1963 was a good year. The overall gain of $3637167 or 38.7%, Buffett start this letter with these words, and the performance was better than that of our fundamental yardstick,

The yardstick was returned against DOW, If Buffett down 20% in a year, and DOW down by 30% a year, then as per Buffett he done well, regardless of whether plus or minus in a year.


If we had been down 20% and the Dow had been down 30%, this letter would still have begun “1963 was a good year.” Regardless of whether we are plus or minus in a particular year, if we can maintain a satisfactory edge on the Dow over an extended period of time, our long term results will be satisfactory — financially as well as philosophically


The following table summarises the year by year performance of Dow, the performance of the Partnership before allocation to the general partner, and the limited partners


Year Overall Results from Dow (1) Partnership Results (2) Limited Partners Results (3)
1957 -8.40% 10.40% 9.30%
1958 38.50% 40.90% 32.20%
1959 20.00% 25.90% 20.90%
1960 -6.20% 22.80% 18.60%
1961 22.40% 45.90% 35.90%
1962 -7.60% 13.90% 11.90%
1963 20.70% 38.70% 30.50%
Source : Buffett Partnership Letter (18 January 1964)


Overall results from Dow, includes the yearly change in Dow value plus dividend received through ownership of Dow, Its just like TRI, Total return index of Benchmark Index.

Partnership Results, Combined results of all limited partnerships after all expenses, but before expenses and allocating to general partner (Buffett himself)

Limited Partnership Results, The results are after allocation to the General partner based upon the present partnership agreement

The following table shows the………………..


Years Dow Partnership Results Limited Partnership Results
1957 -8.40% 10.40% 9.30%
1957-1958 26.90% 55.60% 44.50%
1957-1959 52.30% 95.90% 74.70%
1957-1960 42.90% 140.60% 107.20%
1957-1961 74.90% 251% 181.60%
1957-1962 61.60% 299.80% 215.10%
1957-1963 95.10% 454.40% 311.20%
Annual Compounded Rate 10.00% 27.70% 22.30%
Source : Buffett Partnership Letter (18 January 1964)


Buffett Partnership Limited completed seven years of operations.

I would like to emphasize that, in my judgment; our 17.7 margins over the Dow shown above is unattainable over any long period of time. A ten percentage point advantage would be a very satisfactory accomplishment and even a much more modest edge would produce impressive gains

Buffett emphasizes once again about the 10% advantage over Dow, & Buffett has already achieved (27.70% – 10%) 17.7% advantage over Dow. He very well known that this advantage will not be unattainable over a long period of time, and Buffett see it’s an edge which will produce great returns over time.

This 10% advantage we might not get or become narrow over a prolonged period of times and occasionally we have great returns.


Investment Companies


Open Ended Mutual Fund Close Ended Mutual Fund
Years Mass. Inv. Trust (1) Investors Stocks (1) Lehman (2) Tri-Cont (2) Dow Limited Partners
1957 -11.40% -12.40% -11.40% -2.40% -8.40% 9.30%
1958 42.70% 47.50% 40.80% 33.20% 38.50% 32.20%
1959 9.00% 10.03% 8.10% 8.40% 20.00% 20.90%
1960 -1.00% -0.60% 2.50% 2.80% -6.20% 18.60%
1961 25.60% 24.90% 23.60% 22.50% 22.40% 35.90%
1962 -9.80% -13.40% -14.40% -10.00% -7.60% 11.90%
1963 20.00% -16.50% 23.80% 19.50% 20.70% 30.50%
Source: Buffett Partnership Letter ( 18 January 1964)

 (1) Computed from changes in asset value plus any distributions to holders of record during the year.

 2) From 1963 Moody’s Bank & Finance Manual for 1957-62; Estimated for 1963.

Buffett regularly compares his results with two open-ended mutual fund scheme and two closed-ended mutual fund scheme. These funds typically invest 95%-100% in common stocks. These four mutual funds manage $4 billion from probably of $25 billion investment industry.  Buffett opinion is that their results are parallel to those of vast majority of investment advisory organization.

