o-t w,th a
an2. & hate to end w,th a 0oor .ear, -t we are 2o,n2 to have one ,n 1999. '. e!t 2-e!! ,! that at .earend,
a**ow,n2 1or a !-!tant,a* ,n+rea!e ,n va*-e o1 +ontro**ed +om0an,e! Ia2a,n!t wh,+h a** 0artner! e5+e0t me w,**
have the o0t,on o1 ta",n2 +a!hK, we w,** !how a rea"even re!-*t 1or 1999 e1ore an. month*. 0a.ment! to
0artner!. Th,! w,** e tr-e even ,1 the mar"et !ho-*d advan+e !-!tant,a**. etween now and .earend, !,n+e we
w,** not e ,n an. ,m0ortant 0o!,t,on wh,+h w,** e50o!e -! to m-+h -0!,de 0otent,a*.
O-r e50er,en+e ,n wor"o-t! th,! .ear ha! een atro+,o-! 4 d-r,n2 th,! 0er,od & have 1e*t *,"e the ,rd that
,nadvertent*. 1*ew ,nto the m,dd*e o1 a adm,nton 2ame. We are not a*one ,n !-+h e50er,en+e, -t ,t +ame at a
t,me when we were toward the -00er *,m,t o1 what ha! een o-r h,!tor,+a* ran2e o1 0er+enta2e +omm,tment ,n
th,! +ate2or..
%o+-ment,n2 one/! oner! ,! -n0*ea!ant -!,ne!!. & 1,nd 6!e*e+t,ve re0ort,n26 even more d,!ta!te1-*. O-r 0oor
e50er,en+e th,! .ear ,! 100= m. 1a-*t. &t d,d not re1*e+t ad *-+", -t rather an ,m0ro0er a!!e!!ment o1 a ver.
1a!t4deve*o0,n2 2overnmenta* trend. (arado5,+a**., & have *on2 e*,eved the 2overnment !ho-*d have een do,n2
I,n term! o1 the 0ro*em atta+"ed J not ne+e!!ar,*. the mean! -t,*,<edK what ,t 1,na**. d,d 4 ,n other word!, on an
overa** a!,!, & e*,eve the 2enera* 2oa* o1 the a+t,v,t. wh,+h ha! +o!t -! !-!tant,a* mone. ,! !o+,a**. de!,ra*e
and have !o 0rea+hed 1or !ome t,me. Neverthe*e!!, & d,dn/t th,n" ,t wo-*d ha00en. & never e*,eve ,n m,5,n2 what
& th,n" !ho-*d ha00en I!o+,a**.K w,th what & th,n" w,** ha00en ,n ma",n2 de+,!,on! 4 ,n th,! +a!e, we wo-*d e
!ome m,**,on! etter o11 ,1 & had.
R-,te 1ran"*., ,n !0,te o1 an. 1a+tor! !et 1orth on the ear*,er 0a2e!. & wo-*d +ont,n-e to o0erate the (artner!h,0 ,n
1970, or even 1971, ,1 & had !ome rea**. 1,r!t +*a!! ,dea!. Not e+a-!e & want to, -t !,m0*. e+a-!e & wo-*d !o
m-+h rather end w,th a 2ood .ear than a 0oor one. @owever. & B-!t don/t !ee an.th,n2 ava,*a*e that 2,ve! an.
rea!ona*e ho0e o1 de*,ver,n2 !-+h a 2ood .ear and & have no de!,re to 2ro0e aro-nd, ho0,n2 to 62et *-+".6 w,th
other 0eo0*e/! mone.. & am not att-ned to th,! mar"et env,ronment and & don/t want to !0o,* a de+ent re+ord .
tr.,n2 to 0*a. a 2ame & don/t -nder!tand B-!t !o & +an 2o o-t a hero.
There1ore, we w,** e *,8-,dat,n2 ho*d,n2! thro-2ho-t the .ear, wor",n2 toward a re!,d-a* o1 the +ontro**ed
+om0an,e!, the one 6,nve!tment *etter6 !e+-r,t., the one mar"eta*e !e+-r,t. w,th 1avora*e *on24term 0ro!0e+t!,
130
and the m,!+e**aneo-! 6!t-!6, et+. o1 !ma** tota* va*-e wh,+h w,** ta"e !evera* .ear! to +*ean -0 ,n the Wor"o-t
+ate2or..
& have wr,tten th,! *etter a *,tt*e ear*. ,n *,e- o1 the m,d4.ear *etter. On+e & made a de+,!,on, & wanted .o- to
"now. & a*!o wanted to e ava,*a*e ,n Omaha 1or a 0er,od a1ter .o- re+e,ved th,! *etter to +*ear -0 an.th,n2 that
ma. e +on1-!,n2 ,n ,t. &n >-*., & e50e+t to e ,n $a*,1orn,a.
#ome o1 .o- are 2o,n2 to a!", 6What do .o- 0*an to doM6 & don/t have an an!wer to that 8-e!t,on. & do "now that
when & am 90, & !ho-*d e attem0t,n2 to a+h,eve d,11erent 0er!ona* 2oa*! than tho!e wh,+h had 0r,or,t. at a2e 20.
There1ore, -n*e!! & now d,vor+e m.!e*1 1rom the a+t,v,t. that ha! +on!-med v,rt-a**. a** o1 m. t,me and ener2,e!
d-r,n2 the 1,r!t e,2hteen .ear! o1 m. ad-*t *,1e, & am -n*,"e*. to deve*o0 a+t,v,t,e! that w,** e a00ro0r,ate to new
+,r+-m!tan+e! ,n !-!e8-ent .ear!.
We w,** have a *etter o-t ,n the Fa**, 0roa*. O+toer, e*aorat,n2 on the *,8-,dat,on 0ro+ed-re, the ,nve!tment
adv,!or !-22e!t,on, et+Y
$ord,a**.,
Warren E. B-11ett
WEBP2*"
131
BUFFETT (ARTNER#@&(. LT%.
910 A&EW&T (LAOA
O'A@A, NEBRA#AA 9;1:1
TELE(@ONE 0?24?110
O+toer 9th, 1999
To '. (artner!3
@ere ,! m. 0re!ent e!t,mate o1 the B(L +a*endar 1or the month! to +ome3
I1K Th,! *etter 4 to te** .o- !ometh,n2 o1 B,** R-ane, the mone. mana2er w,th,n m. "now*ed2e who ran"!
the h,2he!t when +om,n,n2 the 1a+tor! o1 ,nte2r,t., a,*,t. and +ont,n-ed ava,*a,*,t. to a** 0artner!. &
a*!o want to +omment -0on the 0re!ent ran2e o1 e50e+tat,on! ,nvo*ved ,n de+,d,n2 on a ond4!to+" m,5.
I2K Late Novemer 4 the re8-,red th,rt. da.! 1orma* not,+e o1 m. ,ntent to ret,re 1rom the (artner!h,0 at the
end o1 the .ear.
I:K Ear*. %e+emer 4 a 0a+"a2e o1 0-*,+*. ava,*a*e mater,a*, a! we** a! !ome 2enera* +omment! . me
re*at,n2 to o-r +ontro**ed +om0an,e!. Ber"!h,re @athawa. &n+. Iown,n2 the te5t,*e -!,ne!!, &**,no,!
Nat,ona* Ban" and Tr-!t $om0an. o1 Ro+"1ord, &**,no,!, Nat,ona* &ndemn,t. $om0an. and Nat,ona*
F,re and 'ar,ne &n!-ran+e $om0an. and #-n New!0a0er!K and %,ver!,1,ed Reta,*,n2 $om0an. Iown,n2
@o+h!+h,*d, Aohn N $o. and A!!o+,ated $otton #ho0!K. & want .o- to have am0*e t,me to !t-d. the
mater,a* re*at,n2 to !-+h +om0an,e! e1ore .o- ma"e an. de+,!,on to ho*d, !e** or -. !-+h !e+-r,t,e!
a1ter d,!tr,-t,on to .o- ,n ear*. >an-ar.. & w,** !o*,+,t wr,tten 8-e!t,on! 1rom 0artner! I& don/t want to
ta*" to .o- ,nd,v,d-a**. ao-t !-+h +om0an,e!, a! & want a** 0artner! to ota,n e5a+t*. the !ame
,n1ormat,onK and then have a 1-rther ma,*,n2 *ate ,n %e+emer, 2,v,n2 a** 8-e!t,on! re+e,ved re*at,n2 to
the!e +om0an,e! a*on2 w,th m. an!wer!, ,1 0o!!,*e. & !t,** ant,+,0ate hav,n2 a 0*an ena*,n2 0artner! to
0rom0t*. +onvert !-+h +ontro**ed +om0an. ho*d,n2! to +a!h, ,1 the. w,!h.
I?K Ao-t >an-ar. 5th 4 IaK a +a!h d,!tr,-t,on amo-nt,n2 to at *ea!t 59= I0roa*. more 4 de0end,n2 -0on
what 0er+enta2e o1 o-r rema,n,n2 ho*d,n2! are !o*d e1ore .earendK o1 .o-r >an-ar. 1, 1999 +a0,ta*, *e!!
an. d,!tr,-t,on! Ithe re2-*ar month*. 0a.ment! man. o1 .o- re+e,veK or orrow,n2! . .o- d-r,n2
1999, IK .o-r 0ro0ort,ona* !hare o1 o-r ho*d,n2! ,n %,ver!,1,ed Reta,*,n2 $om0an. &n+. and Ber"!h,re
@athawa. &n+. & wh,+h, ,1 .o- d,!0o!e o1 them, w,** r,n2 :0= 4 :5= Im. e!t,mate o1 va*-e w,** e
made at .earendK o1 .o-r >an-ar. 1, 1999 +a0,ta*.
We ma. ma"e !-!tant,a* add,t,ona* !a*e! e1ore .earend 4 ,1 !o, the ear*. >an-ar. +a!h d,!tr,-t,on w,**
e !omewhat *ar2er than the 59= ment,oned aove. &1 we don/t, !-+h !a*e! w,** e made d-r,n2 the 1,r!t
ha*1 o1 1970 and an ,nter,m d,!tr,-t,on made. Re!,d-a* a!!et! w,** e !o*d at a00ro0r,ate t,me! and &
e*,eve not more than 10= o1 o-r 0re!ent a!!et va*-e w,** rema,n a1ter >-ne :0
th
, 1970 0end,n2 a 1,na*
d,!tr,-t,on when a** a!!et! and *,a,*,t,e! have een +*eaned -0.
Un*e!! there ,! a 1-rther !-!tant,a* de+*,ne ,n the mar"et. & !t,** e50e+t ao-t a rea"even 0er1orman+e
e1ore an. month*. 0a.ment! 1or 1999. We were *-+". 4 ,1 we had not een ,n *,8-,dat,on th,! .ear, o-r
re!-*t! wo-*d have een !,2n,1,+ant*. wor!e. &dea! that *oo"ed 0otent,a**. ,ntere!t,n2 on a 6+ont,n-,n26
a!,! have on a*an+e 0er1ormed 0oor*. to date. We have on*. two ,tem! o1 rea* !,<e *e1t 4 one we are
!e**,n2 a! & wr,te th,! and the other ,! a ho*d,n2 o1 *,m,ted mar"eta,*,t. re0re!ent,n2 ao-t 741P2= o1 the
o-t!tand,n2 !to+" o1 B*-e $h,0 #tam0! wh,+h we ma. !e** v,a a re2,!tered 0-*,+ o11er,n2 aro-nd
.earend, de0end,n2 -0on mar"et +ond,t,on! and other 1a+tor!.
132
(5) 'ar+h 1!t. 1970 4 >ohn @ard,n2 e50e+t! to *eave B-11ett (artner!h,0. Ltd. and o0en a ran+h o11,+e ,n
Omaha 1or R-ane, $-nn,11 N #t,re!. B,** #+ott and & w,** e ava,*a*e at B(L o11,+e! to he*0 an.
0artner! who are de!,ro-! o1 0-r+ha!,n2 ond!, ta541ree or ta5a*e. We w,** !et a!,de the month o1
'ar+h to ma"e o-r !erv,+e! ava,*a*e w,tho-t +o!t to tho!e who want to a+8-,re ond!. Be+a-!e o1 !ome
e50er,en+e we have ,n ana*.!,! and 0-r+ha!,n2, a! we** a! the a++e!! we have to who*e!a*e mar"et!. &
th,n" ,t ,! *,"e*. we +an !ave mater,a* e*ement! o1 +o!t a! we** a! he*0 !e*e+t etter re*at,ve va*-e! 1or
tho!e o1 .o- who w,!h to ,nve!t ,n ond!. A1ter A0r,* 1
!t
, however, we want to e o-t o1 an. 1orm o1
0er!ona* adv,!or. a+t,v,t..
I9K A1ter 'ar+h, 1970 4 B,** and & w,** +ont,n-e to o11,+e ,n A,ew,t (*a<a, !0end,n2 a ver. m,nor 0ort,on o1
o-r t,me +om0*et,n2 the w,nd4-0 o1 B(L. Th,! w,** mean 1,*,n2 ta5 ret-rn! 1or 1970 and 0roa*. 1971
re!o*v,n2 m,nor a!!et! and *,a,*,t,e! et+.
Now, to B,** R-ane 4 we met ,n Ben )raham/! +*a!! at $o*-m,a Un,ver!,t. ,n 1951 and & have had +on!,dera*e
o00ort-n,t. to o!erve h,! 8-a*,t,e! o1 +hara+ter, tem0erament and ,nte**e+t !,n+e that t,me. &1 #-!,e and & were
to d,e wh,*e o-r +h,*dren are m,nor!, he ,! one o1 three tr-!tee! who have +arte *an+he on ,nve!tment matter! 4
the other two are not ava,*a*e 1or +ont,n-o-! ,nve!tment mana2ement 1or a** 0artner!, *ar2e or !ma**.
There ,! no wa. to e*,m,nate the 0o!!,,*,t. o1 error when B-d2,n2 h-man! 0art,+-*ar*. ,n re2ard to 1-t-re
ehav,or ,n an -n"nown env,ronment. @owever, de+,!,on! have to e made 4 whether a+t,ve*. or 0a!!,ve*. 4 and
& +on!,der B,** to e an e5+e0t,ona**. h,2h 0roa,*,t. de+,!,on on +hara+ter and a h,2h 0roa,*,t. one on
,nve!tment 0er1orman+e. & a*!o +on!,der ,t *,"e*. that B,** w,** +ont,n-e a! a mone. mana2er 1or man. .ear! to
+ome.
