Some Things Never Change

Warren Buffett’s ability to keep his message both timeless and timely sets him apart

One of the comments on last week’s post about Berkshire Hathaway’s 1988 AGM marveled at how Warren Buffett’s message never changes.

What strikes me is Warren’s consistent message over the years/decades. The quotes from the ‘88 meeting could just as easily have been from this year’s meeting.

So true.

Over the weekend, I went back and re-read some of Buffett’s earliest partnership letters — written in the 1950s — and they prove this point all the more.

Even though Buffett was a very different kind of investor back in those days — preferring free puffs on a cigar butt instead of wonderful businesses at a fair price — he already embraced many of the behavioral lessons that would define his later career.

(I’m also reading Morgan Housel’s Same as Ever at the moment, which deals with the things in life that never change, so there’s a bit of a theme developing here.)

Buffett’s ability to keep his message both timeless and timely really sets him apart.

Today, I’ve pulled out three lessons from his ‘50s-era letters that could just as easily have been written in the ‘80s, ‘90s, or today. (That sounds like a radio station tagline.)

Some things never change.

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✨ So much of investment success comes down to detaching yourself from the market machine. It can seem like everything about Wall Street, the financial media, etc. exists solely to get investors revved up and eager to make moves in the market.

Warren Buffett made this easier on himself by moving back to Omaha — away from the overstimulation of New York City and the money game’s hive mind — but he also deliberately kept his focus on individual businesses and not the market as a whole.

He eschewed the temptation to opine on macroeconomic trends or make predictions about whether the Dow Jones Industrial Average would rise or fall. Instead, he poured all of his effort and energy into relentlessly searching through Moody’s manuals for undervalued investment opportunities.

“Primary attention is given at all times to the detection of substantially undervalued securities,” he wrote in 1957. “I make no attempt to forecast either business or the stock market.”

Even back then, that kind of restraint was a rarity.

✨ Warren Buffett’s earliest partnership letters were written in the decade following the release of Ben Graham’s The Intelligent Investor — and did not stray far from his mentor’s message about ignoring the daily rise and fall of markets and resisting the urge to get carried away and make bad decisions.

A recurring theme in these letters was Buffett’s belief that too many inexperienced investors were jumping into the booming stock market — blinded by the promise of easy riches and with unrealistic expectations about the many risks involved.

“I do believe that widespread public belief in the inevitability of profits from investment in stocks will lead to eventual trouble,” he wrote in 1958.

“There are undoubtedly more mercurially-tempered people in the stock market now than for a good many years and the duration of their stay will be limited to how long they think profits can be made quickly and effortlessly,” he continued. “The longer their visit, the greater the reaction from it.”

Was that written in 1958 or 1998?!? After all, he said much the same thing when the dot-com bubble filled investors’ heads with dangerous dreams of mansions, yachts, and the like.

Such unbridled enthusiasm also poses a particular temptation to value-based investors — to alter their methods and discipline because “this time is different”.

“Perhaps other standards of valuation are evolving which will permanently replace the old standard,” a 29-year-old Buffett scoffed in 1959. “I don’t think so.”

“I may very well be wrong,” he continued, “however, 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 a ‘New Era’ philosophy where trees really do grow to the sky.”

Valuations matter. They did in the 1950s — and they still do today.

✨ Warren Buffett (and Charlie Munger) quipped that the best way to make your marriage last forever is for both parties to have low expectations. The same can be said for the “marriage” between a money manager and shareholders/partners.

Buffett had a heck of a time keeping his partners’ expectations in check during the 1950s and 1960s — when he famously beat his Dow Jones benchmark each and every year. Over and over again, he asked his partners to judge his performance over a multi-year period — and warned that any single year’s results were more a matter of luck and timing than skill.

Of course, that message went in one ear and out the other as the partnership racked up win after win over the Dow. To Buffett’s partners, the three certainties of life were death, taxes, and Buffett waxing the benchmark each year.

The partnership’s remarkable winning streak, though, was almost strangled in the cradle by a boom year for the wider market in 1958.

It was exactly the kind of year that Buffett had cautioned his partners about: “Our performance, relatively, is likely to be better in a bear market than in a bull market … In a year when the general market had a substantial advance, I would be well satisfied to match the advance of the Averages.”

(Many of the partnership’s investments were in situations and work-outs that might not move in accord with a rapidly rising market.)

But, when the Dow jumped up 38.5% in 1958, the partnership actually narrowly edged it out with a “slightly better” gain of 40.9%. That win, though, was more a fluke of luck and timing than anything else.

A substantial portion of the partnership’s money had been invested in Commonwealth Trust Co. of Union City, New Jersey — an investment that Buffett expected to “take in the neighborhood of three to five years of work” before it could be harvested for profit.

He described Commonwealth as “a very well-managed bank with substantial earnings power selling at a large discount from intrinsic value”. Buffett snapped up about 12% of the bank at an average price of $51 per share — and, all things being equal, would have preferred to keep gradually accumulating more and more at that same price.

“During any acquisition period,” he wrote in 1957, “our primary interest is to have the stock do nothing or decline rather than advance. Therefore, at any given time, a fair proportion of our portfolio may be in the sterile stage. This policy, while requiring patience, should maximize long-term profits.”

If Commonwealth — his biggest investment — had remained in a “sterile stage” for long, the partnership would have been left in the dust in 1958. (Which would not have been a bad thing. One year’s results don’t matter. But it just goes to show how luck and timing play a huge role in the short term.)

But, as luck would have it, an opportunity presented itself to sell the Commonwealth stock at a big profit and move the partnership’s capital into something better. What Buffett expected to be “three to five years of work” instead took less than two. And it was this surprisingly early sale of Commonwealth that propelled the partnership to its big win in 1958.

“It is obvious that we could still be sitting with $50 [Commonwealth] stock patiently buying in dribs and drabs,” wrote Buffett in 1958, “and I would be quite happy with such a program although our performance relative to the market last year would have looked poor.”

“The year when a situation such as Commonwealth Trust Co. results in a realized profit is, to a great extent, fortuitous,” he admitted. “Thus, our performance for any single year has serious limitations as a basis for estimating long-term results.”

In this case, Buffett demonstrated his skill by identifying Commonwealth as an undervalued outfit and patiently amassing a sizable stake in the trust company. The unexpected timing of the sale, though, just came down to dumb luck.

Even a legend like Warren Buffett needs a little bit of that every now and then.