Buffett’s 1975 Letter to Katharine Graham


Buffett on Career Risk:

“Wall Street abhors a commercial vacuum.  If the will to believe stirs within the customer, the merchandise will be supplied – without warranty.  When franchise companies are wanted by investors, franchise companies will be found – and recommended by the underwriters.  If there are none to be found, they will be created.  Similarly, if above-average investment performance is sought, it will be promised in abidance – and at least the illusion will be produced.

Initially those who know better will resist promising the impossible.  As the clientele first begins to drain away, advisors will argue the un-soundness of the new trend and the strengths of the old methods.  But when the trickle gives signs of turning into a flood, business Darwinism will prevail and most organizations will adapt.  This is what happened in the money management field.”


Buffett on how to manage a portfolio (in this case the Washington Post’s Pension):

“(5) My final option – and the one to which I lean, although not at anything like a 45-degree angle – is mildly unconventional, thereby causing somewhat more legal risk for directors.  It may differ from other common stock programs, more in attitude than in appearance, or even results.  It involves treating portfolio management decisions much like business acquisition decisions by corporate managers.

The directors and officers of the company consider themselves to be quite capable of making business decisions, including decisions regarding the long-term attractiveness of specific business operations purchased at specific prices.  We have made decisions to purchase several television businesses, a newspaper business, etc.  And in other relationships we have made such judgments covering a much wider spectrum of business operations.

Negotiated prices for such purchases of entire businesses often are dramatically higher than stock market valuations attributable to well-managed similar operations.  Longer term, rewards to owners in both cases will flow from such investments proportional to the economic results of the business.  By buying small pieces of businesses through the stock market rather than entire businesses through negotiation, several disadvantages occur: (a) the right to manage, or select mangers, is forfeited; (b) the right to determine dividend policy or direct the areas of internal investment is absent; (c) ability to borrow long-term against the business assets (versus against the stock position) is greatly reduced; and (d) the opportunity to sell the business on a full-value, private-owner basis is forfeited.

These are important negative factors but, if a group of investments are carefully chosen at a bargain price, it can minimize the impact of a single bad experience, in say, the management area, which cannot be corrected.  And occasionally there is an offsetting advantage which can be of very substantial value – but for which nothing should be paid at the time of purchase.  That relates to the periodic tendency of stock markets to experience excesses which cause businesses – when changing hands in small pieces through stock transactions – to sell at prices significantly above privately-determine negotiated values.  At such times, holdings may be liquidated at better prices than if the whole business were owned – and, due to the impersonal nature of securities markets, no moral stigma need be attached to dealing with such unwitting buyers.

Stock market prices may bounce wildly and irrationally but, if decisions regarding internal rates of return of the business are reasonably correct – and a small portion of the business is bought at a fraction of its private-owner value – a good return for the fund should be assured over the time span against which pension fund results should be measured.

It might be asked what the difference is between this approach and simply pick stocks a la Morgan, Scudder, Stevens, etc.  It is, in large part, a matter of attitude, whereby the results of the business become the standard against which measurements are made rather than quarterly stock prices.  It embodies a long time span for judgement confirmation, just as does an investment by a corporation in a major new division, plant or product.  It treats stock ownership as business ownership with the corresponding adjustment in mental set.  And it demands an excess of value over price paid, not merely a favorable short-term earnings or stock market outlook.  General stock market considerations simply don’t enter into the purchase decision.

Finally, it rests on a belief, which both seems logical and which has been borne out historically in securities markets, that intrinsic business value is the eventual prime determinant of stock prices.  In the words of my former boss: ‘in the short run the market is a voting machine, but in the long run it is a weighing machine.'”


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