B,** ha! re+ent*. 1ormed a New Gor" #to+" E5+han2e 1,rm, R-ane, $-nn,11 N #t,re!, &n+., ;5 Broad #treet, New
Gor", N.G. 1000?, te*e0hone n-mer I212K :??49700. >ohn @ard,n2 0re!ent*. 0*an! to e!ta*,!h an o11,+e 1or the
1,rm ,n Omaha ao-t 'ar+h 1!t, 1970. B,** mana2e! a++o-nt! ,nd,v,d-a**. on a 1ee a!,! and a*!o e5e+-te!
ro"era2e 1or the a++o-nt! 4 0re!ent*. w,th !ome 0ort,on o1 the ro"era2e +omm,!!,on! -!ed to o11!et a 0ort,on
o1 the ,nve!tment adv,!or. 1ee. @,! method o1 o0erat,on a**ow! month*. w,thdrawa*! on a a!,! !,m,*ar to B(L 4
a! a 0er+enta2e o1 +a0,ta* and -nre*ated to rea*,<ed or -nrea*,<ed 2a,n or *o!!. &t ,! 0o!!,*e he ma. 1orm !ome
!ort o1 0oo*ed a++o-nt -t !-+h determ,nat,on! w,** e made etween h,m and tho!e o1 .o- who e*e+t to 2o w,th
h,m. &, o1 +o-r!e, w,** not e ,nvo*ved w,th h,! o0erat,on. & am ma",n2 m. *,!t o1 0artner! ava,*a*e to h,m and
he w,** e wr,t,n2 .o- 1a,r*. !oon re2ard,n2 a tr,0 he 0*an! to ma"e e1ore .earend to Omaha, Lo! An2e*e! and
$h,+a2o, !o that tho!e o1 .o- who w,!h to meet h,m ma. do !o. An. o1 .o- who are 2o,n2 to e ,n New Gor"
d-r,n2 the ne5t 1ew month! +an +onta+t h,m d,re+t*..
B,**/! overa** re+ord ha! een ver. 2ood4avera2,n2 1a,r*. +*o!e to B(L/!, -t w,th +on!,dera*. 2reater var,at,on.
From 195941991 and 1rom 199?4199;, a +om0o!,te o1 h,! ,nd,v,d-a* a++o-nt! avera2ed over ?0= 0er ann-m.
@owever, ,n 1992, -ndo-ted*. !omewhat a! a 0rod-+t o1 the e-0hor,+ e50er,en+e o1 the ear*,er .ear!, he wa!
down ao-t 50=. A! he re4or,ented h,! th,n",n2, 199: wa! ao-t rea"even.
Wh,*e two .ear! ma. !o-nd *,"e a !hort t,me when ,n+*-ded ,n a ta*e o1 0er1orman+e, ,t ma. 1ee* *,"e a *on2
t,me when .o-r net worth ,! down 50=. & th,n" .o- r-n th,! !ort o1 !hort4term r,!" w,th v,rt-a**. an. mone.
mana2er o0erat,n2 ,n !to+"! and ,t ,! a 1a+tor to +on!,der ,n de+,d,n2 the 0ort,on o1 .o-r +a0,ta* to +omm,t to
e8-,t,e!. To date ,n 1999, B,** ,! down ao-t 15=, wh,+h & e*,eve to e 1a,r*. t.0,+a* o1 mo!t mone. mana2er!.
B,**, o1 +o-r!e, ha! not een ,n +ontro* !,t-at,on! or wor"o-t!, wh,+h have -!-a**. tended to moderate the !w,n2!
,n B(L .ear4to4.ear 0er1orman+e. Even e5+*-d,n2 the!e 1a+tor!, & e*,eve h,! 0er1orman+e wo-*d have een
!omewhat more vo*at,*e I-t not ne+e!!ar,*. 0oorer . an. mean!K than m,ne 4 h,! !t.*e ,! d,11erent, and wh,*e
h,! t.0,+a* 0ort1o*,o I-nder mo!t +ond,t,on!K wo-*d tend to have a m,*d over*a0 w,th m,ne, there wo-*d a*wa.!
e ver. !,2n,1,+ant d,11eren+e!.
133
B,** ha! a+h,eved h,! re!-*t! wor",n2 w,th an avera2e o1 H5 to H10 m,**,on. & +on!,der the three mo!t *,"e*.
ne2at,ve 1a+tor! ,n h,! 1-t-re to e3 I1K the 0roa,*,t. o1 mana2,n2 !,2n,1,+ant*. *ar2er !-m! 4 th,! ,! a 0ro*em
.o- are 2o,n2 to have rather 8-,+"*. w,th an. !-++e!!1-* mone. mana2er, and ,t w,** tend to moderate
0er1orman+e7 & e*,eve B,**/! 1,rm ,! now mana2,n2 H20 4H:0 m,**,on and, o1 +o-r!e, the. w,** +ont,n-e to add
a++o-nt!7 I2K the 0o!!,,*,t. o1 B,**/! e+om,n2 too ,nvo*ved ,n the deta,* o1 h,! o0erat,on rather than !0end,n2 a**
o1 h,! t,me !,m0*. th,n",n2 ao-t mone. mana2ement. The 0ro*em! o1 e,n2 the 0r,n+,0a* 1a+tor ,n a NG#E
1,rm a! we** a! hand*,n2 man. ,nd,v,d-a* a++o-nt! +an mean that he, *,"e mo!t ,nve!tment adv,!or!, w,** e
!-Be+t to 0re!!-re! to !0end m-+h o1 h,! t,me ,n a+t,v,t,e! that do noth,n2 to *ead to !-0er,or ,nve!tment
0er1orman+e. &n th,! +onne+t,on, & have a!"ed B,** to ma"e h,! !erv,+e! ava,*a*e to a** B(L 0artner! 4 *ar2e or
!ma** and he w,**, -t & have a*!o to*d h,m he ,! +om0*ete*. a 1ree a2ent ,1 he 1,nd! 0art,+-*ar +*,ent! d,vert,n2
h,m 1rom h,! ma,n Bo7 I:K the h,2h 0roa,*,t. that even e5+e**ent ,nve!tment mana2ement d-r,n2 the ne5t
de+ade w,** on*. 0rod-+e *,m,ted advanta2e! over 0a!!,ve mana2ement. & w,** +omment on th,! e*ow.
The 1,na* 0o,nt re2ard,n2 the ne2at,ve! *,!ted aove ,! that the. are not the !ort o1 drawa+"! *ead,n2 to horr,*e
0er1orman+e, -t more *,"e*. the !ort o1 th,n2! that *ead to avera2e 0er1orman+e. & th,n" th,! ,! the ma,n r,!" .o-
r-n w,th B,** 4 and avera2e 0er1orman+e ,! B-!t not that terr,*e a r,!".
&n re+ommend,n2 B,**, & am en2a2,n2 ,n the !ort o1 a+t,v,t. & have tr,ed to avo,d ,n B(L 0ort1o*,o a+t,v,t,e! 4 a
de+,!,on where there ,! noth,n2 to 2a,n I0er!ona**.K and +on!,dera*e to *o!e. #ome o1 m. 1r,end! who are not ,n
the (artner!h,0 have !-22e!ted that & ma"e no re+ommendat,on !,n+e, ,1 re!-*t! were e5+e**ent ,t wo-*d do me
no 2ood and, ,1 !ometh,n2 went wron2, & m,2ht we** 2et a 0ort,on o1 the *ame. &1 .o- and & had B-!t had a
norma* +ommer+,a* re*at,on!h,0, !-+h rea!on,n2 m,2ht e !o-nd. @owever, the de2ree o1 tr-!t 0artner! have
e5tended to me and the +oo0erat,on man,1e!ted ,n var,o-! wa.! 0re+*-de! !-+h a 6hand! o116 0o*,+.. 'an. o1
.o- are 0ro1e!!,ona* ,nve!tor! or +*o!e thereto and need no adv,+e 1rom me on mana2er! 4 .o- ma. we** do
etter .o-r!e*1. For tho!e 0artner! who are 1,nan+,a**. ,ne50er,en+ed. & 1ee* ,t wo-*d e tota**. -n1a,r 1or me to
a!!-me a 0a!!,ve 0o!,t,on and de*,ver .o- to the mo!t 0er!-a!,ve !a*e!man who ha00ened to +onta+t .o- ear*. ,n
1970.
F,na**., a word ao-t e50e+tat,on!. A de+ade or !o a2o wa! 8-,te w,**,n2 to !et a tar2et o1 ten 0er+enta2e 0o,nt!
0er ann-m etter than the %ow, w,th the e50e+tat,on that the %ow wo-*d avera2e ao-t 7=. Th,! meant an
e50e+tan+. 1or -! o1 aro-nd 17=, w,th w,de var,at,on! and no 2-arantee!, o1 +o-r!e 4 -t, neverthe*e!!, an
e50e+tan+.. Ta541ree ond! at the t,me .,e*ded ao-t :=. Wh,*e !to+"! had the d,!advanta2e o1 ,rre2-*ar
0er1orman+e, overa** the. !eemed m-+h the more de!,ra*e o0t,on. & a*!o !tre!!ed th,! 0re1eren+e 1or !to+"! ,n
tea+h,n2 +*a!!e!, 0art,+,0at,n2 ,n 0ane* d,!+-!!,on!, et+Y
For the 1,r!t t,me ,n m. ,nve!tment *,1et,me. & now e*,eve there ,! *,tt*e +ho,+e 1or the avera2e ,nve!tor etween
0ro1e!!,ona**. mana2ed mone. ,n !to+"! and 0a!!,ve ,nve!tment ,n ond!. &1 +orre+t. th,! v,ew ha! ,m0ortant
,m0*,+at,on!. Let me r,e1*. Iand ,n !omewhat over!,m0*,1,ed 1ormK !et o-t the !,t-at,on a! & !ee ,t3
I1K & am ta*",n2 ao-t the !,t-at,on 1or, !a., a ta50a.er ,n a ?0= Federa* &n+ome Ta5 ra+"et who a*!o ha!
!ome #tate &n+ome Ta5 to 0a.. Lar,o-! +han2e! are e,n2 0ro0o!ed ,n the ta5 *aw!, wh,+h ma.
adver!e*. a11e+t net re!-*t! 1rom 0re!ent*. ta54e5em0t ,n+ome, +a0,ta* 2a,n!, and 0erha0! other t.0e! o1
,nve!tment ,n+ome. 'ore 0ro0o!a*! w,** 0roa*. +ome ,n the 1-t-re. Overa**, & 1ee* !-+h +han2e! over
the .ear! w,** not ne2ate m. re*at,ve e50e+tat,on! ao-t a1ter4ta5 ,n+ome 1rom 0re!ent*. ta541ree ond!
ver!-! +ommon !to+"!, and ma. we** even m,*d*. re,n1or+e them.
I2K & am ta*",n2 ao-t e50e+tat,on! over the ne5t ten .ear! 4 not the ne5t wee"! or month!. & 1,nd ,t m-+h
ea!,er to th,n" ao-t what !ho-*d deve*o0 over a re*at,ve*. *on2 0er,od o1 t,me than what ,! *,"e*. ,n an.
!hort 0er,od. A! Ben )raham !a,d3 E&n the *on2 r-n, the mar"et ,! a we,2h,n2 ma+h,ne 4 ,n the !hort r-n,
a vot,n2 ma+h,ne.F & have a*wa.! 1o-nd ,t ea!,er to eva*-ate we,2ht! d,+tated . 1-ndamenta*! than
vote! d,+tated . 0!.+ho*o2..
134
I:K (-re*. 0a!!,ve ,nve!tment ,n ta541ree ond! w,** now r,n2 ao-t 941P2=. Th,! .,e*d +an e a+h,eved
w,th e5+e**ent 8-a*,t. and *o+"ed -0 1or B-!t ao-t an. 0er,od 1or wh,+h the ,nve!tor w,!he! to +ontra+t.
#-+h +ond,t,on! ma. not e5,!t ,n 'ar+h when B,** and & w,** e ava,*a*e to a!!,!t .o- ,n ond
0-r+ha!e!, -t the. e5,!t toda..
I?K The ten .ear e50e+tat,on 1or +or0orate !to+"! a! a 2ro-0 ,! 0roa*. not etter than 9= overa**. !a. :=
d,v,dend! and 9= 2a,n ,n va*-e. & wo-*d do-t that )ro!! Nat,ona* (rod-+t 2row! more than 9= 0er
ann-m 4 & don/t e*,eve +or0orate 0ro1,t! are *,"e*. to 2row !,2n,1,+ant*. a! a 0er+enta2e o1 )N( 4 and ,1
earn,n2! m-*t,0*,er! don/t +han2e Iand w,th the!e a!!-m0t,on! and 0re!ent ,ntere!t rate! the. !ho-*dn/tK
the a22re2ate va*-at,on o1 Amer,+an +or0orate enter0r,!e !ho-*d not 2row at a *on24term +om0o-nded
rate aove 9= 0er ann-m. Th,! t.0,+a* e50er,en+e ,n !to+"! m,2ht 0rod-+e I1or the ta50a.er de!+r,ed
ear*,erK 14:P?= a1ter ta5 1rom d,v,dend! and ?4:P?= a1ter ta5 1rom +a0,ta* 2a,n, 1or a tota* a1ter4ta5
ret-rn o1 ao-t 941P2=. The 0re4ta5 m,5 etween d,v,dend! and +a0,ta* 2a,n! m,2ht e more *,"e ?= and
5=, 2,v,n2 a !*,2ht*. *ower a1terta5 re!-*t. Th,! ,! not 1ar 1rom h,!tor,+a* e50er,en+e and overa**, &
e*,eve 1-t-re ta5 r-*e! on +a0,ta* 2a,n! are *,"e*. to e !t,11er than ,n the 0a!t.
I5K F,na**., 0roa*. ha*1 the mone. ,nve!ted ,n !to+"! over the ne5t de+ade w,** e 0ro1e!!,ona**.
mana2ed. Th-!, . de1,n,t,on v,rt-a**., the tota* ,nve!tor e50er,en+e w,th 0ro1e!!,ona**. mana2ed
mone. w,** e avera2e re!-*t! Ior 941P2= a1ter ta5 ,1 m. a!!-m0t,on! aove are +orre+tK.
'. B-d2ment wo-*d e that *e!! than 10= o1 0ro1e!!,ona**. mana2ed mone. Iwh,+h m,2ht ,m0*. an
avera2e o1 H?0 ,**,on B-!t 1or th,! !-0er,or !e2mentK hand*ed +on!,!tent*. 1or the de+ade wo-*d avera2e
2 0o,nt! 0er ann-m over 2ro-0 e50e+tan+.. #o4+a**ed 6a22re!!,ve*. r-n6 mone. ,! -n*,"e*. to do
!,2n,1,+ant*. etter than the 2enera* r-n o1 0ro1e!!,ona**. mana2ed mone.. There ,! 0roa*. H50 ,**,on
,n var,o-! 2radat,on! o1 th,! 6a22re!!,ve6 +ate2or. now 4 ma.e 100 t,me! that o1 a de+ade a2o 4 and
H50 ,**,on B-!t +an/t 60er1orm6.
&1 .o- are e5treme*. 1ort-nate and !e*e+t adv,!or! who a+h,eve re!-*t! ,n the to0 1= to 2= o1 the
+o-ntr. I-t who w,** e wor",n2 w,th mater,a* !-m! o1 mone. e+a-!e the. are that 2oodK, & th,n" ,t ,!
-n*,"e*. .o- w,** do m-+h more than ? 0o,nt! 0er ann-m etter than the 2ro-0 e50e+tan+.. & th,n" the
odd! are 2ood that B,** R-ane ,! ,n th,! !e*e+t +ate2or.. '. e!t,mate . there1ore, ,! that over the ne5t
de+ade the re!-*t! o1 rea**. e5+e**ent mana2ement 1or o-r 6t.0,+a* ta50a.er6 a1ter ta5 m,2ht e 14:P?=
1rom d,v,dend! and 74:P?= 1rom +a0,ta* 2a,n. or 9 J1.2= overa**.
I9K The rather !tart*,n2 +on+*-!,on ,! that -nder toda./! h,!tor,+a**. -n-!-a* +ond,t,on!, 0a!!,ve ,nve!tment
,n ta541ree ond! ,! *,"e*. to e 1-**. the e8-,va*ent o1 e50e+tat,on! 1rom 0ro1e!!,ona**. mana2ed mone.
