The 1960s were the decade when the American economy flourished. However, the year saw the start of the recession. As the 1960 presidential election campaign got underway, the 1960-1961 recession began. It is the starting point where big businesses started their dominance. J F Kennedy came into power by saying to ‘Get America moving again.’ his vision was to keep annual growth 4-6%. Kennedy sends congress the Economic Growth and Recovery Package with 12 measures.
Warren Buffett wrote a long letter to his Partners in such an atmosphere.
A year ago, I commented on the somewhat faulty picture presented in 1959 by the Dow-Jones Industrial Average which had advanced from 583 to 679, or 16.4%. Although practically all investment companies showed gains for that year, less than 10% of them were able to match or better the record of the Industrial Average. The Dow-Jones Utility Average had a small decline and the Railroad Average recorded a substantial one.
In 1960, the picture was reversed. The Industrial Average declined from 679 to 616, or 9.3%. Adding back the dividends which would have been received through ownership of the Average still left it with an overall loss of 6.3%. On the other hand, the Utility Average showed a good gain and, while all the results are not now available, my guess is that about 90% of all investment companies outperformed the Industrial Average. The majority of investment companies appear to have ended the year with overall results in the range of plus or minus 5%. On the New York Stock Exchange, 653 common stocks registered losses for the year while 404 showed gains.
Everything pretty much explains itself. But some terms need to explain.
Investment companies are nothing but Mutual fund companies in today’s era. The time may change the structure with time. Utility companies are companies related to Electricity, gas, water, etc. They don’t show massive growth. But they can pay a good dividend as their income can’t grow after a specific limit, but the payment is assured. Railroad companies are the characteristics of that time. Railway in the US was private, and Warren Buffett is well known for buying all such companies. Dow Jones industrial average is very similar to the Sensex of India. 30 companies.
The ’60s were the decade when America was being built. So Warren Buffett was fitting that these companies may be complex in the short run but will earn money in the long run. And so, He kept building a good portfolio. But not all days are the same. That is why one line is essential.
I would consider a year in which we declined 15% and the Average ( Dow) 30% to be much superior to a year when both we and the Average advanced 20%. Over a period of time, there are going to be good and bad years; there is nothing to be gained by getting enthused or depressed about the sequence in which they occur. The important thing is to be beating par; a four on a par three hole is not as good as a five on a par five hole and it is unrealistic to assume we are not going to have our share of both par three’s and par five’s.
In simple words, if one fund manager keeps doing good, then Sensex for five years. But, every year, many investors come to him, and the inflow will destroy his returns.
Something similar happened with warren Buffett. He received many new people giving him money, so he mentions that this may affect his return. The worst thing here is that the newcomer is coming by watching good returns, but if he sees a bad result, that may make him withdraw money. The reason why I am mentioning it is the number itself. In the word of Warren Buffett, ” As contrasted with an overall loss of 6.3% for the Industrial Average, we had a 22.8% gain for the seven partnerships operating throughout the year.” In 1960 itself, When Dow Jones was up by 42.6%, Portfolio managed by Warren Buffett was up 140.6%
Here I want to quote him… “four years is entirely too short a period from which to make deductions,” In today’s era, many people at least track the performance of 10 years.
This year, He mentions Sunburn maps. One critical example is to learn how he thinks. Warren Buffett is a value investor. A value can be anything. So buying a company’s share at lower than intrinsic value and buying all together important business with some practical value is also value investing. That is where Sunburn map company. Came into the picture.
Sanborn Map Co. is engaged in the publication and continuous revision of extremely detailed maps of all cities of the United States. For example, the volumes mapping Omaha would weigh perhaps fifty pounds and provide minute details on each structure. The map would be revised by the paste-over method showing new construction, changed occupancy, new fire protection facilities, changed structural materials, etc. These revisions would be done approximately annually and a new map would be published every twenty or thirty years when further paste overs became impractical. The cost of keeping the map revised to an Omaha customer would run around $100 per year.
This detailed information showing diameter of water mains underlying streets, location of fire hydrants, composition of roof, etc., was primarily of use to fire insurance companies. Their underwriting departments, located in a central office, could evaluate the business by agents nationally. The theory was that a picture was worth a thousand words and such evaluation would decide whether the risk was properly rated, the degree of conflagration exposure in an area, advisable reinsurance procedure, etc. The bulk of Sanborn’s business was done with about thirty insurance companies although maps were also sold to customers outside the insurance industry such as public utilities, mortgage companies, and taxing authorities.
A perfect example of How he thinks. Here we all need to understand that investment is maths + knowledgeable guess. What I am saying is perfectly explained by Warren Buffett in the next para.
In the early 1950’s a competitive method of under-writing known as “carding” made inroads on Sanborn’s business and after-tax profits of the map business fell from an average annual level of over $500,000 in the late 1930s to under $100,000 in 1958 and 1959. Considering the upward bias in the economy during this period, this amounted to almost complete elimination of what had been sizable, stable earning power.
This whole case explains many things perfectly. You can read this and other letters HERE. Click on links.
