Warren Buffett
According to related descriptions in wikipedia, buffet sold a co-owned business when he was a sophmore (year 1945) in high school for around $1000. If we assume his savings was 10 times of the business he sold 10 years later, then by 1955， his savings would be $10,000. A second description in wikipeida stated that buffet finished college (after 5 years) with a saving of $9,800, which collaborates with our first estimation in terms of magitude. A concervative estimation of buffet's wealth when he founded Buffett Partnership, Ltd would be around $100,000 (around 6.3 Million RMB)
1957 to 1959 Letter
In these three letters, buffett stated an annual portfolio return of 8% to 30% depending on the general market performance (as measured by percentage change of Dow Jones Industry Average). It is unknown whether this return is superior in the investment community at a portfolio size of multi million USD. It is unknown whether a 8% to 30% return is hard to achieve for a fund size of multi thousands USD. My guess is that a higher return (30% to 100%) is achievable assuming certain level of risk.
1957 Letter
In buffet's view, the market is in general priced above intrinsic value. This view relates to blue-chip securities. Buffet stated that if this view is accurate, it is possible that a substantial decline in all stock prices, both overvalued and undervalued, is to happen. As it is very unlikely that current market level will be thought of as cheap 5 years from now. Even a full-scale bear market won't hurt the current work-out portfolio. In buffet's plan, if the general market were to return to an undervalued status, he would invest in the undervalued general issues. It should be noted that, for Buffett at this time, debt financing is an option for the fund needed for general issue investment under this condition. If the general market were to move to a higher level (overvaluation), Buffett plan to put more capital on work-outs.
In Buffett's view, a market decline followed by general decline in earning power is a normal market behavior and it should be. Any market decline not in the same magnitude with the decline in earning power can be considered as "moderate".
Buffett Talks about "current market level", but how does he determine if the current market level is overvalued or undervalued ? Perhaps he was using average PE ratio as a reference to make the judgement.
When dicussing market declines, Buffett use the word "moderate" to describe the market decline in 1957 because the decrease of corporate earning power was worse.
Buffett identify market price, corporate earning power and intransic value as specifically three seperate concept.
I assume that "corporate earning power" refers to the earning power of the company for the next few years. "Intransic" value refers to a longer period, say 30 years.
Does the Buffett position "work-out" stocks before or after corporate action announcement ?
1958 Letter
1958 year, In Mr Buffett's view, is a year with huge number of amateurs entering into the market, pushing up the general market level. The public enthusiasm on stock market will eventually cause trouble, affecting even undervalued stocks. Commonwealth Trust Co. of Union City is the stock our partnerships has large stakes on, we hope its price to remain stable or even decline, so we can purchase more shares for a reasonable price. This would hold back our overall portfolio performance.
Buffett stated that the performance of thier portolio, due to their strategy, would be better in a bear market than in a bull market. He is well statisfied to match the advance of the general market in a bull year.
The partnership has large stake in the Commonwealth Trust Co. of Union City, New Jersey. For reasons including not paying dividends and etcs, the market price for the Comonwealth's stock is $50, while the intransic value of the company is $125 under Buffett's estimation.
The acquiring period of undervalued stock (here Commonwealth Trust Co. of Union City, New Jersey) can be as long as a year. Buffett was building up a position with great patient, buy in shares in good price multiple times.
Buffett chose not to do block trade because of the mangitude of his target position is high, over 10% of target floating shares. Block trade will push up market price for the target stock, which hurt investment return.
1959 Letter
To the extent possible, invest in situations at least partially insulated from the behavior of the general market. This policy should lead to superior results in bear markets and average performance in bull markets. (In modern sense, a low beta, high potential alpha policy. By this policy, an investor can minimize the adverse influence of the general market which he cannot control, therefore the uncertainty of the investment is minimized.)
1977 Letter
- Capital Gain
It is improper to include capital gains and losses when evaluating the performance of a company for a single year, they are an important component of the longer term record.
Buffet admits that