,n !to+"!, and on*. mode!t*. ,n1er,or to e5treme*. we**4mana2ed e8-,t. mone..
I7K A word ao-t ,n1*at,on 4 ,t ha! ver. *,tt*e to do w,th the aove +a*+-*at,on e5+e0t that ,t enter! ,nto the
9= a!!-med 2rowth rate ,n )N( and +ontr,-te! to the +a-!e! 0rod-+,n2 941P2= on ta541ree ond!. &1
!to+"! !ho-*d 0rod-+e ;= a1ter ta5 and ond! ?=, !to+"! are etter to own than ond!, re2ard*e!! o1
whether 0r,+e! 2o -0, down or !,dew,!e. The +onver!e ,! tr-e ,1 ond! 0rod-+e 941P2= a1ter ta5. and
!to+"! 9=. The !,m0*e tr-th, o1 +o-r!e, ,! that the e!t e50e+ta*e a1ter4ta5 rate o1 ret-rn ma"e! the mo!t
!en!e 4 2,ven a r,!,n2, de+*,n,n2 or !ta*e do**ar.
A** o1 the aove !ho-*d e v,ewed w,th a** the !-!0,+,on 0ro0er*. a++orded to a!!e!!ment! o1 the 1-t-re. &t doe!
!eem to me to e the mo!t rea*,!t,+ eva*-at,on o1 what ,! a*wa.! an -n+erta,n 1-t-re 4 & 0re!ent ,t w,th no 2reat
1ee*,n2 re2ard,n2 ,t! a00ro5,mate a++-ra+., -t on*. !o .o- w,** "now what & th,n" at th,! t,me.
Go- w,** have to ma"e .o-r own de+,!,on a! etween ond! and !to+"! and, ,1 the *atter, who adv,!e! .o- on
135
!-+h !to+"!. &n man. +a!e!, & th,n" the de+,!,on !ho-*d *ar2e*. re1*e+t .o-r tan2,*e and ,ntan2,*e
Item0eramenta*K need! 1or re2-*ar,t. o1 ,n+ome and a!en+e o1 *ar2e 0r,n+,0a* 1*-+t-at,on, 0erha0! a*an+ed
a2a,n!t 0!.+h,+ need! 1or !ome e5+,tement and the 1-n a!!o+,ated w,th +ontem0*at,n2 and 0erha0! enBo.,n2
rea**. B-,+. re!-*t!. &1 .o- wo-*d *,"e to ta*" over the 0ro*em w,th me, & w,** e ver. ha00. to he*0.
#,n+ere*.,
Warren E. B-11ett
WEBP2*"
136
BUFFETT (ARTNER#@&(. LT%.
910 A&EW&T (LAOA
O'A@A, NEBRA#AA 9;1:1
TELE(@ONE 0?24?110
%e+emer 5
th
, 1999
To '. (artner!3
Th,! *etter ,! to !-00*. .o- w,th !ome 0-*,!hed ,n1ormat,on re*at,n2 to o-r two +ontro**ed +om0an,e! Iand the,r
1o-r 0r,n+,0a* o0erat,n2 +om0onent!K, a! we** a! to 2,ve .o- m. 2enera* v,ew! re2ard,n2 the,r o0erat,on!. '.
+omment! are not de!,2ned to 2,ve .o- *oad! o1 deta,*ed ,n1ormat,on 0ro!0e+t-!4!t.*e, -t on*. m. 2enera*
6!*ant6 a! & !ee the -!,ne!!e! at th,! t,me.
At .earend, B(L w,** own ;00,000 o1 1,000,000 !hare! o-t!tand,n2 o1 %,ver!,1,ed Reta,*,n2 $om0an.. F,r!t
'anhattan $om0an. and Whee*er, '-n2er N $om0an. w,** ea+h own 100,000 !hare!. %R$ 0rev,o-!*. owned
100= o1 @o+h!+h,*d, Aohn N $om0an. o1 Ba*t,more, and +-rrent*. own! 100= o1 A!!o+,ated Reta,* #tore!
I1ormer*. named A!!o+,ated $otton #ho0!K. On %e+emer 1!t, %R$ !o*d ,t! ent,re ,ntere!t ,n @4A to
#-0ermar"et! )enera* $or0. 1or H5,0?5,205 o1 +a!h 0*-! non4,ntere!t ear,n2 #)$ note! 1or H2 m,**,on d-e 2414
70, and H?,5?0,000 d-e 241471. The 0re!ent va*-e o1 the!e note! a00ro5,mate! H9.0 m,**,on !o, e11e+t,ve*., %R$
re+e,ved ao-t H11 m,**,on on the !a*e. Lar,o-! warrant,e! were made . %R$ ,n +onne+t,on w,th the !a*e, and,
wh,*e we e50e+t no +*a,m! 0-r!-ant to the +ontra+t, a remote +ont,n2ent *,a,*,t. a*wa.! e5,!t! wh,*e warrant,e!
are ,n 1or+e.
A!!o+,ated Reta,* #tore! ha! a net worth o1 ao-t H7.5 m,**,on. &t ,! an e5+e**ent -!,ne!! w,th a !tron2 1,nan+,a*
0o!,t,on, 2ood o0erat,n2 mar2,n! and a re+ord o1 ,n+rea!,n2 !a*e! and earn,n2! ,n re+ent .ear!. La!t .ear, !a*e!
were ao-t H:7.5 m,**,on and net ,n+ome ao-t H1 m,**,on. Th,!
.ear !ho-*d !ee new re+ord! ,n !a*e! and earn,n2!, w,th m. 2-e!! on the *atter to e ,n the area o1 H1.1 m,**,on
a1ter 1-** ta5e!.
%R$ ha! H9.9 m,**,on ,n deent-re! o-t!tand,n2 I0ro!0e+t-! w,th 1-** de!+r,0t,on o1 the -!,ne!! a! o1
%e+emer 1;th, 1997 and the deent-re term! w,** e !ent .o- -0on re8-e!tK wh,+h have one -n-!-a* 1eat-re ,n
that ,1 &, or an ent,t. +ontro**ed . me, ,! not the *ar2e!t !hareho*der o1 %R$, the deent-reho*der! have the r,2ht
to 0re!ent the,r deent-re! 1or 0a.ment . the +om0an. at 0ar.
Th-!, %R$ ha! tan2,*e net a!!et! o1 ao-t H11.50 4 H12.00 0er !hare, an e5+e**ent o0erat,n2 -!,ne!! and
!-!tant,a* 1-nd! ava,*a*e 1or re,nve!tment ,n other o0erat,n2 -!,ne!!e!. On an ,nter,m a!,!, !-+h 1-nd! w,**
e em0*o.ed ,n mar"eta*e !e+-r,t,e!.
Ber"!h,re @athawa. &n+. ha! 9;:,5;2 !hare! o-t!tand,n2, o1 wh,+h B(L own! 991,??1. B4@ ha! three ma,n
o0erat,n2 -!,ne!!e!, the te5t,*e o0erat,on, the ,n!-ran+e o0erat,on I+ond-+ted . Nat,ona* &ndemn,t. $om0an.
and Nat,ona* F,re N 'ar,ne &n!-ran+e $om0an., wh,+h w,** e +o**e+t,ve*. +a**ed the ,n!-ran+e +om0an.K and
the &**,no,! Nat,ona* Ban" and Tr-!t $om0an. o1 Ro+"1ord, &**,no,!. &t a*!o own! #-n New!0a0er! &n+, B*a+"er
(r,nt,n2 $om0an. and 70= o1 )atewa. Underwr,ter!, -t the!e o0erat,on! are not 1,nan+,a**. !,2n,1,+ant
re*at,ve to the tota*.
The te5t,*e o0erat,on 0re!ent*. em0*o.! ao-t H19 0er !hare ,n +a0,ta* and, wh,*e & th,n" ,t ha! made !ome
0ro2re!! re*at,ve to the te5t,*e ,nd-!tr. 2enera**., +annot e B-d2ed a !at,!1a+tor. -!,ne!!. &t! ret-rn on +a0,ta*
ha! not een !-11,+,ent to !-00ort the a!!et! em0*o.ed ,n the -!,ne!! and, rea*,!t,+a**., an ade8-ate ret-rn ha!
*e!! than an even +han+e o1 e,n2 avera2ed ,n the 1-t-re. &t re0re!ent! the e!t !e2ment! o1 the -!,ne!! that
e5,!ted when we 0-r+ha!ed +ontro* 1o-r and one4ha*1 .ear! a2o. $a0,ta* 1rom the other !e2ment! ha! een
137
!-++e!!1-**. rede0*o.ed 4 1,r!t, on an ,nter,m a!,! ,nto mar"eta*e !e+-r,t,e! and, now on a 0ermanent a!,! ,nto
,n!-ran+e and an",n2. & *,"e the te5t,*e o0erat,n2 0eo0*e 4 the. have wor"ed hard to ,m0rove the -!,ne!! -nder
d,11,+-*t +ond,t,on! 4 and, de!0,te the 0oor ret-rn, we e50e+t to +ont,n-e the te5t,*e o0erat,on a! *on2 a! ,t
0rod-+e! near +-rrent *eve*!.
The ,n!-ran+e o0erat,on Io1 wh,+h B4@ own! v,rt-a**. 100=K and the an" Iwhere B4@ own! 97.7=K 0re!ent a
m-+h ha00,er 0,+t-re. Both are 1,r!t4+*a!! -!,ne!!e!, earn,n2 2ood ret-rn! on +a0,ta* and !ta+",n2 -0 we** on
an. a!o*-te or +om0arat,ve ana*.!,! o1 o0erat,n2 !tat,!t,+!. The an" ha! ao-t H17 0er !hare o1 net tan2,*e
a!!et! a00*,+a*e to B4@, and the ,n!-ran+e +om0an. a00ro5,mate*. H15. & wo-*d e!t,mate the,r norma* +-rrent
earn,n2 0ower to e ao-t H? 0er !hare I+om0ared to ao-t H:.?0 1rom o0erat,on! 0ro41orma ,n 199;K, w,th 2ood
0ro!0e+t! 1or 1-t-re 2rowth on the +om,ned H:2 o1 tan2,*e net a!!et! ,n the an" and ,n!-ran+e +om0an..
Add,n2 ,n the te5t,*e -!,ne!! and m,!+e**aneo-! a!!et!, and !-tra+t,n2 0arent +om0an. an" det o1 ao-t H7
m,**,on, 2,ve! a tan2,*e net a!!et va*-e o1 ao-t H?: 0er !hare 1or B4@, or ao-t H?5 !tated oo" va*-e, a**ow,n2
1or the 0rem,-m over tan2,*e a!!et! 0a,d 1or the an".
One +aveat 4 when & ta*" aove o1 tan2,*e net a!!et!. & am va*-,n2 the H75 m,**,on o1 ond! he*d . the
,n!-ran+e +om0an. and an" at amort,<ed +o!t. Th,! ,! ,n a++ord w,th !tandard a++o-nt,n2 0ro+ed-re! -!ed ,n
tho!e ,nd-!tr,e! and a*!o ,n a++ord w,th the rea*,t,e! o1 the,r -!,ne!! o0erat,on! where ,t ,! 8-,te -n*,"e*. that
ond! w,** have to e !o*d e1ore mat-r,t.. At toda./! h,!tor,+a**. *ow ond 0r,+e!, however, o-r ond! have a
mar"et va*-e !-!tant,a**. e*ow +arr.,n2 va*-e, 0roa*. on the order o1 H10 0er !hare o1 B4@ !to+".
Between %R$ and B4@, we have 1o-r ma,n o0erat,n2 -!,ne!!e! w,th three o1 them ,n m. o0,n,on, de1,n,te*.
1,r!t +*a!! . an. o1 the -!-a* !tandard! o1 eva*-at,on. The three e5+e**ent -!,ne!!e! are a** r-n . men over
!,5t. who are *ar2e*. re!0on!,*e 1or -,*d,n2 ea+h o0erat,on 1rom !+rat+h. The!e men are hard wor",n2,
wea*th., and 2ood J e5traord,nar,*. 2ood. The,r a2e ,! a ne2at,ve, -t ,t ,! the on*. ne2at,ve a00*,+a*e to them.
One o1 the rea!on! & am ha00. to have a *ar2e !e2ment o1 m. +a0,ta* ,n B4@ and %R$ ,! e+a-!e we have !-+h
e5+e**ent men ,n +har2e o1 the o0erat,n2 -!,ne!!e!.
We have var,o-! ann-a* re0ort!, a-d,t!, ,nter,m re0ort!, 0ro5. mater,a*! 0ro!0e+t-!e!, et+Y a00*,+a*e to o-r
+ontro* ho*d,n2! and we w,** e 2*ad to !-00*. .o- w,th an. ,tem .o- re8-e!t. & a*!o !o*,+,t .o-r wr,tten
8-e!t,on! and w,** !end to a** 0artner! the 8-e!t,on! and an!wer! !hort*. e1ore .earend. %on/t he!,tate to a!"
an. 8-e!t,on at a** that +ome! to m,nd 4 ,1 ,t ,!n/t +*ear to .o-, ,t 0roa*. ,!n/t +*ear to other! 4 and there ,! no
rea!on 1or an. o1 .o- to e wonder,n2 ao-t !ometh,n2 that & m,2ht +*ear -0.
%R$ and B4@ 0re!ent*. 0a. no d,v,dend! and w,** 0roa*. 0a. e,ther no d,v,dend! or ver. mode!t d,v,dend!
1or !ome .ear! to +ome. There are a n-mer o1 rea!on! 1or th,!. Both 0arent +om0an,e! have orrowed mone. 4
we want to ma,nta,n a 2ood *eve* o1 0rote+t,on 1or de0o!,tor! at the an" and 0o*,+.ho*der! at the ,n!-ran+e
+om0an. 4 !ome o1 the o0erat,n2 +om0an,e! have ver. !at,!1a+tor. wa.! to -t,*,<e add,t,ona* +a0,ta* 4 and we are
ho0e1-* o1 1,nd,n2 new -!,ne!!e! to oth d,ver!,1. and a-2ment o-r earn,n2 0ower.
'. 0er!ona* o0,n,on ,! that the ,ntr,n!,+ va*-e o1 %R$ and B4@ w,** 2row !-!tant,a**. over the .ear!. Wh,*e no
one "now! the 1-t-re, & wo-*d e d,!a00o,nted ,1 !-+h 2rowth wa!n/t at a rate o1 a00ro5,mate*. 10= 0er ann-m.
'ar"et 0r,+e! 1or !to+"! 1*-+t-ate at 2reat am0*,t-de! aro-nd ,ntr,n!,+ va*-e -t, over the *on2 term, ,ntr,n!,+
va*-e ,! v,rt-a**. a*wa.! re1*e+ted at !ome 0o,nt ,n mar"et 0r,+e. Th-!, & th,n" oth !e+-r,t,e! !ho-*d e ver.
de+ent *on24term ho*d,n2! and & am ha00. to have a !-!tant,a* 0ort,on o1 m. net worth ,nve!ted ,n them. Go-
!ho-*d e -n+on+erned ao-t !hort4term 0r,+e a+t,on when .o- own the !e+-r,t,e! d,re+t*., B-!t a! .o- were
-n+on+erned when .o- owned them ,nd,re+t*. thro-2h B(L. & th,n" ao-t them a! -!,ne!!e!, not E!to+"!F, and
,1 the -!,ne!! doe! a** r,2ht over the *on2 term, !o w,** the !to+".
