Wednesday, February 26, 2014

Warren Wednesday: H2 1961

Getting back on track with my Warren Wednesday series on the actual Wednesday its to come out...

H2 1961
Written: Jan 24, 1962
Length: 11 pages
S&P 500 return for all of 1961: +23.13%
Buffett's return for all of 1961: +45.9%
Major events: Construction begins on the Berlin Wall. 

Roger Maris breaks Babe Ruth's home runs in a season record. 
The book Catch-22 is published. 
The Vietnam War begins for the U.S.

This letter right here is exactly why I wanted to read his letters. He really gives us a big serving of meaty portfolio management ideas. Buffett discusses how he breaks up his portfolio.
1: "Generals": Undervalued non activist securities: Companies he is passively invested in with no specific time table on when they want to sell.
5 large positions (5%-10% total assets) and 10-15 smaller ones.
He discusses how his timing of purchase is better then the timing of sales. Isn't that the truth. It is one of the few things you can control. When you get into a position and at what price.
These generals won't outperform the Dow by much but over time of several years they should.

2:  "Work-Outs": Positions requiring corporate action to unlock the profit potential. Well we have our answer as to what a work-out is that first came up in the 1959 Warren Wednesday. 10-15 workouts at a given time. Buffett mentions that he will borrow money for this section of the portfolio and I get the impression that this is the only reason he would.

3: "Control": Positions in which they control the company itself or have a big enough position to be an activist. These positions he wants to have nothing happen for possibly years while he buys up more to increase his position. Then the big payoff comes similar to the Sanborn map business from the 1960 letter.

I find this interesting that he is famous for telling people to go with your 6 or 7 best ideas because your 8th idea won't make as much money. Yet here he is in 25-30 positions excluding their "control" activist positions. It's important to keep in mind though that a person's strategy and process will change over time. For Buffett, he had a big change when Charlie Munger enters the picture. Though they met in 1959, Munger will gain more and more interaction and work with Buffett over time.

To me it appears he breaks up his portfolio based upon how much work he has to do and how much control of that work. The generals are pretty passive. Work-outs are activist that he doesn't have control over so presumably he has less he can do. Control obviously is where he is sitting on the board of directors and having to spend his time with.

On the topic of conservatism in how he doesn't jump in to high P/E companies because the market is moving up...
You will not be right simply because a large number of people momentarily agree with you. You will not be right simply because important people agree with you. In many quarters the simultaneous occurance of the two above factors is enough to make a course of action meet the test of conservatism.
You will be right, over the course of many transaction, if your hypotheses is correct, your factors are correct, and your reasoning is correct. True conservatism is only possible through knowledge and reason.
Dempster Mill Manufacturing. Buffett reveals they own 70% of the company and that there are only 150 total stockholders. To me that's very risky as there is no liquidity here to exit a position if one so wanted. His cost basis is $28 a share and book value is $75. That's quite a large margin of safety so I can understand why he went in heavy. This one position accounts for 21% of all partnership assets.

Later in this letter he again goes over their strategy of matching or struggling in a rising market but beating the Dow in a declining market. He mentions something I think is important. That his partners fully understand this not only in their cerberal regions but also in the pit of their stomach. Psychology in investing and trading is so huge, far more important than most people think. You can say you will do one thing or follow one strategy then it get tested by the markets and you fold like a house of cards.

All in all this was a great letter. I find Buffett's ideas of portfolio management as similar to mine: broken down by my work load.
My rental is managed by a property manager and I am in contact with them about every two weeks for various things however it's for getting my input and permission for various requirements.
Next is Lending Club which I just run my screen and pick some notes. Then wait for the payments to add up alongside a deposit before I buy again. This amounts to perhaps 30 minutes every two weeks.
Third is dividend investing taking up a bit more of my time in reading and researching how they are doing and looking out for any news worthy events.
Lastly is Forex. I do plan to return to it at some point but as it will be taking up most of my financial time I need to finish college first so I can have a clear head.
So I have to admit I take a little pride that I am doing some of the things Buffett did. I won't be shadowing him, that would be disastrous but the underlying concepts of what he did and why he did them is what I am after here to learn about.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, 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. I really enjoy this series Pulley. It's been 3 or 4 years since I read all of Buffett's letters and I am beginning to forget all the companies and all the deals. I'm always on the look out for Buffett/Graham style net-nets, but haven't found one since Emerson Radio (MSN) last summer.

    1. Glad you are liking the series.
      It does seem like these days with as many eyes as there are on the markets and the amount of tools and access to information we have today that its harder to find a company deeply below its book value.

  2. I didn't realize you had traded forex. How do you find it from an investment/trading standpoint vs other activities ( returns, volatility, risk?