Wednesday, January 15, 2014

Warren Wednesday: 1959

Written: Feb 20, 1960
Length: 3 pages
S&P 500 return: +8.48%
Buffett's return: +25.9%
Major events: Fidel Castro takes power in Cuba, Women's suffrage is not approved in a vote in Switzerland (they wouldn't have it until 1971?!?), Alaska and Hawaii become the 49th and 50th state. Disney's Sleeping Beauty is in theaters and The Twilight Zone premiers on CBS.

While the S&P 500 only had +8.48% the Dow did +19.9% (including dividends). In today's markets of tight correlations it seems odd they wouldn't be so close.

He discusses that while the market was up investment companies and funds struggled. Tri-Continental Corp was the largest closed ended company at $400m AUM and Massachusetts Investors Trust the largest mutual fund at the time with $1.5b both got single digit.

Warren then goes on to talk about how the stock market seems a bit overpriced. Given his investing style it really doesn't matter since he invests in such deeply valued stock. In 2013 we know how well getting a big margin of safety has worked for him. 

I found the next part to be insightful...
"I would rather sustain the penalties resulting from over-conservatism than face the consequences of error, perhaps with permanent capital loss, resulting from the adoption of "New-Era" philosophy where trees really grow to the sky."
I've been in the markets since 2000 though not "seriously" into them since 2009. My personal experience has been that the long something goes great capital gains wise, the more people will start talking about how its different this time. Right now its Bitcoins, before that was gold in 2011, before that was housing in 2008, before that was tech stocks in 2000. Each time there is some new model to be used in generating wealth. Stock investing wise I think this is true too and it seems like there is always some new technical analysis tool to use. Then the strategy of buying an undervalued stock with a wide moat of protection that has worked for decades is set aside. Funny how when things blow up people return to it. Perhaps they should never leave it in the first place.

He discusses how one of his positions is at a 35% weighting of his portfolio. That is a crazy high amount for me. I do not have the self confidence or conviction that he does. In fact I recently sold some of my STX stake because it had risen to 12% of the account. Note that this is NOT in my blog portfolio. That was in other portfolios not receiving deposits. Deposits give protection of time in that something overweight now will not be next year. However I have noticed that I am becoming more self confident. I used to never ever ever go above a 5% weighting and would start panicking about a 7% position.
On the other hand I should keep in mind that Warren got his masters degree in economics in 1951 so he had been doing this for 8 years after that education.

Near the end he discusses something he mentioned in the previous year's letter that I am not sure about. He talks about the rest of the portfolio being invested in undervalued and work-out operations. I have no idea what a work-out operation is. I have searched online but found nothing. I contacted Berkshire Hathaway and left a voice mail message asking what it is. No idea if I will get a response but what the heck.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial advisor, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.


  1. That is a great quote Pully. Clearly, he isn't worried about letting his money sit idle during periods of overpriced markets. It goes along with his analogy that investing is like baseball, but without called strikes. Just wait for the fat pitch. I remind myself of this everytime I get nervous because that I have too much cash in my portfolio.

    I'll be curious what the " work-outs" he's referring to are all about. My guess is that they are situations like buying bonds of companies in bankruptcy and so forth. A company I used to work for made a fortune buying busted bonds and non-performing notes during the financial crisis. Thanks for sharing, have a great day

  2. One of the things I like best about this series so far, besides learning from arguably the best investor of all time, is the Major Events recap. It's a great reminder that there's always some major catastrophe that is leading to world to imminent doom but the markets just keep chugging along. I like the quote from Buffett as I have to remind myself that sitting on cash is sometimes the best option.

    1. I felt that the major events would be important. Its easy for us in 2014 to sit back and talk about what should or shouldn't have been done but we are talking 50 years ago here. Different mindset and different time.

  3. I believe work-outs would refer to something like a bankruptcy where a company is trading at 20c per share but you do some math (work out) that it's going to pay out 28c to shareholders after all the assets are divested.