& want to !tre!! that & w,** not e ,n a mana2er,a* or 0artner!h,0 !tat-! w,th .o- re2ard,n2 .o-r 1-t-re ho*d,n2! o1
!-+h !e+-r,t,e!. Go- w,** e 1ree to do what .o- w,!h w,th .o-r !to+" ,n the 1-t-re and !o, o1 +o-r!e, w,** &. &
138
th,n" that there ,! a ver. h,2h 0roa,*,t. that & w,** ma,nta,n m. ,nve!tment ,n %R$ and B4@ 1or a ver. *on2
0er,od, -t & want no ,m0*,ed mora* +omm,tment to do !o nor do !o nor do & w,!h to adv,!e other! over an
,nde1,n,te 1-t-re 0er,od re2ard,n2 the,r ho*d,n2!. The +om0an,e!, o1 +o-r!e, w,** "ee0 a** !hareho*der! adv,!ed o1
the,r a+t,v,t,e! and .o- w,** re+e,ve re0ort! a! ,!!-ed . them, 0roa*. on a !em,4ann-a* a!,!. #ho-*d &
+ont,n-e to ho*d the !e+-r,t,e!, a! & 1-**. e50e+t to do, m. de2ree o1 ,nvo*vement ,n the,r a+t,v,t,e! ma. var.
de0end,n2 -0on m. other ,ntere!t!. The odd! are that & w,** ta"e an ,m0ortant 0o!,t,on on matter! o1 0o*,+., -t &
want no mora* o*,2at,on to e other than a 0a!!,ve !hareho*der, !ho-*d m. ,ntere!t! deve*o0 e*!ewhere.
We 0re!ent*. 0*an to ma"e the ,n,t,a* B(L +a!h d,!tr,-t,on on >an-ar. 5th, wh,+h w,** now +ome to at *ea!t
9?= o1 >an-ar. 1, 1999 +a0,ta* *e!! an. d,!tr,-t,on! I,n+*-d,n2 month*. 0a.ment!K .o- have re+e,ved 1rom -!
!,n+e >an-ar. 1, 1999. There ,! now 0end,n2 a 0-*,+ o11er,n2, headed . 'err,**, L.n+h, (,er+e, Fenner N
#m,th, o1 o-r B*-e $h,0 #tam0! ho*d,n2! wh,+h, ,1 +om0*eted th,! month a! e50e+ted, !ho-*d r,n2 the 1,2-re to
at *ea!t 70=.
&1 .o- w,!h B,** and me to 2,ve .o- o-r ,dea! re2ard,n2 ond! ,n 'ar+h, .o- !ho-*d 0-r+ha!e U.#. Trea!-r.
B,**! mat-r,n2 ,n *ate 'ar+h w,th the a00*,+a*e 0ort,on o1 the >an-ar. 5th d,!tr,-t,on. Then adv,!e -! ,n the
*a!t wee" o1 Fer-ar. o1 the amo-nt .o- w,!h to ,nve!t ,n ond! and we w,** *et .o- "now o-r tho-2ht!.
Ao-t the m,dd*e o1 >an-ar. Ia! !oon a! the e5a+t amo-nt! are 1,2-red and !hare! are re+e,ved 1rom the Tran!1er
A2ent a1ter hav,n2 een re2,!tered ,n .o-r nameK we w,** d,!tr,-te the %R$ and B4@ !to+" a00*,+a*e to .o-r
0artner!h,0 ,ntere!t and !-!e8-ent*. adv,!e .o- o1 .o-r ta5 a!,! and a+8-,!,t,on date attr,-ta*e to the !to+".
#-+h !hare! w,** e 6*e2ended6 a! de!+r,ed ,n the en+*o!ed *etter 1rom 'onen, #e,d*er N R.an. The!e !to+"
+ert,1,+ate! are va*-a*e and !ho-*d e "e0t ,n a !a1e 0*a+e.
&n 0a!t *etter! & had e50re!!ed the ho0e that B(L +o-*d !-00*. a me+han,!m where. .o- +o-*d, ,1 .o- w,!hed,
a-tomat,+a**. +onvert .o-r %R$ and B4@ to +a!h. & have had two *aw 1,rm! +on!,der e5ten!,ve*. the !tat-! o1
the!e !hare! ,n .o-r hand! 1o**ow,n2 the *,8-,dat,on and the a++om0an.,n2 *etter! Iwh,+h !ho-*d e !aved and
"e0t w,th the !hare!K 2,ve the,r +on+*-!,on!. A! .o- +an !ee, ,t ,! not an area that 0rod-+e! !,m0*e, +*ear4+-t
2-,de*,ne!. & !ee no 0r-dent wa. to ,m0*ement the a*ternat,ve! & had 0rev,o-!*. een +on!,der,n2. There1ore, .o-
m-!t 1o**ow the 2-,de*,ne! the. !et 1orth ,1 .o- w,!h to d,!0o!e o1 .o-r !hare!. A! .o- 0roa*. rea*,<e, the
re!tr,+t,on! on !-!e8-ent !a*e a00*. more !evere*. to #-!,e and me Ie+a-!e o1 m. +ont,n-ed 6,n!,der6
0o!,t,onK than the. 0roa*. do to .o-. #-!tant,a* 8-ant,t,e! o1 !e+-r,t,e! o1ten are !o*d v,a the 60r,vate !a*e6
o0t,on de!+r,ed ,n 0ara2ra0h I:K o1 the o0,n,on. &1 the r-*e! e+ome +*earer or more !,m0*,1,ed ,n the 1-t-re, &
w,** e !-re to *et .o- "now.
At the t,me o1 d,!tr,-t,on o1 %R$ and B4@, & w,** adv,!e .o- o1 the va*-e! a00*,ed to !-+h !hare! at 1999
.earend. Go- w,** re+e,ve o-r a-d,t and ta5 *etter ao-t the end o1 >an-ar.. &t 0re!ent*. a00ear! that !a*e o1 o-r
B*-e $h,0 !hare! and a !-!tant,a* ,n+rea!e ,n va*-e o1 %R$ and B4 @ w,** r,n2 o-r overa** 2a,n 1or the .ear to
!*,2ht*. over 9=.
'. ne5t *etter w,** e ,n *ate %e+emer, !-mmar,<,n2 the 8-e!t,on! and an!wer! re2ard,n2 %R$ and B4@. and
a*!o !-00*.,n2 a 1,na* e!t,mate on the >an-ar. 5th +a!h d,!tr,-t,on.
Warren E. B-11ett
WEB& 2*"
En+*o!-re!3
Le2a* o0,n,on. 'onen, #e,d*er N R.an
$on+-rr,n2 o0,n,on, '-n2er, To**e!. @,**! N R,+"er!ha-!er 199; Ann-a* Re0ort. Ber"!h,re @athawa.. &n+.
1999 #em,4Ann-a* Re0ort. Ber"!h,re @athawa.. &n+.
A0r,* :. 1999 *etter to #hareho*der!. Ber"!h,re @athawa.. &n+. 199; Ann-a* Re0ort. %,ver!,1,ed Reta,*,n2
139
$om0an.. &n+.
F,nan+,a* ,n1ormat,on re2ard,n2 A!!o+,ated Reta,* #tore!. &n+. F,nan+,a* ,n1ormat,on re2ard,n2 &**,no,! Nat,ona*
Ban" N Tr-!t $o. 1999 Be!t/! Re0ort. Nat,ona* &ndemn,t. $om0an.
1999 Be!t/! Re0ort. Nat,ona* F,re N 'ar,ne &n!-ran+e $om0an.
140
BUFFETT (ARTNER#@&(. LT%.
910 A&EW&T (LAOA
O'A@A, NEBRA#AA 9;1:1
TELE(@ONE 0?24?110
%e+emer 29, 1999
To '. (artner!3
O-r 0*an! re2ard,n2 the ,n,t,a* +a!h d,!tr,-t,on have een 1,na*,<ed and we e50e+t to ma,* to .o- on >an-ar. :rd
a +he+" dated >an-ar. 5
th
, 1970 1or a00ro5,mate*. 9?= o1 .o-r >an-ar. 1!t. 1999 +a0,ta*, *e!! an. d,!tr,-t,on!
made to .o- I,n+*-d,n2 month*. 0a.ment!K !,n+e >an-ar. 1!t. 1999. &1 .o- have ta"en no month*. 0a.ment!
d-r,n2 1999, there w,** e a !ma** ,ntere!t adB-!tment ,n .o-r 1avor7 ,1 .o- have had *oan! 1rom B(L, there w,**
e an ,ntere!t +har2e. & +o-*dn/t e more de*,2hted ao-t the a+t,on o1 the ond and !to+" mar"et! 1rom the
!tand0o,nt o1 the t,m,n2 o1 o-r *,8-,dat,on. & e*,eve 0ra+t,+a**. a** 0artner! 4 whether the. wo-*d have ,nve!ted
,n ond! or !to+"! 4 w,** e 1ar etter o11 re+e,v,n2 the +a!h now than ,1 we had *,8-,dated at the end o1 *a!t .ear.
Tho!e !ee",n2 ,n+ome w,** re+e,ve ao-t ?0= more a1ter ta5 on the !ame 0r,n+,0a* ,nve!tment than the. wo-*d
have a+h,eved on*. a .ear a2o at what then !eemed *,"e 2enero-! .,e*d!.
O-r ta5 0,+t-re ,! v,rt-a**. +om0*ete and ,t a00ear! that .o- w,** have ord,nar. ,n+ome Id,v,dend! 0*-! ,ntere!t
,n+ome *e!! ord,nar. *o!!K 1or Federa* ta5 0-r0o!e! o1 ao-t : J:P?= o1 .o-r >an-ar. 1!t. 1999 +a0,ta* I,tem 1 ,n
en+*o!ed *etterK, no !,2n,1,+ant *on24term +a0,ta* 2a,n or *o!!, and a !hort4term +a0,ta* *o!! o1 ao-t ;41P2= o1
.o-r >an-ar. 1
!t
, 1999 -nrea*,<ed a00re+,at,on I,tem :K. The!e e!t,mate! are B-!t ro-2h a00ro5,mat,on! 4
de1,n,t,ve 1,2-re! w,** rea+h .o- ,n ear*. Fer-ar..
The !a*e o1 o-r :71,?00 !hare! o1 B*-e $h,0 #tam0! wa! not +om0*eted ,n 1999. When the !to+" went ,nto
re2,!trat,on, ,t wa! !e**,n2 at ao-t H2? 0er !hare. The -nderwr,ter! ,nd,+ated a ran2e where the. e50e+ted to
o11er o-r !hare! Ia*on2 w,th other!K w,th heav. we,2ht 0*a+ed on a +om0ar,!on w,th #0err. N @-t+h,n!on.
#hort*. e1ore the !to+" wa! to e o11ered, w,th the %ow4>one! &nd-!tr,a*! m-+h *ower -t # N @ v,rt-a**.
-n+han2ed, the. ,nd,+ated a 0r,+e e*ow the,r 1ormer ran2e. We re*-+tant*. a2reed and 1e*t we had a dea* -t, on
the ne5t -!,ne!! da., the. !tated that o-r a2reed 0r,+e wa! not 1ea!,*e. We then w,thdrew and a m-+h !ma**er
o11er,n2 wa! done.
& ,ntend to ho*d o-r *o+" o1 B*-e $h,0 #tam0! ,n B(L 1or a more advanta2eo-! d,!0o!a* or event-a* d,!tr,-t,on
to o-r 0artner!. The odd! are de+ent that we w,** do etter ,n th,! manner 4even ,1 ,t ta"e! a .ear or two 4 than ,1
we had 0art,+,0ated ,n a ver. *ar2e !a*e ,nto a !omewhat d,!tre!!ed mar"et. Un*e!! there ,! a mater,a* +han2e ,n
the mar"et ,n the ne5t 1ew da.!, & 0*an to va*-e o-r B*-e $h,0 ho*d,n2! at .earend at the 0r,+e re+e,ved .
!e**,n2 !hareho*der! on the 0-*,+ o11er,n2 a1ter -nderwr,t,n2 d,!+o-nt and e50en!e!.
Lar,o-! 8-e!t,on! have een a!"ed 0-r!-ant to the *a!t *etter3
1. &1 we are not 2ett,n2 a 2ood ret-rn on the te5t,*e -!,ne!! o1 Ber"!h,re @athawa. &n+., wh. do we
+ont,n-e to o0erate ,tM
(rett. m-+h 1or the rea!on! o-t*,ned ,n m. *etter. & don/t want to *,8-,date a -!,ne!! em0*o.,n2 1100 0eo0*e
when the 'ana2ement ha! wor"ed hard to ,m0rove the,r re*at,ve ,nd-!tr. 0o!,t,on, w,th rea!ona*e re!-*t!,
and a! *on2 a! the -!,ne!! doe! not re8-,re !-!tant,a* add,t,ona* +a0,ta* ,nve!tment. & have no de!,re to
trade !evere h-man d,!*o+at,on! 1or a 1ew 0er+enta2e 0o,nt! add,t,ona* ret-rn 0er ann-m. Ov,o-!*., ,1 we
1a+ed mater,a* +om0-*!or. add,t,ona* ,nve!tment or !-!ta,ned o0erat,n2 *o!!e!, the de+,!,on m,2ht have to
e d,11erent, -t & don/t ant,+,0ate !-+h a*ternat,ve!.
141
2. @ow *ar2e ,! o-r ,nve!tment ,n #-n New!0a0er!, et+., and do we ,ntend to e50and ,n the new!0a0er,
rad,o and TL -!,ne!!M
The +om,ned ,nve!tment ,n #-n, B*a+"er (r,nt,n2 and )atewa. Underwr,ter! ,! a *,tt*e over H1 0er !hare o1
Ber"!h,re @athawa., and earn! !ometh,n2 *e!! than 10 +ent 0er !hare. We have no 0art,+-*ar 0*an! to
e50and ,n the +omm-n,+at,on 1,e*d.
:. What doe! )atewa. Underwr,ter! doM
)atewa. Underwr,ter! !erve! 0r,mar,*. a! a )enera* A2ent 1or Nat,ona* &ndemn,t. $om0an. ,n the #tate o1
',!!o-r,.
?. Are there 2ood 6!e+ond men6 to ta"e over 1rom the men r-nn,n2 the three e5+e**ent o0erat,n2
-!,ne!!e!M
&n an. +om0an. where the 1o-nder and +h,e1 dr,v,n2 1or+e eh,nd the enter0r,!e ,! !t,** a+t,ve, ,t ,! ver.
d,11,+-*t to eva*-ate 6!e+ond men6. The on*. rea* wa. to !ee how !omeone ,! 2o,n2 to do when r-nn,n2 a
+om0an. ,! to *et h,m r-n ,t. #ome o1 o-r -!,ne!!e! have +erta,n*. een more 6one4man !how!6 than the
t.0,+a* +or0orat,on. #-Be+t to the 1ore2o,n2 +aveat, & th,n" that we do have !ome 2ood E!e+ond menF
+om,n2 a*on2.
5. &n what area do .o- 0*an to ,nve!t the +a!h ,n %,ver!,1,ed Reta,*,n2 $om0an. and do .o- ,ntend to !t,+"
0r,mar,*. to the reta,*,n2 1,e*dM
Wh,*e we 0re1er the reta,*,n2 1,e*d, we do not 0re+*-de an.th,n2 that w,** ma"e !en!e. We have een *oo",n2
w,tho-t !-++e!! 1or two .ear! 1or an ,nte**,2ent a+8-,!,t,on 1or %R$, !o we are not ao-t to r-*e o-t an.