What is the purpose of showing this comparison? The answer to that is Dow is no pushover or investment achievement. These mutual funds commands $7 Million of annual fees, which is very high, but remain the fraction of the industry,  and these mutual fund manager average return achieved is slightly less than the Dow.       Buffett portfolio and method of operation differ from the mutual fund shown in the table



Open Ended Mutual Fund Close Ended Mutual Fund  
Years Mass. Inv. Trust Investors Stocks Lehman Tri-Cont Dow Limited Partners
1957 -11.40% -12.40% -11.40% -2.40% -8.40% 9.30%
1957-1958 26.40% 29.20% 24.70% 30.00% 26.90% 44.50%
1957-1959 37.80% 42.50% 34.80% 40.90% 52.30% 74.70%
1957-1960 36.40% 41.60% 38.20% 44.80% 42.90% 107.20%
1957-1961 71.40% 76.90% 70.80% 77.40% 74.90% 181.60%
1957-1962 54.50% 53.20% 46.20% 59.70% 61.60% 215.10%
1957- 1963 85.40% 78.50% 81.00% 90.80% 95.10% 311.20%
Annual Compounded Rate 9.20% 8.60% 8.80% 9.70% 10.00% 22.30%
Source : Buffett Partnership Letter (18 January 1964)


These funds declined in concert with Dow, by such behavior of declining market, Buffett own method of operation has proven to be more conservative than the stocks in the mutual fund. Which is true in the past, but no guarantee about the future. The above comparison not for criticism,

This is the institutional framework of handling billions of dollars. That is why they produce these results.

To behave unconventionally within this framework is extremely difficult. Therefore, the collective record of such investment media is necessarily tied to the record of corporate America. Their merits, except in the unusual case, do not lie in superior results or greater resistance to decline in value. Rather, I feel they earn their keep by the ease of handling, the freedom from decision making and the automatic diversification they provide, plus, perhaps most important, the insulation afforded from temptation to practice patently inferior techniques which seem to entice so many world-be investors.   

The Joys of Compounding

Just like every year Buffett provide us with an example of compounding, Last year Buffett gave us an example of Queen Isabella, which is a low compound situation. This year example is from Art.

Francis I of France paid 4,000 ecus in 1540 for Leonardo da Vinci’s Mona Lisa. On the off chance that a few of you have not kept track of the fluctuations of the ecu 4,000 converted out to about $20,000.

If Francis had been able to find a 6% after-tax investment, the estate now would be worth something over $1,000,000,000,000,000.00. That’s $1 quadrillion or over 3,000 times the present national debt, all from 6%. I trust this will end all discussion in our household about any purchase or paintings qualifying as an investment.

The moral of the story is living a long time, and a small change in the rate of compounding have a significant impact on compounding.


4% 8% 12% 16%
10 Years $48,024 $115,892 $210,584 $341,143
20 Years $119,111 $366,094 $864,627 $1,846,060
30 Years $224,337 $906,260 $2,895,970 $8,484,940
Source : Buffett Partnership Letter (18 January 1964)


It is obvious that a variation of merely a few percentage points has an enormous effect on the success of a compounding (investment) program. It is also obvious that this effect mushrooms as the period lengthens. If, over a meaningful period of time, Buffett Partnership can achieve an edge of even a modest number of percentage points over the major investment media, its function will be fulfilled.

As the compounding table above suggests, such a lowered rate can still provide highly satisfactory long term investment results.


Our Method of Operation

At this point, I always develop literary schizophrenia. On the one hand, I know that we have in the audience a number of partners to whom details of our business are interesting. We also have a number to whom this whole thing is Greek and who undoubtedly wish I would quit writing and get back to work.

Buffett knows very well few of partners were interested in investment operations, few does not know anything, and few thinks Buffett stop writing and get back to work. Buffett knows the psychology of partners.

To placate both camps, I am just going to sketch briefly our three categories at this point and those who are interested in getting their doctorate can refer to the appendix for extended treatment of examples.

For both type of investors Buffett explain three types of categories, and those who want to dig it dip can see appendix, usually, we definitely see the appendix and do our doctorate.

These three types of categories are differentiated, by their expected profitability over time, which will give ten percentage point margin over Dow. These categories had different behaviour characteristics, depending upon the market conditions, and when they work out.


