Buffett's 1959 Letter: Key Takeaways for Investors
Highlights
Stick to your investment discipline, even in the most challenging of times.
Being overly conservative in your assumptions and missing out during exuberant periods is better than risking permanent loss of your capital. Fight the FOMO!
A concentrated portfolio should not automatically be characterized as a risky one.
Bet big when the odds are in your favor.
Markets continued to march higher in 1959. However, it was a smaller subset of stocks driving the markets higher, with more stocks declining than advancing. The overall Dow Jones Industrial Average was up 19.9% on a total-return basis, yet the Dow-Jones Railroad and Utility averages were down.
Tri-Continental Corporation, the nation's largest closed-end investment company at the time, delivered an overall gain of about 5.7% for the year, significantly underperforming the broader market.
“Markets in which investor sentiment and enthusiasm play so large a part as those of 1959, are difficult for investment managers trained in values and tuned to investing for the long-term. Perhaps we haven't had our space boots adjusted properly.” - Fred Brown, President of Tri-Continental Corp.
His space boot reference reminded me of the “to the moon” Reddit crowd rhetoric during the meme stock frenzy of 2021.
Buffett shared similar concerns around sentiment in his prior two partnership letters but noted that his caution had been unnecessary as markets continued to march higher. He reiterated his concerns that the market’s valuations of "blue chip" stocks contained a substantial speculative component. “Blue chip” refers to companies that are generally large, well-known, high-quality companies.
“Perhaps other standards of valuation are evolving which will permanently replace the old standard. I don't think so. I may very well be wrong; however, I would rather sustain the penalties resulting from over-conservatism than face the consequences of error, perhaps with permanent capital loss, resulting from the adoption of a "New Era" philosophy where trees really do grow to the sky.” - Warren Buffett
To end his letter, Buffett reminded his investment partners that the previous year he sold their stake in Commonwealth Trust Co. and undertook a new commitment worth 25% of partnership assets at initiation. This investment had now grown to 35% of assets, a level some would deem “very risky.” While it was a large position, the new investment was in an investment trust that owned 30-40 securities of high-quality businesses. The investment was made at a substantial discount to asset value based on the market value of the stocks it owned and on a conservative appraisal of the operating businesses it owned. Therefore, Buffett felt there was a significant margin of safety in the investment. In other words, it was a “heads I win, tails I don’t lose much” proposition. In the same way former Red Sox outfielder Ted Williams used to wait for pitches in his sweet spot before swinging, Buffett tends to exhibit an uncanny ability to be patient and “swings for the fences” when he feels the odds are deeply in his favor.