Buffett Letter: 1957
Though Buffett says this is the second letter I think this is the first which is actually a 'letter'. I don't know if a 1956 letter exists or not but I believe that it would have been an inaugural letter to all the partners. Nevertheless going into what matters most, his ideas.
- When the general market is priced above intrinsic value then there is a greater chance of decline in stock prices. This decline effects all stocks whether they are undervalued or not.
- If the market is overvalued currently think about 5 years down the line with what probability you will look back and say the market was valued to its intrinsic levels.
- Buffett talks about two segregation in his portfolios. First he calls General Issues and the second he calls Work Outs. General Issues are the ones which is a standard equity investment in the business for growth basis fair valuations (I think in these years he was focusing only on undervalued stocks). Work Outs are investments which make profit on specific corporate action. Nowadays we would be calling it special situation investing I believe.
- He believes if the general market were to go higher he would reduce his exposure to General Issues. I think this is something which I have intuitively practiced. Have some barometer of the market valuation and have appropriate chips on the table for the General Issues.
- Buffett says he is not into predicting market movements though I think he is highly cognizant of what levels the indices trade at. His sole focus is finding undervalued securities.
- A great piece of advice he shares is that there is recency bias in a correction especially those who are new in the market. The market correction looks quite deep when in the larger scale of things its very small. And there will be more correction lying ahead from the current valuation levels of the market.
- He doesn't focus on any kind of prediction be it market, economy or businesses. Then I wonder his measure of intrinsic valuation is based on past performances? Is it that Buffett doesn't do forecasting of future cash flows rather more of a reverse cash flow discounting. Just my questions.
- Buffett is ready to take aggressive portfolio bets going all the way up to 20% of allocation on a single idea.
- Great patience to add to a position over months maybe years, I don't know. But he feels a declining or a flat price will work to his advantage. That is great conviction in his ideas.