,nd-!tr., ,1 the -!,ne!! *oo"! 2ood. (end,n2 !-+h t,me a! we 1,nd one or more o0erat,n2 -!,ne!!e! to -.,
the mone. w,** e ,nve!ted ,n mar"eta*e !e+-r,t,e!.
9. Wh. d,dn/t %R$ 0a.o-t the mone. ,t re+e,ved on the !a*e o1 @o+h!+h,*d, Aohn N $om0an.M
&n add,t,on to the 1a+t that !-+h a 0a.ment wo-*d +on!t,t-te a d,v,dend, ta5a*e ,n !,2n,1,+ant 0art a!
ord,nar. ,n+ome, there are re!tr,+t,on! ,n the ond ,ndent-re wh,+h 0revent !-+h a 0a.4o-t w,tho-t t-rn,n2
over +ontro* o1 the +om0an. to the ondho*der!.
7. W,** d,!tr,-t,on o1 the %R$ !to+" +a-!e the %R$ deent-re! to e +a**edM
A1ter d,!tr,-t,on o1 the !to+", & w,** e the *ar2e!t !to+"ho*der ,n %R$ and, hen+e, the +a** 0rov,!,on w,**
not a00*..
;. @ow wo-*d we "now ,1 the %R$ deent-re! were +a**edM
A** !to+"ho*der! and deent-re ho*der! wo-*d 1,nd o-t d,re+t*. 1rom the +om0an. thro-2h re2-*ar or !0e+,a*
re0ort! that the +om0an. ,!!-e! to ,t! !e+-r,t. ho*der!. There ,! no ,ntent,on at a** o1 +a**,n2 the deent-re!.
9. Wh. d,d .o- not re2,!ter o-r Ber"!h,re @athawa. and %,ver!,1,ed Reta,*,n2 !hare! !o that the !to+",
when re+e,ved . the 0artner!, wo-*d e 1ree*. mar"eta*eM
We +on!,dered th,! 0o!!,,*,t. -t reBe+ted ,t 1or oth 0ra+t,+a* and *e2a* +on!,derat,on!. & w,** B-!t d,!+-!!
the 0ra+t,+a*,t,e!, !,n+e the. wo-*d ,nde0endent*. d,+tate the de+,!,on we made.
142
There ,! 0re!ent*. no e5,!t,n2 mar"et 1or %,ver!,1,ed Reta,*,n2, and o-r ho*d,n2! o1 Ber"!h,re @athawa. are
0roa*. 1o-r or 1,ve t,me! the 0re!ent 1*oat,n2 !-00*. o1 th,! !to+". An attem0t to 8-,+"*. -. or !e** a 1ew
tho-!and !hare! +an ea!,*. move B@ !to+" !evera* 0o,nt! or more. We own 991,??1 !hare!. Were we to
d,!tr,-te the!e !to+"! to .o- v,a a re2,!trat,on w,tho-t an -nderwr,t,n2, and w,th the 0o!!,,*,t. that a
!-!tant,a* 0ort,on wo-*d e o11ered 1or !a*e . man. !e**er! o0erat,n2 ,nd,v,d-a**. -t v,rt-a**.
!,m-*taneo-!*., there ,! a rea* *,"e*,hood, 0art,+-*ar*. ,n a !to+" mar"et env,ronment !-+h a! we have !een
re+ent*., that the mar"et 1or the!e two !to+"! wo-*d e *,tt*e !hort o1 +haot,+. &t ha! not !eemed to me that
th,! wa! the ",nd o1 !,t-at,on w,th wh,+h & !ho-*d *eave .o-, oth 1rom the !tand0o,nt o1 the 0r,+e *eve*
wh,+h m,2ht 0reva,*, a! we** a! 1or the rea!on that d,11erent 0artner! m,2ht we** have to *,8-,date at w,de*.
var.,n2 0r,+e *eve*!. The more !o0h,!t,+ated 0artner! m,2ht have an ,m0ortant ed2e on the *e!! !o0h,!t,+ated
one!, and & e*,eve man. 0artnerD! m,2ht have no +han+e to rea*,<e the 0r,+e! & ant,+,0ate -!,n2 1or .earend
va*-at,on. Th,! wo-*d r,2ht*. !eem mo!t -n1a,r to .o-, !,n+e & wo-*d have re+e,ved !ome a**o+at,on o1 1999
B(L 0ro1,t! a!ed -0on the!e .earend va*-at,on!. &1 the mar"et! were to e+ome d,!tre!!ed, & wo-*d
0roa*. +ome ,n 1or +r,t,+,!m, whether & 0er!ona**. o-2ht at *ower 0r,+e! or, 0erha0! more !o, ,1 &
re1ra,ned 1rom -.,n2.
Were we to attem0t to !0on!or an -nderwr,t,n2 ,n +onne+t,on w,th a re2,!trat,on 1or tho!e 0artner! who
m,2ht w,!h to !e**, there wo-*d e, ,n m. o0,n,on, the *,"e*,hood that the re!-*t wo-*d !t,** e 1ar *e!! than
!at,!1a+tor.. We have B-!t een aro-nd th,! tra+" w,th o-r ho*d,n2! o1 B*-e $h,0 #tam0!, where we wat+hed
the 0r,+e o1 o-r !to+" 2o 1rom 2? to 1941P2 a1ter anno-n+ement o1 the -nderwr,t,n2, o1 wh,+h we or,2,na**.
were to e a 0art. & d,d not want th,! !ort o1 re!-*t 1or the 0artner! w,th re!0e+t to the,r ho*d,n2! o1 Ber"!h,re
and %,ver!,1,ed.
&t ,! m. e*,e1 that, . +on1,n,n2 !a*e! to 0r,vate 0*a+ement!, tho!e 0artner! who w,!h to !e** w,** rea*,<e
more 1or the,r !to+" Iw,th the !o0h,!t,+ated 0artner! hav,n2 no mar"et,n2 ed2e on the *e!! "now*ed2ea*eK
than wo-*d e a+h,eved, thro-2h an -nderwr,t,n2 at th,! t,me. A*!o, the !to+" !ho-*d e more *,"e*. to 1,nd
,t! wa. ,nto the hand! o1 *on24term ,nve!tment4m,nded ho*der!, wh,+h !ho-*d mean *e!! vo*at,*e mar"et! ,n
the 1-t-re. We have had !evera* 0hone +a**! 1rom 0er!on! ,nd,+at,n2 that the. w,!h to ma"e 0r,vate !a*e! 4
we ant,+,0ate there w,** e no d,11,+-*t. ,n e11e+t-at,n2 !-+h !a*e! at 0r,+e! re*ated to o-r .earend va*-at,on!.
Tho!e 0artner! who wo-*d 0re1er an -nderwr,tten d,!tr,-t,on a*wa.! have the o0t,on o1 hav,n2 a
re2,!trat,on o1 the,r own. & w,** e 2*ad to 1a+,*,tate th,! . 0*a+,n2 a** 0artner! ,n to-+h w,th ea+h other who
,nd,+ate to me the,r de!,re to !e** v,a a re2,!tered -nderwr,t,n2, at the,r e50en!e and thro-2h an -nderwr,ter
o1 the,r +ho,+e. &n th,! wa. the e50en!e o1 an -nderwr,t,n2, wh,+h +an e +on!,dera*e, wo-*d e orne .
the !e**,n2 0artner! and not . the 0artner! a! a who*e.
& have a*!o had 0artner! a!" ,1 the. +o-*d 0art,+,0ate ,n a re2,!tered o11er,n2 ,n the 1-t-re ,1 & !ho-*d !e**
!hare! ,n th,! manner. & th,n" ,t ,! a*mo!t +erta,n & w,** never !e** !to+" v,a 0-*,+ o11er,n2 -t, !ho-*d ,t ever
ha00en, & w,** e 2*ad to *et an. o1 .o- 0art,+,0ate ,n an. -nderwr,tten o11er,n2 ,n wh,+h & m,2ht e
,nvo*ved. &n a** 0roa,*,t., ,1 ,t ever d,d ha00en, .o-r !to+" wo-*d a*read. e E1reeF, a*tho-2h m,ne wo-*d
!t,** e re!tr,+ted. & +annot ma"e the !ame +omm,tment to .o- re2ard,n2 an. 0r,vate !a*e & m,2ht ma"e ,n the
1-t-re, B-!t a! & +an/t e50e+t .o- to re!tr,+t an. !a*e o0t,on! .o- m,2ht have ,n order to ,n+*-de me.
10. W,** .o- *et -! "now ,1 .o- !e** .o-r ho*d,n2! o1 B@ or %R$M
Go- wo-*d -ndo-ted*. "now 1rom +or0orate +omm-n,+at,on!, re0ort! ,n the 0re!! and re0ort! to
)overnment a2en+,e! ,1 & d,!0o!ed o1 m. ho*d,n2!. & have no ,ntent,on at a** o1 do,n2 !o ,n the 1ore!eea*e
1-t-re 4 & mere*. ma"e no +omm,tment not to. @owever, 1ormer B(L 0artner! w,** have no 0r,or,t. over
other B@ or %R$ !e+-r,t. ho*der! ,n ota,n,n2 ,n1ormat,on re*at,n2 to the,r +or0orate a+t,v,t,e!.
11. #ho-*d & ho*d m. B@ or %R$ !to+"M
143
& +anDt 2,ve .o- the an!wer on th,! one. A** & +an !a. ,! that &Dm 2o,n2 to do !o and & 0*an to -. more. & am
ver. ha00. to have a mater,a* 0ort,on o1 m. net worth ,nve!ted ,n the!e +om0an,e! on a *on2 term a!,!.
Ov,o-!*., & th,n" the. w,** e worth !,2n,1,+ant*. more mone. 1,ve or ten .ear! hen+e. $om0ared to mo!t
!to+"!, & th,n" there ,! a *ow r,!" o1 *o!!. & ho0e the,r 0r,+e 0attern! 1o**ow a rather moderate ran2e re*ated to
-!,ne!! re!-*t! rather than ehav,n2 ,n a vo*at,*e manner re*ated to !0e+-*at,ve enth-!,a!m or de0re!!,on.
Ov,o-!*., & +annot +ontro* the *atter 0henomena, -t there ,! no ,ntent to 60romote6 the !to+"! a *a m-+h o1
the d,!ta!te1-* 2enera* 1,nan+,a* mar"et a+t,v,t. o1 re+ent .ear!.
12. $an & 2,ve e,ther B@ or %R$ !hare! to m. w,1e or +h,*drenM
We are adv,!ed . +o-n!e* that th,! ,! 0erm,!!,*e -t, o1 +o-r!e the !ame re!tr,+t,on! on tran!1er that
a00*,ed to .o- wo-*d a00*. to the donee o1 the 2,1t.
1:. Wh. are .o- wa,t,n2 -nt,* 'ar+h to 2,ve -! .o-r !-22e!t,on! re2ard,n2 ond!M
>an-ar. and Fer-ar. 0rom,!e to e ver. -!. month!. 'an. 0artner! ma. want to ta*" to me ao-t the,r
8-e!t,on! and oBe+t,ve! re2ard,n2 ond!. & want to have a** ,m0ortant B(L matter! o-t o1 the wa. e1ore &
ta*" w,th an. o1 them on an ,nd,v,d-a* a!,!. & ma"e no 1ore+a!t! re2ard,n2 the ond mar"et Ior !to+"
mar"etK 4 ,t ma. e h,2her or *ower ,n 'ar+h than now. A1ter m. O+toer *etter, !evera* 0artner! e+ame
ver. ea2er to -. ond! ,mmed,ate*. 4 to date the. are m-+h etter o11 . wa,t,n2. The e5+e**ent 8-a*,t. ta54
1ree ond! & ta*"ed ao-t at that t,me w,th .,e*d! o1 9 41P2= +an now e o-2ht to .,e*d ao-t 7=.
$ord,a**.,
Warren E. B-11ett
WEBP2*"
144
BUFFETT (ARTNER#@&(. LT%.
910 A&EW&T (LAOA
O'A@A, NEBRA#AA 9;1:1
TELE(@ONE 0?24?110
Fer-ar. 25
th
, 1970
To '. (artner!3
Th,! *etter w,** attem0t to 0rov,de a ver. e*ementar. ed-+at,on re2ard,n2 ta54e5em0t ond! w,th em0ha!,! on
the t.0e! and mat-r,t,e! o1 ond! wh,+h we e50e+t to he*0 0artner! ,n 0-r+ha!,n2 ne5t month. &1 .o- e50e+t to
-!e o-r he*0 ,n the 0-r+ha!e o1 ond!, ,t ,! ,m0ortant that .o- +are1-**. read Iand, ,1 ne+e!!ar. , rereadK th,!
*etter a! ,t w,** !erve a! a+"2ro-nd 1or the !0e+,1,+ 0-r+ha!e! & !-22e!t. &1 .o- d,!a2ree w,th me a! to
+on+*-!,on! re2ard,n2 t.0e! o1 ond! or mat-r,t,e! Iand .o- wo-*d have een r,2ht and & wo-*d have een
wron2 ,1 .o- had d,!a2reed w,th me on the *atter 0o,nt e,ther one or two .ear! a2oK, .o- ma. we** e +orre+t, -t
we +annot e o1 a!!,!tan+e to .o- ,n the 0-r+ha!e o1 ond! o-t!,de o-r area. We w,** !,m0*. have o-r hand! 1-**
+on+entrat,n2 ,n o-r re+ommended area, !o w,** e -nava,*a*e to a!!,!t or adv,!e ,n the 0-r+ha!e o1 +onvert,*e
ond!, +or0orate ond! or !hort term ,!!-e!.
& have tr,ed to o,* th,! *etter down a! m-+h a! 0o!!,*e. #ome o1 ,t w,** e a *,tt*e we,2ht. 4 !ome a *,tt*e over4
!,m0*,1,ed. & a0o*o2,<e 1or the !hort+om,n2! ,n advan+e. & have a 1ee*,n2 & am tr.,n2 to 0-t a** the meat o1 a 100
0a2e oo" ,n 10 0a2e! 4 and have ,t read *,"e the 1-nn. 0a0er!.
QQQQQQQQQQQQQ
& am !-re .o- -nder!tand that o-r a,d ,n the 0-r+ha!e o1 ond! w,** ,nvo*ve no 1-t-re a!!,!tan+e re2ard,n2 e,ther
the!e !0e+,1,+ ond! or 2enera* ,nve!tment de+,!,on!. & want to e ava,*a*e at th,! t,me to e o1 he*0 e+a-!e o1
the -n-!-a* amo-nt o1 +a!h .o- have re+e,ved ,n one d,!tr,-t,on 1rom -!. & have no de!,re to e ,n the
,nve!tment +o-n!e*,n2 -!,ne!!, d,re+t*. or ,nd,re+t*., and w,** not e ava,*a*e 1or d,!+-!!,on o1 1,nan+,a*
matter! a1ter 'ar+h :1!t.
QQQQQQQQQQQQQ
The me+han,+! o1 Ta54Free Bond!.