These are undervalued stocks, determined primarily by quantitative standards, but considering qualitative factors also. The main qualifications for generals are they must available at bargain price. Good management, in decent industry, with a value attached to it. If Dow will be in minus, generals will be in big minus, but it will outperform Dow in advancing market.


These are the securities with the timetable, they arise from the corporate activity like sell outs, mergers, reorganization, spin-offs, etc. Buffett is not talking about the rumors or, inside information. These are publicly announced activities. The predictability of returns with a short time of period will produce a quite decent annual rate of returns. In declining market, it piles up a big edge for Buffett, during advancing market it is a drag on performance.


“Controls” – These are rarities, but when they occur they are likely to be of significant size. Unless we start off with the purchase of a sizable block or stock, controls develop from the general category.

If our continued buying puts us in a controlling position at some

point in the future, we will probably remain very passive regarding the operation or this business.

We do not want to get active merely for the sake of being active. Everything else being equal I would much rather let others do the work. However, when an active role is necessary to optimize the employment of capital you can be sure we will not be standing in the wings.

Once control is achieved, the value of our investment is determined by the value of the enterprise, not the oftentimes irrationalities of the marketplace.

If the market changes its opinion for the better, the security will advance in price. If it doesn’t, we will continue to acquire stock until we can look to the business itself rather than the market for a vindication of our judgment.

 If there is any trend as our assets grow, I would expect it to be toward controls which heretofore have been our smallest category. I may be wrong in this expectation – a great deal depends, of course, on the future behavior of the market on which your guess is as good as mine (I have none). At this writing, we have a majority of our capital in generals, workouts rank second, and controls are third.



We are starting off the year with net assets of $17,454,900. Our rapid increase in assets always raises the question of whether this will result in a dilution of future performance. To date, there is more of a positive than inverse correlation between size of the Partnership and its margin over the Dow. This should not be taken

seriously however. Larger sums may be an advantage at some times and a disadvantage at others. My opinion is that our present portfolio could not be improved if our assets were $1 million or $5 million. Our idea inventory has always seemed to be 10% ahead of our bank account. If that should change, you can count on hearing from me.

Susie and I have an investment of $2,392,900 in the Partnership. For the first time I had to withdraw funds in addition to my monthly payments, but it was a choice of this or disappointing the Internal Revenue Service. Susie and I have a few non-marketable (less than 300 holders) securities of nominal size left over from earlier years which in aggregate are worth perhaps 1% of our partnership interest. In addition we have one nonmarketable holding of more material size of a local company purchased in 1960 which we expect to hold indefinitely. Aside from this all our eggs are in the BPL basket and they will continue to be. I can’t promise results but I can promise a common destiny. In addition, that endless stream of relatives of mine consisting of my three children, mother, father, two sisters, two brothers-in-law, father-in-law, four aunts four cousins and five nieces and nephews, have interests in BPL directly or indirectly totaling $1,247,190.


Bill Scott is also in with both feet, having an interest along with his wife or $237,400, the large majority or their net worth. Bill has done an excellent job and on several or our more interesting situations going into 1964, he has done the majority or the contact work. I have also shoved off on him as much as possible of the administrative work so if you need anything done or have any questions, don’t hesitate to ask for Bill if I’m not around.

Buffett explains great points.

  • Understand fundamental yardstick of returns, the ten percentage point of margin over Dow.
  • If we can maintain a satisfactory edge on the Dow over an extended period of time, our long term results will be satisfactory — financially as well as philosophically
  • understand the institutional framework of handling billions of dollars,
  • The Joy of Compounding as usual
  • Three method of operation Generals, Workouts & Controls
  • Buffett and his wife has an investment in the partnership, where he says, I can’t promise results, but I can Promise a common destiny


(Disclaimer: All figures and data used from Buffett Partnership Letter (Dated, 18 January 1964), all are my opinions, and this is for educational purpose only. I am not genius or clever to understand all things, I may be wrong in interpreting the data and letter, take your decision on your own)


To Your Success with Lot of Love!


Harish S Kawalkar


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