Buffett Letter: 1958

1958

  • Buffett says that there is exuberance in the markets. Any reason is used to justify high valuations.
  • He aptly says that the duration of the stay of mercurially tempered people in the market will be as long as profits can be made quickly and effortlessly. I am assuming he thinks that value investing is the only way of making money which I humbly disagree. If the mercurial people are making money by say trend following then so be it. But being a master of one's own domain is what matters and I assume he is the master of masters in his.
  • He reiterates that he chooses not to make any kind of forecasts.
  • Even if price correction happens which undoubtedly will one day intrinsic value will not be lost.
  • In his Work Outs i.e. Special Situation investing of 1957 the price had remained constant and he had build up position in the stock. He discloses the company name a bank. But the key point is that he perhaps holds no position in the stock at the time of writing the 1958 letter. Now here there is some disconnect I have. He was adamant that he was waiting for a value unlock even if that takes years and he gets out of this position because he sees another brighter prospect. It is fair to say one thing and do the same but its quite not justified to say something and do another thing. But the best part is he makes this stance explicitly clear which I like. As I always have felt an investor is only a very long term trader.
  • He lays out the reasons for the investment in the bank in 1957 - well managed bank, substantial earnings, selling at a large discount to intrinsic value. In essence the business displayed very strong defensive characteristics at a satisfactory price and there would be value unlocked even if it took 10 years.
  • As outlined above Buffett sold his stake in this bank and entered another special situation. He says that he is virtually assured of a better return than the market on this and he wants to allocate to opportunities which have better returns of capital. Fair enough. This new position is even bigger than the earlier holding in the bank  he had in 1957.
  • He feels as the market is overvalued he will get fewer opportunities to invest in General Issues and would have to now look for more Work Outs. He says he is working to make his own special situations by taking majority positions in companies. And this would lead to an above average performance in a bear market.

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