For tho!e who w,!h o-r he*0, we w,** arran2e the 0-r+ha!e o1 ond! d,re+t*. 1rom m-n,+,0a* ond dea*er!
thro-2ho-t the +o-ntr. and have them +on1,rm !a*e o1 the ond! d,re+t*. to .o-. The +on1,rmat,on !ho-*d e
!aved a! a a!,+ do+-ment 1or ta5 0-r0o!e!. Go- !ho-*d not !end a +he+" to the ond dea*er !,n+e he w,** de*,ver
the ond! to .o-r an", a*on2 w,th a dra1t wh,+h the an" w,** 0a. . +har2,n2 .o-r a++o-nt w,th them. &n the
+a!e o1 ond! 0-r+ha!ed ,n the !e+ondar. mar"et I,!!-e! a*read. o-t!tand,n2K, th,! !ett*ement date w,** -!-a**.
e ao-t a wee" a1ter +on1,rmat,on date wherea!, on new ,!!-e!, the !ett*ement date ma. e a! m-+h a! a month
*ater. The !ett*ement date ,! !hown 0*a,n*. on the +on1,rmat,on t,+"et I,n the +a!e o1 new ,!!-e! th,! w,** e the
!e+ond and 1,na* t,+"et rather than the 0re*,m,nar. 6when ,!!-ed6 t,+"etK, and .o- !ho-*d have the 1-nd! at .o-r
an" read. to 0a. 1or the ond! on the !ett*ement date. &1 .o- 0re!ent*. own Trea!-r. B,**!, the. +an e !o*d on
a +o-0*e o1 da.! not,+e . .o-r an" -0on .o-r ,n!tr-+t,on!, !o .o- !ho-*d e50er,en+e no 0ro*em! ,n hav,n2
the mone. ava,*a*e on t,me. &ntere!t e2,n! to a++r-e to .o- on the !ett*ement date, even ,1 the ond dea*er ,!
*ate ,n 2ett,n2 them de*,vered to .o-r an".
Bond! w,** e de*,vered ,n ne2ot,a*e 1orm I!o4+a**ed 6earer6 1orm wh,+h ma"e! them *,"e +-rren+.K w,th
145
+o-0on! atta+hed. U!-a**. the ond! are ,n H5,000 denom,nat,on! and 1re8-ent*. the. +an e e5+han2ed 1or
re2,!tered ond! I!omet,me! at +on!,dera*e e50en!e and !omet,me! 1ree4,t de0end! -0on the term!K. Bond! ,n
re2,!tered 1orm are nonne2ot,a*e w,tho-t a!!,2nment . .o-, !,n+e .o- are the re2,!tered owner on the Tran!1er
A2ent/! oo"!. Bond! trade a*mo!t e5+*-!,ve*. on a earer a!,! and ,t ,! v,rt-a**. ,m0o!!,*e to !e** re2,!tered
ond! w,tho-t +onvert,n2 them a+" ,nto earer 1orm. Th-!, -n*e!! .o- are 2o,n2 to own 2reat 0h.!,+a*
8-ant,t,e! o1 ond!. & re+ommend "ee0,n2 ond! ,n earer 1orm. Th,! mean! "ee0,n2 them ,n a ver. !a1e 0*a+e
and +*,00,n2 the +o-0on! ever. !,5 month!. #-+h +o-0on!, when +*,00ed, +an e de0o!,ted ,n .o-r an" a++o-nt
B-!t *,"e +he+"!. &1 .o- have H250,000 ,n ond!, th,! 0roa*. mean! ao-t 1,1t. !e0arate 0,e+e! o1 0a0er IH5,000
denom,nat,on!K and 0erha0! !,5 or e,2ht tr,0! a .ear to the !a1e de0o!,t !e+t,on to +-t and de0o!,t +o-0on!.
&t ,! a*!o 0o!!,*e to o0en a +-!tod. a++o-nt w,th a an" where, 1or a 1a,r*. nom,na* +o!t, the. w,** "ee0 the
ond!, +o**e+t the ,ntere!t and 0re!erve .o-r re+ord! 1or .o-. For e5am0*e, a an" w,** 0roa*. 0er1orm the
+-!tod,a* !erv,+e 1or .o- 1or ao-t H200 a .ear on a H250,000 0ort1o*,o. &1 .o- are ,ntere!ted ,n a +-!tod,a*
a++o-nt, .o- !ho-*d ta*" to a Tr-!t O11,+er at .o-r +ommer+,a* an" a! to the nat-re o1 the,r !erv,+e! and +o!t.
Otherw,!e, .o- !ho-*d have a !a1e de0o!,t o5.
Ta5at,on
The ,ntere!t re+e,ved -0on the de0o!,t o1 +o-0on! 1rom ta541ree ond! ,!, o1 +o-r!e, 1ree 1rom Federa* &n+ome
Ta5e!. Th,! mean! ,1 .o- are at a :0= to0 Federa* &n+ome Ta5 ra+"et, a 9= ret-rn 1rom ta541ree ond! ,!
e8-,va*ent to ao-t ;41P2= 1rom ta5a*e ond!. Th-!, 1or mo!t o1 o-r 0artner!, e5+*-d,n2 m,nor! or !ome ret,red
0eo0*e, ta541ree ond! w,** e more attra+t,ve than ta5a*e ond!. For 0eo0*e w,th *,tt*e or no ,n+ome 1rom
wa2e! or d,v,dend!, -t w,th !-!tant,a* +a0,ta*, ,t ,! 0o!!,*e that a +om,nat,on o1 ta5a*e ond! Ito r,n2
ta5a*e ,n+ome -0 to ao-t the 25= or :0= ra+"etK 0*-! ta541ree ond! w,** r,n2 the h,2he!t tota* a1ter4ta5
,n+ome. Where a00ro0r,ate, we w,** wor" w,th .o- to a+h,eve !-+h a a*an+e.
The !,t-at,on ,n re!0e+t to #tate &n+ome Ta5e! ,! more +om0*,+ated. &n Nera!"a. where the #tate &n+ome Ta5 ,!
+om0-ted a! a 0er+enta2e o1 the Federa* &n+ome Ta5, the e11e+t ,! that there ,! no !tate ta5 on ,ntere!t 1rom ta54
1ree ond!. '. -nder!tand,n2 o1 oth the New Gor" and $a*,1orn,a *aw ,! that ta541ree ond! o1 ent,t,e! w,th,n
the home !tate are not !-Be+t to #tate &n+ome Ta5, -t ta541ree ond! 1rom other !tate! are !-Be+t to the *o+a*
#tate &n+ome Ta5. & a*!o e*,eve that the New Gor" $,t. &n+ome Ta5 e5em0t! ta541ree ond! o1 ent,t,e! a!ed
w,th,n the #tate o1 New Gor", -t ta5e! tho!e 1rom other !tate!. & am no e50ert on !tate ,n+ome ta5e! and ma"e
no attem0t to 0o!t m.!e*1 on +han2e! ta",n2 0*a+e w,th,n the var,o-! !tate! or +,t,e!. There1ore, & de1er to .o-r
*o+a* ta5 adv,!or, -t !,m0*. ment,on the!e 1ew 2enera* ,m0re!!,on! !o that .o- w,** e a*ert to the e5,!ten+e o1 a
0otent,a* 0ro*em. &n Nera!"a there ,! no need to have an. *o+a* +on!,derat,on! enter ,nto the a1ter4ta5
+a*+-*at,on. Where o-t4o14!tate ,!!-e! are !-Be+t to *o+a* ta5at,on, the e11e+t,ve +o!t o1 .o-r #tate or '-n,+,0a*
&n+ome Ta5 ,! red-+ed . the ene1,t re+e,ved 1rom ded-+t,n2 ,t on .o-r Federa* &n+ome Ta5 ret-rn. Th,!, o1
+o-r!e, var,e! w,th the ,nd,v,d-a*. Add,t,ona**., ,n !ome !tate! there are var,o-! ta5e! on ,ntan2,*e 0ro0ert.
wh,+h ma. a00*. to a** ta541ree ond! or B-!t tho!e o1 o-t4o14!tate ent,t,e!. There are none o1 the!e ,n Nera!"a,
-t & +annot adv,!e on the other !tate!.
When ond! are o-2ht at a d,!+o-nt 1rom 0ar and *ater are !o*d or mat-re I+ome d-e and 2et 0a,dK, the
d,11eren+e etween the 0ro+eed! and +o!t ,! !-Be+t to +a0,ta* 2a,n or *o!! treatment. IThere are m,nor e5+e0t,on!
to th,! !tatement a!, -n1ort-nate*., there are to mo!t 2enera* !tatement! on ,nve!tment! and ta5e! -t the. w,**
e 0o,nted o-t to .o- !ho-*d the. a11e+t an. !e+-r,t,e! we re+ommendK. Th,! red-+e! the net a1ter4ta5 .,e*d . a
1a+tor ,nvo*v,n2 the 2enera* rate o1 1-t-re +a0,ta* 2a,n! ta5e! and the !0e+,1,+ 1-t-re ta5 0o!,t,on o1 the
,nd,v,d-a*. Later on, we w,** d,!+-!! the ,m0a+t o1 !-+h +a0,ta* 2a,n! ta5e! ,n +a*+-*at,n2 the re*at,ve
attra+t,vene!! o1 d,!+o-nt ond! ver!-! 61-** +o-0on6 ond!.
F,na**., one mo!t ,m0ortant 0o,nt. A*tho-2h the *aw ,! not +om0*ete*. +*ear, .o- !ho-*d 0roa*. not
+ontem0*ate own,n2 ta541ree ond! ,1 .o- have, or e50e+t to have, 2enera* 0-r0o!e an" or other ,ndetedne!!.
146
The *aw e5+*-de! the ded-+t,,*,t. o1 ,ntere!t on *oan! ,n+-rred or +ont,n-ed to 0-r+ha!e or +arr. ta541ree ond!,
and the ,nter0retat,on o1 th,! !tat-te w,** 0roa*. tend to e roadened a! the .ear! 0a!!. For e5am0*e, m.
,m0re!!,on ,! that .o- have no 0ro*em ,1 .o- have a mort2a2e a2a,n!t rea* 0ro0ert. I-n*e!! the det wa!
,n+-rred ,n order to a+8-,re m-n,+,0a* ond!K ,n ded-+t,n2 the mort2a2e ,ntere!t on .o-r Federa* Ta5 ret-rn,
even tho-2h .o- own ta541ree ond! at the !ame t,me. @owever, & e*,eve that ,1 .o- have a 2enera* an" *oan,
even tho-2h the 0ro+eed! were d,re+t*. -!ed to 0-r+ha!e !to+"!, a handa** +o-rt, et+. and the ta541ree ond! are
not -!ed 1or !e+-r,t. 1or the *oan, .o- are a!",n2 1or tro-*e ,1 .o- ded-+t the ,ntere!t and, at the !ame t,me, are
the owner o1 ta541ree ond!. There1ore, & wo-*d 0a. o11 an" *oan! e1ore own,n2 ta541ree ond!, -t & *eave
deta,*ed e5am,nat,on o1 th,! 8-e!t,on to .o- and .o-r ta5 adv,!or. & mere*. ment,on ,t to ma"e .o- aware o1 the
0otent,a* 0ro*em.
'ar"eta,*,t.
Ta541ree ond! are mater,a**. d,11erent 1rom +ommon !to+"! or +or0orate ond! ,n that there are *,tera**.
h-ndred! o1 tho-!and! o1 ,!!-e!, w,th the 2reat maBor,t. hav,n2 ver. 1ew ho*der!. Th,! !-!tant,a**. ,nh,,t! the
deve*o0ment o1 +*o!e, a+t,ve mar"et!. Whenever the $,t. o1 New Gor" or (h,*ade*0h,a want! to ra,!e mone. ,t
!e**! 0erha0! twent., th,rt. or 1ort. non4,dent,+a* !e+-r,t,e!, !,n+e ,t w,** o11er an ,!!-e w,th that man. d,11erent
mat-r,t,e!. A 9= ond o1 New Gor" +om,n2 d-e ,n 19;0 ,! a d,11erent an,ma* 1rom a 9= ond o1 New Gor"
+om,n2 d-e ,n 19;1. One +annot e e5+han2ed 1or the other, and a !e**er ha! to 1,nd a -.er 1or the !0e+,1,+ ,tem
he ho*d!. When .o- +on!,der that New Gor" ma. o11er ond! !evera* t,me! a .ear, ,t ,! ea!. to !ee wh. B-!t th,!
one +,t. ma. have !omewhere ,n the ne,2horhood o1 1,000 ,!!-e! o-t!tand,n2. )rand &!*and, Nera!"a ma.
have 75 ,!!-e! o-t!tand,n2. The avera2e amo-nt o1 ea+h ,!!-e m,2ht e H100,000 and the avera2e n-mer o1
ho*der! ma. e !,5 or e,2ht 0er ,!!-e. Th-!, ,t ,! a!o*-te*. ,m0o!!,*e to have 8-oted mar"et! at a** t,me! 1or a**
,!!-e! and !0read! etween ,d! and o11er! ma. e ver. w,de. Go- +an/t !et 1orth ,n the morn,n2 to -. a
!0e+,1,+ )rand &!*and ,!!-e o1 .o-r +hoo!,n2. &t ma. not e o11ered at an. 0r,+e, an.where, and ,1 .o- do 1,nd
one !e**er, there ,! no rea!on wh. he ha! to e rea*,!t,+ +om0ared to other o11er,n2! o1 !,m,*ar 8-a*,t.. On the
other hand, there are !,n2*e ,!!-e! !-+h a! tho!e o1 the Oh,o T-rn0,"e, &**,no,! T-rn0,"e, et+. that amo-nt to
H200 m,**,on or more and have tho-!and! o1 ondho*der! own,n2 a !,n2*e ent,re*. homo2eneo-! and
,nter+han2ea*e ,!!-e. Ov,o-!*., here .o- 2et a h,2h de2ree o1 mar"eta,*,t..
'. ,m0re!!,on ,! that mar"eta,*,t. ,! 2enera**. a 1-n+t,on o1 the 1o**ow,n2 three ,tem!, ,n de!+end,n2 order o1
,m0ortan+e3 I1K the !,<e o1 the 0art,+-*ar ,!!-e7 I2K the !,<e o1 the ,!!-er Ia H100,000 ,!!-e o1 the #tate o1 Oh,o
w,** e more mar"eta*e than a H100,000 ,!!-e o1 (od-n", Oh,oK7 and I:K the 8-a*,t. o1 the ,!!-er. B. 1ar the
mo!t !a*e! e11ort 2oe! ,nto the !e**,n2 o1 new ,!!-e! o1 ond!. An avera2e o1 over H200 m,**,on 0er wee" o1 new
,!!-e! +ome! -0 1or !a*e, and the ma+h,ner. o1 ond d,!tr,-t,on ,! 2eared to 2et them !o*d, *ar2e or !ma**. &n m.
o0,n,on, there ,! 1re8-ent*. ,n!-11,+,ent d,11erent,a* ,n .,e*d at t,me o1 ,!!-e 1or the mar"eta,*,t. d,11eren+e! that
w,** e5,!t on+e the ,n,t,a* !a*e! 0-!h ,! term,nated. We have 1re8-ent*. r-n ,nto mar"et! ,n ond! where the
!0read etween ,d and a!"ed 0r,+e! ma. 2et to 15=. There ,! no need to -. ond! w,th the 0otent,a* 1or !-+h
2rote!8-e mar"et! Ia*tho-2h the 0ro1,t !0read to the dea*er who or,2,na**. o11er! them ,! 1re8-ent*. w,der than
on more mar"eta*e ond!K and we w,** not e -.,n2 them 1or .o-. The ond! we e50e+t to -. w,** -!-a**.
tend to have !0read! Ire1*e+t,n2 the d,11eren+e etween what .o- wo-*d 0a. net 1or !-+h ond! on 0-r+ha!e and
re+e,ve net on !a*e at the !ame 0o,nt ,n t,meK o1 1rom 2= to 5=. #-+h a !0read wo-*d e deva!tat,n2 ,1 .o-
attem0ted to trade ,n !-+h ond!, -t & don/t e*,eve ,t !ho-*d e a deterrent 1or a *on24term ,nve!tor. The rea*
ne+e!!,t. ,! to !ta. awa. 1rom ond! o1 ver. *,m,ted mar"eta,*,t. 4 wh,+h 1re8-ent*. are the t.0e *o+a* ond
dea*er! have the 2reate!t monetar. ,n+ent,ve to 0-!h.
