One of the things warren buffet repeats across his letter is his focus on limiting the downside to his portfolio. He considers a performance of -10% v/s -20 % of Dow better than a +20% v/s +10% of the dow. This clearly demonstrates the fact (which he has pointed out too ) that the portfolio was unconventional but also had a lower risk.
Warren buffet had put this approach in the inital letters and made it one of the key objectives in managing the portfolio.
The above approach bring to mind the quote from buffet –
rule 1 – Dont lose money
Rule 2 – dont forget rule 1

This is a very powerful approach to manage a portfolio. If one is convinced that the stock market would do well over the long term , and can limit the downside of the portfolio during bear markets , then as even buffet acknowldeged ,even if one cannot match the market on the upside , one should come out fine.

I have been reading the letters further and have read till the 1965 letter. After initial formal / fact driven style of letters, the latter ones are more informative and one can see the buffet humor in those letter coming through. These letters are closer to the BRK letter from the chairman and i was quite surprised to find example, quotes which buffet has repeated later through his BRK letters.

He discusses the ‘joys of compounding’ in the latter letters and stresses on the importance of compounding at a higher than average rate and the impact on one’s terminal networth.

There is a section on taxes (which has appeared later in the BRK letters) which discusses the importance of focussing on the post tax returns and focussing on investing based on this measure. Buffet points out to the folly of trying to minimise taxes at the cost of the post tax returns. He stresses on focussing on post tax returns and if the course of action enables the investor to save taxes , then thats added benefit. however the ‘means’ should not be confused with the ‘end’.

In addition buffet discusses about a workout (arbitrage) situation as an example. These workout enable buffet to post a great performance during the down markets. The second category is ‘generals’ which is mainly the undervalued stocks and this was the highest proportion of the partnership most of the times.

The third portion is the control situation and buffet has discussed about dempster mills in detail and how he was able to extract value out of it . The point he makes several times is the focus on buying at a such a good price that a mediocore sale is good enough. He even states that buying is 90 % of the task and selling the balance 10%. This is illuminating !!!

i am enjoying reading the letters

I have been reading the buffet partnership letters. One of the board members from the MSN – BRK boards emailed the letters to me. I had been looking out for these letters as they cannot be downloaded directly.

I knew of the superb performance of the partnership and was keen on going through these letters as they would give me an idea of how warren buffet has evolved into the greatest investors of all time

What struck me was the clarity of thought, a regular and clear communication of the partnership’s mode of operation and clear setting of expectations from the partnership .

There are a few things which struck me as warren buffet’s core operating belief which one can see in the later years in his BRK letters

– Warren buffet stresses repeatedly on the long term performance (and long term focus) v/s a short term focus

– circle of competence : focussed on investing in undervalued stocks , workouts – arbitrage , and control situation. These themes evolved into Berkshire hathaway ( control ) and the equity portfolio ( undervalued stocks )

– refusal to predict the stock market and trying to profit from it – warren buffet talks about it right from the time he started the partnership.

As i read the letters from 1957 onwards , i could see the letters increase in length (maybe warren buffet wanted to share his mode of working with the partners as the partnership grew), more discussion on his thought process ( and thenbuffet jokes / wit appearing more often )

i am still halfway through the letters and finding them very interesting