Warren Buffett’s Letters

Patrick Labbe, CFA

Long before he became known as the “Oracle of Omaha,” Warren Buffett started his first investment partnership in 1956 at the age of 25. As you might guess, Buffett’s returns were outstanding: Partners achieved a 24.5% annual return after fees compared to the Dow’s 9.1% over the partnership’s 12-year life. Buffett regularly wrote to his partners, and his letters are worth studying even decades later.

As with his Berkshire Hathaway shareholder letters, Buffett tried to keep his investors informed and worked hard to make sure they understood his strategy. One constant theme throughout his partnership writings was his goal of investing for superior returns. This seems like an obvious starting point, but in Buffett’s thinking, it carries many important implications. He made clear, for example, his desire for superior returns meant he wouldn’t try to move in and out of the market to avoid volatility. He also stated that this goal meant he’d select many investments others probably wouldn’t touch, and he’d concentrate the partners’ funds in what he considered to be the best opportunities. It’s clear that Buffett understood the risks of trying to time the market, the dangers of overdiversifi­cation and the need for a differentiated approach to achieve superior results. For him, typical managers ended up with mediocre results by following the conventional approach of relying on short-term forecasts and trading the most popular “blue chip” stocks. Instead, his partners could expect him to use the market’s volatility and tendency toward herd-like behavior to his advantage.

Another recurring theme in the letters is that successful investors must be long-term investors. Buffett emphasized this with a golf analogy: “There will be some good holes and some bad holes, but the important thing is to break par for the entire round.” Any single investment can lead to disap­pointment, and the partnership did have some poor performers, but he was always convinced that the consistent application of superior analysis tilts the odds in an investor’s favor over the long haul. Time also plays an important role in another favorite subject: compounding. Writing often about the joys of compounding, he also wrote about the “sorrows” of compounding—his term for the cumulative loss of value when even modest rates of compounding are interrupted, often due to investors focusing on the short term.

Patience and the ability to withstand the market’s ups and downs were the qualities that Buffett desired most among his partners, and his partnership letters make it clear that Buffett believed the manager played an important role in helping his investors develop these qualities. We agree that working hard to inform and educate clients offers them the best chance of success.