#0e+,1,+ Area! o1 (-r+ha!e
We w,** 0roa*. +on+entrate o-r 0-r+ha!e! ,n the 1o**ow,n2 2enera* area!3
I1K Lar2e reven-e40rod-+,n2 0-*,+ ent,t,e! !-+h a! to** road!, e*e+tr,+ 0ower d,!tr,+t!, water d,!tr,+t!, et+.
147
'an. o1 the!e ,!!-e! 0o!!e!! h,2h mar"eta,*,t., are !-Be+t to 8-ant,tat,ve ana*.!,!, and !omet,me!
have 1avora*e !,n",n2 1-nd or other 1a+tor! wh,+h tend not to re+e,ve 1-** va*-at,on ,n the mar"et 0*a+e.
I2K &nd-!tr,a* %eve*o0ment A-thor,t. ond! wh,+h ar,!e when a 0-*,+ ent,t. ho*d! t,t*e to 0ro0ert. *ea!ed
to a 0r,vate +or0orat,on. For e5am0*e, Lora,n, Oh,o ho*d! t,t*e to an H;0 m,**,on 0roBe+t 1or U.#. #tee*
$or0. The %eve*o0ment A-thor,t. Board ,!!-ed ond! to 0a. 1or the 0roBe+t and ha! e5e+-ted a net and
a!o*-te *ea!e w,th U.#. #tee* to +over the ond 0a.ment!. The +red,t o1 the +,t. or !tate ,! not eh,nd
the ond! and the. are on*. a! 2ood a! the +om0an. that ,! on the *ea!e. 'an. to042rade +or0orat,on!
!tand eh,nd an a22re2ate o1 !evera* ,**,on do**ar! o1 the!e o*,2at,on!, a*tho-2h new one! are e,n2
,!!-ed on*. ,n !ma** amo-nt! IH5 m,**,on 0er 0roBe+t or *e!!K e+a-!e o1 +han2e! ,n the ta5 *aw!. For a
0er,od o1 t,me there wa! a ver. !-!tant,a* 0reB-d,+e a2a,n!t !-+h ,!!-e!, +a-!,n2 them to !e** at .,e*d!
+on!,dera*. h,2her than tho!e +ommen!-rate w,th the,r ,nherent +red,t !tand,n2. Th,! 0reB-d,+e ha!
tended to d,m,n,!h, red-+,n2 the 0rem,-m .,e*d! ava,*a*e, -t & !t,** +on!,der ,t a mo!t attra+t,ve 1,e*d.
O-r ,n!-ran+e +om0an. own! a maBor,t. o1 ,t! ond! ,n th,! +ate2or..
I:K (-*,+ @o-!,n2 A-thor,t. &!!-e! 1or tho!e o1 .o- who w,!h the ver. h,2he!t 2rade o1 ta541ree ond!. &n
e11e+t, the!e ond! ear the 2-arantee o1 the U.#. )overnment, !o the. are a** rated AAA. &n !tate!
where *o+a* ta5e! 0-t a 0rem,-m on -.,n2 ,n4!tate ,!!-e!, and & +anDt 1,** .o-r need! 1rom I1K and I2K ,
m. tenden+. wo-*d e to 0-t .o- ,nto @o-!,n2 A-thor,t. ,!!-e! rather than tr. to !e*e+t 1rom amon2
+red,t! that & don/t -nder!tand. &1 .o- d,re+t me to -. o*,2at,on! o1 .o-r home !tate, .o- !ho-*d e50e+t
!-!tant,a* 8-ant,t,e! o1 @o-!,n2 A-thor,t. ,!!-e!. There ,! no need to d,ver!,1. amon2 !-+h ,!!-e!, a!
the. a** re0re!ent the to0 +red,t ava,*a*e.
I?K #tate o*,2at,on! o1 a d,re+t or ,nd,re+t nat-re.
Go- w,** not,+e & am not -.,n2 ,!!-e! o1 *ar2e +,t,e!. & don/t have the 1a,nte!t ,dea how to ana*.<e a New Gor"
$,t., $h,+a2o, (h,*ade*0h,a, et+. Ia 1r,end ment,oned the other da. when Newar" wa! tr.,n2 to !e** ond! at a
ver. 1an+. rate that the 'a1,a wa! 2ett,n2 ver. -0!et e+a-!e Newar" wa! 2,v,n2 them a ad nameK. Go-r
ana*.!,! o1 a New Gor" $,t. 4 and & adm,t ,t ,! hard to ,ma2,ne them not 0a.,n2 the,r ,**! 1or an. e5tended
0er,od o1 t,me 4 wo-*d e a! 2ood a! m,ne. '. a00roa+h to ond! ,! 0rett. m-+h *,"e m. a00roa+h to !to+"!. &1 &
+an/t -nder!tand !ometh,n2, & tend to 1or2et ,t. (a!!,n2 an o00ort-n,t. wh,+h & don/t -nder!tand 4 even ,1
!omeone e*!e ,! 0er+e0t,ve eno-2h to ana*.<e ,t and 2et 0a,d we** 1or do,n2 ,t 4 doe!n/t other me. A** & want to
e !-re o1 ,! that & 2et 0a,d we** 1or the th,n2! & do 1ee* +a0a*e o1 hand*,n2 4 and that & am r,2ht when & ma"e
a11,rmat,ve de+,!,on!.
We w,** 0roa*. tend to 0-r+ha!e !omewhere etween 1,ve and ten ,!!-e! 1or mo!t o1 .o-. @owever, ,1 .o-
w,!h to *,m,t me to .o-r home !tate, ,t ma. e 1ewer ,!!-e! 4 and 0erha0! tho!e w,** on*. e @o-!,n2
A-thor,t,e!. We w,** tr. not to -. ,n !ma**er than H25,000 0,e+e! and w,** 0re1er *ar2er amo-nt! where
a00ro0r,ate. #ma**er *ot! o1 ond! are -!-a**. 0ena*,<ed -0on re!a*e, !omet,me! !-!tant,a**.. The ond
!a*e!man doe!n/t -!-a**. e50*a,n th,! to .o- when .o- -. the H10,000 o1 ond! 1rom h,m, -t ,t 2et! e50*a,ned
when .o- *ater tr. to !e** the H10,000 to h,m. We ma. ma"e e5+e0t,on! where we are -.,n2 !e+ondar. mar"et
,!!-e! ,n !ma**er 0,e+e! 4 -t on*. ,1 we are 2ett,n2 an e!0e+,a**. 2ood 0r,+e on the -. !,de e+a-!e o1 the !ma**
!,<e o1 the o11er,n2.
$a**a*e Bond!
We w,** not -. ond! where the ,!!-er o1 the ond! ha! a r,2ht to +a** Iret,reK the ond! on a a!,! wh,+h
!-!tant,a**. *oad! the +ontra+t ,n h,! 1avor. &t ,! ama<,n2 to me to !ee 0eo0*e -. ond! wh,+h are d-e ,n 1ort.
.ear!, -t where the ,!!-er ha! the r,2ht to +a** the ond! at a t,n. 0rem,-m ,n 1,ve or ten .ear!. #-+h a +ontra+t
e!!ent,a**. mean! that .o- have made a 1ort. .ear dea* ,1 ,t ,! advanta2eo-! to the ,!!-er Iand d,!advanta2eo-! to
.o-K and a 1,ve .ear dea* ,1 the ,n,t,a* +ontra+t t-rn! o-t to e advanta2eo-! to .o- Iand d,!advanta2eo-! to the
148
,!!-erK. #-+h +ontra+t! are rea**. o-tra2eo-! and e5,!t e+a-!e ond ,nve!tor! +an/t th,n" thro-2h the
,m0*,+at,on! o1 !-+h a +ontra+t 1orm and ond dea*er! don/t ,n!,!t on etter term! 1or the,r +-!tomer!. One
e5treme*. ,ntere!t,n2 1a+t ,! that ond! w,th ver. -nattra+t,ve +a** 1eat-re! !e** at v,rt-a**. the !ame .,e*d a!
otherw,!e ,dent,+a* ond! wh,+h are non+a**a*e.
&t !ho-*d e 0o,nted o-t that mo!t Nera!"a ond! +arr. h,2h*. -n1a,r +a** 0rov,!,on!. %e!0,te th,! !evere
+ontra+t-a* d,!advanta2e, the. do not o11er h,2her .,e*d! than ond! w,th more e8-,ta*e term!.
One wa. to avo,d th,! 0ro*em ,! to -. ond! wh,+h are tota**. non+a**a*e. Another wa. ,! to -. d,!+o-nt
ond! where the r,2ht o1 the ,!!-er to +a** the ond ,! at a 0r,+e !o 1ar aove .o-r +o!t a! to render the 0o!!,*e
+a** ,n+on!e8-ent,a*. &1 .o- -. a ond at 90 wh,+h ,! +a**a*e at 10:, the e11e+t,ve +o!t to .o- o1 2rant,n2 the
,!!-er the r,2ht to 0remat-re*. term,nate the +ontra+t Iwh,+h ,! a r,2ht .o- never haveK ,! ,n!,2n,1,+ant. B-t to
-. a ond o1 the Lo! An2e*e! %e0artment o1 Water and (ower at 100 to +ome d-e at 100 ,n 1999 or to +ome
d-e at
10? ,n 197?, de0end,n2 on wh,+h ,! to the advanta2e o1 the ,!!-er and to .o-r d,!advanta2e, ,! the he,2ht o1
1oo*,!hne!! when +om0ara*e .,e*d! are ava,*a*e on !,m,*ar +red,t! w,tho-t !-+h an -n1a,r +ontra+t.
Neverthe*e!!, B-!t !-+h a ond wa! ,!!-ed ,n O+toer, 1999 and !,m,*ar ond! +ont,n-e to e ,!!-ed ever. da.. &
on*. wr,te at !-+h *en2th ao-t an ov,o-! 0o,nt, !,n+e ,t ,! a00arent 1rom the +ont,n-a* !a*e o1 !-+h ond! that
man. ,nve!tor! haven/t the 1a,nte!t not,on how th,! *oad! the d,+e a2a,n!t them and man. ond !a*e!men aren/t
ao-t to te** them.
'at-r,t. and the 'athemat,+! o1 Bond!
'an. 0eo0*e, ,n -.,n2 ond!, !e*e+t mat-r,t,e! a!ed on how *on2 the. th,n" the. are 2o,n2 to want to ho*d
ond!, how *on2 the. are 2o,n2 to *,ve, et+. Wh,*e th,! ,! not a !,**. a00roa+h, ,t ,! not ne+e!!ar,*. the mo!t
*o2,+a*. The 0r,mar. determ,nant! ,n !e*e+t,on o1 mat-r,t. !ho-*d 0roa*. e I1K the !ha0e o1 the .,e*d +-rve7
I2K .o-r e50e+tat,on! re2ard,n2 1-t-re *eve*! o1 ,ntere!t rate! and I:K the de2ree o1 8-otat,ona* 1*-+t-at,on .o-
are w,**,n2 to end-re or ho0e to 0o!!,*. 0ro1,t 1rom. O1 +o-r!e, I2K ,! the mo!t ,m0ortant -t . 1ar the mo!t
d,11,+-*t -0on wh,+h to +omment ,nte**,2ent*..
Let/! ta+"*e the .,e*d +-rve 1,r!t. When other a!0e+t! o1 8-a*,t. are ,dent,+a*, there w,** e a d,11eren+e ,n ,ntere!t
rate! 0a,d a!ed -0on the *en2th o1 the ond e,n2 o11ered. For e5am0*e, a to0 2rade ond e,n2 o11ered now
m,2ht have a .,e*d o1 ?.75= ,1 ,t +ame d-e ,n !,5 or n,ne month!, 5.00= ,n two .ear!, 5.25= ,n 1,ve .ear!,
5.50= ,n ten .ear! and 9.25= ,n twent. .ear!. When *on2 rate! are !-!tant,a**. h,2her than !hort rate!, the
+-rve ,! !a,d to e !tron2*. 0o!,t,ve. &n the U. #. )overnment ond mar"et, rate! re+ent*. have tended to
0rod-+e a ne2at,ve .,e*d +-rve7 that ,!, a *on2 term )overnment ond over the *a!t .ear or !o ha! +on!,!tent*.
.,e*ded *e!! than a !hort term one. #omet,me! the .,e*d +-rve ha! een ver. 1*at, and !omet,me! ,t ,! 0o!,t,ve o-t
to a 2,ven 0o,nt, !-+h a! ten .ear!, and then 1*atten! o-t. What .o- !ho-*d -nder!tand ,! that ,t var,e!, o1ten ver.
!-!tant,a**., and that on an h,!tor,+a* a!,! the 0re!ent !*o0e tend! to e ,n the h,2h 0o!,t,ve ran2e. Th,! doe!n/t
mean that *on2 ond! are 2o,n2 to e worth more -t ,t doe! mean that .o- are e,n2 0a,d more to e5tend
mat-r,t. than ,n man. 0er,od!. &1 .,e*d! rema,ned +on!tant 1or !evera* .ear!, .o- wo-*d do etter w,th *on2er
ond! than !horter ond!, re2ard*e!! o1 how *on2 .o- ,ntended to ho*d them.
The !e+ond 1a+tor ,n determ,n,n2 mat-r,t. !e*e+t,on ,! e50e+tat,on! re2ard,n2 1-t-re rate *eve*!. An.one who ha!
done m-+h 0red,+t,n2 ,n th,! 1,e*d ha! tended to *oo" ver. 1oo*,!h ver. 1a!t. & d,d not re2ard rate! a! -nattra+t,ve
one .ear a2o, and & wa! 0roved ver. wron2 a*mo!t ,mmed,ate*.. & e*,eve 0re!ent rate! are not -nattra+t,ve and &
ma. *oo" 1oo*,!h a2a,n. Neverthe*e!!, a de+,!,on ha! to e made and .o- +an ma"e B-!t a! 2reat a m,!ta"e ,1 .o-
-. !hort term !e+-r,t,e! now and rate! ava,*a*e on re,nve!tment ,n a 1ew .ear! are m-+h *ower.
The 1,na* 1a+tor ,nvo*ve! .o-r to*eran+e 1or 8-otat,ona* 1*-+t-at,on. Th,! ,nvo*ve! the mathemat,+! o1 ond
,nve!tment and ma. e a *,tt*e d,11,+-*t 1or .o- to -nder!tand. Neverthe*e!!, ,t ,! ,m0ortant that .o- 2et a 2enera*
149
2ra!0 o1 the 0r,n+,0*e!. Let/! a!!-me 1or the moment a 0er1e+t*. 1*at .,e*d +-rve and a non4+a**a*e ond. F-rther
a!!-me 0re!ent rate! are 5= and that .o- -. two ond!, one d-e ,n two .ear! and one d-e ,n twent. .ear!.
Now a!!-me one .ear *ater that .,e*d! on new ,!!-e! have 2one to := and that .o- w,!h to !e** .o-r ond!.
For2ett,n2 ao-t mar"et !0read!, +omm,!!,on!, et+. , .o- w,** re+e,ve H1,019.90 1or the or,2,na* two .ear H1,000
ond Inow w,th one .ear to r-nK and H1,2;;.10 1or the n,neteen .ear ond Ior,2,na**. twent. .ear!K. At the!e
0r,+e!, a 0-r+ha!er w,** 2et e5a+t*. := on h,! mone. a1ter amort,<,n2 the 0rem,-m he ha! 0a,d and +a!h,n2 the
!tream o1 5= +o-0on! atta+hed to ea+h ond. &t ,! a matter o1 ,nd,11eren+e to h,m whether to -. .o-r n,neteen
.ear 5= ond at H1,2;;.10 or a new := ond Iwh,+h we have a!!-med ,! the rate +-rrent 4 one .ear *aterK at
H1,000.00. On the other hand, *et/! a!!-me rate! went to 7=. A2a,n we w,** ,2nore +omm,!!,on!, +a0,ta* 2a,n!
ta5e! on the d,!+o-nt, et+. Now the -.er w,** on*. 0a. H9;1.00 1or the ond w,th one .ear rema,n,n2 -nt,*
mat-r,t. and H791.90 1or the ond w,th n,neteen .ear! *e1t. #,n+e he +an 2et 7= on new ,!!-e!, he ,! on*.
w,**,n2 to -. .o-r ond at a d,!+o-nt !-11,+,ent !o that a++r-a* o1 th,! d,!+o-nt w,** 2,ve h,m the !ame
e+onom,+ ene1,t! 1rom .o-r 5= +o-0on that a 7= +o-0on at H1,000.00 wo-*d 2,ve h,m.
The 0r,n+,0*e ,! !,m0*e. The w,der the !w,n2! ,n ,ntere!t rate! and the *on2er the ond, the more the va*-e o1 a
ond +an 2o -0 or down on an ,nter,m a!,! e1ore mat-r,t.. &t !ho-*d e 0o,nted o-t ,n the 1,r!t e5am0*e where
rate! went to :=, o-r *on2 term ond wo-*d on*. have a00re+,ated to ao-t H1,070.00 ,1 ,t had een +a**a*e ,n
1,ve .ear! at 0ar, a*tho-2h ,t wo-*d have 2one down B-!t a! m-+h ,1 7= rate! had o++-rred. Th,! B-!t ,**-!trate!
the ,nherent -n1a,rne!! o1 +a** 0rov,!,on!.
For over two de+ade!, ,ntere!t rate! on ta541ree ond! have a*mo!t +ont,n-o-!*. 2one h,2her and -.er! o1 *on2
term ond! have +ont,n-o-!*. !-11ered. Th,! doe! not mean ,t ,! ad now to -. *on2 term ond! 4 ,t !,m0*.
mean! that the ,**-!trat,on ,n the aove 0ara2ra0h ha! wor"ed ,n on*. one d,re+t,on 1or a *on2 0er,od o1 t,me and
0eo0*e are m-+h more +on!+,o-! o1 the down!,de r,!"! 1rom h,2her rate! than the -0!,de 0otent,a* 1rom *ower
one!.
&1 ,t ,! a 50450 +han+e a! to the 1-t-re 2enera* *eve* o1 ,ntere!t rate! and the .,e*d +-rve ,! !-!tant,a**. 0o!,t,ve,
then the odd! are etter ,n -.,n2 *on2 term non4+a**a*e ond! than !horter term one!. Th,! re1*e+t! m. +-rrent
+on+*-!,on and, there1ore, & ,ntend to -. ond! w,th,n the ten to twent.41,ve .ear ran2e. &1 .o- have an.
0re1eren+e! w,th,n that ran2e, we w,** tr. to !e*e+t ond! re1*e+t,n2 !-+h 0re1eren+e!, -t ,1 .o- are ,ntere!ted ,n
!horter term ond!, we w,** not e a*e to he*0 .o- a! we are not !ear+h,n2 o-t ond! ,n th,! area.
Be1ore .o- de+,de to -. a twent. .ear ond, 2o a+" and read the 0ara2ra0h !how,n2 how 0r,+e! +han2e a!ed
-0on +han2e! ,n ,ntere!t rate!. O1 +o-r!e, ,1 .o- ho*d the ond !tra,2ht thro-2h, .o- are 2o,n2 to 2et the
+ontra+ted rate o1 ,ntere!t, -t ,1 .o- !e** ear*,er, .o- are 2o,n2 to e !-Be+t to the mathemat,+a* 1or+e!
de!+r,ed ,n that 0ara2ra0h, 1or etter or 1or wor!e. Bond 0r,+e! a*!o +han2e e+a-!e o1 +han2e! ,n 8-a*,t. over
the .ear! -t, ,n the ta541ree area, th,! ha! tended to e 4 and 0roa*. w,** +ont,n-e to e 4 a re*at,ve*. m,nor
1a+tor +om0ared to the ,m0a+t o1 +han2e! ,n the 2enera* !tr-+t-re o1 ,ntere!t rate!.
%,!+o-nt Ler!-! F-** $o-0on Bond!
Go- w,** have not,+ed ,n the aove d,!+-!!,on that ,1 .o- now wanted to -. a 7= ret-rn on a n,neteen .ear
ond, .o- had a +ho,+e etween -.,n2 a new n,neteen .ear ond w,th a 7= +o-0on rate or -.,n2 a ond w,th
a 5= +o-0on at H791.90, wh,+h wo-*d 0a. .o- H1,000.00 ,n n,neteen .ear!. E,ther 0-r+ha!e wo-*d have .,e*ded
e5a+t*. 7= +om0o-nded !em,4ann-a**. to .o-. 'athemat,+a**., the. are the !ame. &n the +a!e o1 ta541ree ond!
the e8-at,on ,! +om0*,+ated, however, . the 1a+t that the H70.00 +o-0on ,! ent,re*. ta541ree to .o-, wherea! the
ond 0-r+ha!ed at a d,!+o-nt 2,ve! .o- ta541ree ,n+ome o1 H50.00 0er .ear -t a +a0,ta* 2a,n at the end o1 the
n,neteenth .ear o1 H20;.?0. Under the 0re!ent ta5 *aw, .o- wo-*d owe an.th,n2 1rom a nom,na* ta5, ,1 the 2a,n
1rom rea*,<at,on o1 the d,!+o-nt wa! .o-r on*. ta5a*e ,n+ome ,n the n,neteenth .ear, -0 to a ta5 o1 over H70.00
,1 ,t +ame on to0 o1 ver. *ar2e amo-nt! o1 +a0,ta* 2a,n at that t,me Ithe new ta5 *aw 0rov,de! 1or +a0,ta* 2a,n
rate! o1 :5=, and even !*,2ht*. h,2her on an ,nd,re+t a!,! ,n 1972 and therea1ter 1or tho!e rea*,<,n2 ver. *ar2e
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2a,n!.K &n add,t,on to th,!, .o- m,2ht have !ome !tate ta5e! to 0a. on the +a0,ta* 2a,n.
Ov,o-!*., -nder the!e +,r+-m!tan+e! .o- are not 2o,n2 to 0a. the H791.90 1or the 5= +o-0on and 1ee* .o- are
e8-a**. a! we** o11 a! w,th the 7= +o-0on at H1,000.00. Ne,ther ,! an.one e*!e. There1ore, ,dent,+a* 8-a*,t.
!e+-r,t,e! w,th ,dent,+a* mat-r,t,e! !e** at +on!,dera*. h,2her 2ro!! .,e*d! when the. have *ow +o-0on! and are
0r,+ed at d,!+o-nt! than ,1 the. ear +-rrent h,2h +o-0on!.
&ntere!t,n2*. eno-2h, 1or mo!t ta50a.er!, !-+h h,2her 2ro!! .,e*d! over4+om0en!ate 1or the 0roa*e ta5 to e
0a,d. Th,! ,! d-e to !evera* 1a+tor!. F,r!t, no one "now! what the ta5 *aw w,** e when the ond! mat-re and ,t ,!
oth nat-ra* and 0roa*. +orre+t to a!!-me the ta5 rate w,** e !t,11er at that t,me than now. #e+ond, even
tho-2h a 5= +o-0on on a H1,000.00 ond 0-r+ha!ed at H791.90 d-e ,n n,neteen .ear! ,! the e8-,va*ent o1 a 7=
+o-0on on a H1,000.00 ond 0-r+ha!ed at 0ar w,th the !ame mat-r,t., 0eo0*e 0re1er to 2et the h,2her +-rrent
ret-rn ,n the,r 0o+"et. The owner o1 the 5= +o-0on ond ,! on*. 2ett,n2 aro-nd 9.:= +-rrent .,e*d on h,!
H791.90 w,th the a*an+e ne+e!!ar. to 2et h,m -0 to 7= +om,n2 1rom the e5tra H20;.?0 he 0,+"! -0 at the end.
F,na**., the mo!t ,m0ortant 1a+tor a11e+t,n2 0r,+e! +-rrent*. on d,!+o-nt ond! Iand wh,+h w,** "ee0 a11e+t,n2
themK ,! that an"! have een ta"en o-t o1 the mar"et a! -.er! o1 d,!+o-nt ta541ree ond! . +han2e! ro-2ht
ao-t ,n an" ta5 treatment thro-2h the 1999 Ta5 Re1orm A+t. Ban"! have h,!tor,+a**. een the *ar2e!t
0-r+ha!er! and owner! o1 ta541ree ond! and an.th,n2 that 0re+*-de! them 1rom one !e2ment o1 the mar"et ha!
dramat,+ e11e+t! on the !-00*.4demand !,t-at,on ,n that !e2ment. Th,! ma. tend to 2,ve !ome ed2e to ,nd,v,d-a*!
,n the d,!+o-nt ta541ree mar"et, 0art,+-*ar*. tho!e who are not *,"e*. to e ,n a h,2h ta5 ra+"et when the ond!
mat-re or are !o*d.
&1 & +an 2et a !,2n,1,+ant*. h,2her e11e+t,ve a1ter4ta5 .,e*d Ia**ow,n2 1or !en!,*e e!t,mate! o1 .o-r 0art,+-*ar
1-t-re ta5 rate 0o!!,,*,t,e!K, & ,ntend to 0-r+ha!e d,!+o-nt ond! 1or .o-. & "now !ome 0artner! 0re1er 1-**
+o-0on ond!, even tho-2h the,r e11e+t,ve .,e*d ,! *e!!, !,n+e the. 0re1er to ma5,m,<e the +-rrent +a!h .,e*d and
,1 the. w,** !o adv,!e me, we w,** !t,+" to 1-** +o-0on ,!!-e! Ior ver. +*o!e theretoK ,n the,r +a!e!.
(ro+ed-re
& ,ntend to e ,n the o11,+e !o*,d*. thro-2h 'ar+h I,n+*-d,n2 ever. #at-rda. e5+e0t 'ar+h 7thK and w,** e 2*ad
to !ee an. 0artner or ta*" w,th h,m . 0hone. To a,d ,n !+hed-*,n2, 0*ea!e ma"e an a00o,ntment w,th )*ad.! Ior
meK. The on*. re8-e!t & ma"e ,! that .o- a!or a! m-+h a! 0o!!,*e o1 th,! *etter e1ore we ta*". A! .o- +an !ee,
,t wo-*d e an enormo-! 0ro*em ,1 & had to e50*a,n ea+h ,tem to a** o1 .o-.
&1 .o- de+,de .o- want -! to he*0 .o- ,n -.,n2 ond!, .o- !ho-*d *et -! "now3
I1K Whether .o- want to re!tr,+t 0-r+ha!e! to .o-r home !tate 1or *o+a* ta5 rea!on!7
I2K Whether .o- want to re!tr,+t -! to 1-** +o-0on ,!!-e! or *et -! -!e o-r B-d2ment a! to where .o- 2et the
e!t va*-e7
I:K Go-r 0re1eren+e a! to mat-r,t. ,n the ten to twent.41,ve .ear ran2e or ,1 .o- 0re1er to *et -! -!e o-r
B-d2ment ,n that area7
I?K @ow m-+h .o- want to ,nve!t 4 we ma. end -0 !evera* 0er +ent !hort o1 the 1,2-re .o- name, -t we
w,** never 2o over7
I5K On what an" the ond! !ho-*d e dra1ted.
We w,** adv,!e .o- . 0hone or *etter a! we -. ond!. B,** and >ohn w,** e do,n2 m-+h o1 the me+han,+a*
wor". Need*e!! to !a., none o1 -! w,** have an. 1,nan+,a* ,ntere!t ,n an. tran!a+t,on. #ho-*d .o- have an.
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8-e!t,on! re2ard,n2 the me+han,+!, 0*ea!e d,re+t them to >ohn or B,** a! & w,** 0roa*. e !wam0ed and the.
w,** e more 1am,*,ar w,th !0e+,1,+ tran!a+t,on!. A1ter 'ar+h :1!t, & don/t e50e+t to e aro-nd the o11,+e 1or
!evera* month!. There1ore, ,1 .o- want to ta*" th,n2! over, +ome ,n . then. The +om0*et,on o1 a** 0-r+ha!e!
ma. 2o ,nto A0r,*, -t B,** w,** e ta",n2 +are o1 th,! and the me+han,+! w,** a** e !et -0.
Go- !ho-*d rea*,<e that e+a-!e o1 the enormo-! d,ver!,t. o1 ,!!-e! ment,oned ear*,er, ,t ,! ,m0o!!,*e to !a. B-!t
what w,** e o-2ht. #omet,me! the ta541ree ond mar"et ha! more !,m,*ar,t,e! to rea* e!tate than to !to+"!.
There are h-ndred! o1 tho-!and! o1 ,tem! o1 var.,n2 +om0ara,*,t., !ome w,th no !e**er!, !ome w,th re*-+tant
!e**er! and !ome w,th ea2er !e**er!. Wh,+h ma. e the e!t -. de0end! on the 8-a*,t. o1 what ,! e,n2 o11ered,
how we** ,t 1,t! .o-r need! and the ea2erne!! o1 the !e**er. The !tandard o1 +om0ar,!on ,! a*wa.! new ,!!-e!
where an avera2e o1 !evera* h-ndred m,**,on do**ar! worth have to e !o*d ea+h wee" 4 however, !0e+,1,+
!e+ondar. mar"et o00ort-n,t,e! I,!!-e! a*read. o-t!tand,n2K ma. e more attra+t,ve than new ,!!-e! and we +an
on*. 1,nd o-t how attra+t,ve the. are when we are read. to ma"e ,d!.
A*tho-2h mar"et! +an +han2e, ,t *oo"! a! ,1 we w,** have no d,11,+-*t. ,n 2ett,n2 ,n the area o1 941P2= a1ter ta5
Ie5+e0t 1rom @o-!,n2 A-thor,t. ,!!-e!K on ond! ,n the twent.4.ear mat-r,t. ran2e.
$ord,a**.,
Warren E. B-11ett
WEB& 2*"
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