Warren Buffett's Letter to Shareholders - 1962

Fund Performance

First Half Performance：

• From the end of 1961 to June 30, 1962, the Dow Jones Index fell from 731.14 points to 561.28 points, a decline of 21.7%.
• In the first half of 1962, Buffett achieved one of his best historical performances, with a result of -7.5%, which was much better compared to the overall result of the Dow Jones Index at -21.7%.

Annual Performance：

• For the entire year of 1962, the overall result of the Dow Jones Index was -7.6%.
• Buffett's overall annual record was +13.9%.

Quotes

"To most of you this material will seem unduly repetitious, but I would rather have nine partners out of ten mildly bored than have one out of ten with any basic misconceptions."

The text mentions over-communication. We have an experienced American partner in our company who places great emphasis on "over-communication." By repeatedly emphasizing basic information, we ensure that everyone correctly understands the investment philosophy and strategy.

"Whether we do a good job or a poor job is not to be measured by whether we are plus or minus for the year. It is instead to be measured against the general experience in securities as measured by the Dow- Jones Industrial Average, leading investment companies, etc."

It is always compared with opportunity cost. A single year’s performance cannot fully reflect the effectiveness of an investment strategy. Comparing with market benchmarks can help better understand the long-term effects of investments.

"Our investments will be chosen on the basis of value, not popularity."

Investment choices should be based on value rather than following popular market trends. This value investing method focuses on the inherent financial condition and potential growth ability of companies, rather than short-term market fluctuations and emotions.

On Compound Interest

We often emphasize the magic of compound interest. However, in the 1962 shareholder letter, Mr. Buffett specifically discussed it again.

Buffett emphasized that even a few percentage point advantages relative to the Dow Jones Index are very worthwhile achievements. Over one or two decades, such advantages can translate into significant capital growth. By focusing on returns slightly higher than the market average, investors can achieve substantial wealth accumulation in the long term.

Dempster Mill Manufacturing Company

. The investment in Dempster Mill belongs to the third strategy control, owning 73% of Dempster Mill. Dempster mainly engages in farm tools (mostly retailing for less than $1,000), water systems, well supplies, and pipe products.

Financial Status

Initial Financial Status:

• Assets (in thousands omitted)
  
• Liabilities (in thousands omitted)
  
• Net Assets (in thousands omitted) $4,601
• Adjusted Net Assets (in thousands omitted) $2,120

Per Share Value:

Buffett's cost of purchasing shares: In August 1961, he obtained control at an average price of about $28 per share. He bought some stocks as low as $16 in earlier years, but most were purchased at $30.25 in August.

He then hired Harry Bottle to manage. Harry was undoubtedly the man of the year. He achieved every goal Buffett set for him, and all surprises were pleasant ones. He completed task after task considered impossible, always starting with the most difficult things. Dempster's breakeven point was almost halved, slow-moving or obsolete goods were sold or written off, marketing procedures were reformed, and unprofitable facilities were sold.

The company's adjusted balance sheet:

• Assets (in thousands omitted)
• Liabilities (in thousands omitted)
• Net Assets (in thousands omitted) $4,077
• Adjusted Net Assets (in thousands omitted) $3,125

Per Share Value: (

• $60,000 is Harry Bottle's potential gain if he exercises his options.
• 2,000 is the possible increase in the number of shares after exercising the options.

Summary

1. : Although there was a reduction in net assets due to clean-up and asset impairment (a write-off of $550,000 from inventory; fixed assets brought gains exceeding book value), Dempster converted assets into cash much faster than implied by the valuation a year ago.

2. : Dempster partially shifted assets from underperforming manufacturing businesses to what Buffett considered good businesses — securities.

3. : By purchasing assets at favorable prices, Buffett did not need to rely on any special means to achieve excellent percentage gains. This is the cornerstone of Buffett's investment philosophy: "Never count on selling at a good price. Make the purchase price so attractive that even mediocre sales can bring good results. Better sales will be icing on the cake."

"Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results. The better sales will be the frosting on the cake."

This advantage is similar to what Brother Cong often says: We cannot depend on luck🍀 for success in doing things. Having luck is certainly good, and we welcome it with open arms, but more importantly, we must do things solidly.

Harry Bottle's Role and Future Impact

1. : Harry had never thought about running a farm tool company before taking over, but he demonstrated high flexibility and diligence. He could quickly execute once policies were determined and enjoyed earning high compensation through superior performance.

2. : Harry and Buffett liked each other and did not pursue luxurious office facilities. This pragmatic attitude and efficient execution are highly beneficial for future controlling investments.

3. : This partnership is expected to bring substantial returns to Buffett Partnership, Ltd., and play an important role in future controlling investments.

Takeaways

1. Re-emphasizing Compound Interest

• The importance of the power of compound interest in long-term investments, achieving significant wealth growth through continuous return accumulation.

• Success should not depend on luck but should be achieved through solid foundational work and sound investment strategies. While having luck is certainly good, it should not be the main factor relied upon.

• Repeatedly emphasizing basic information ensures that everyone correctly understands the investment philosophy and strategy. This communication approach helps avoid basic misunderstandings and builds a common understanding within the team.

• The value investing method focuses on the inherent financial condition and potential growth ability of companies rather than short-term market fluctuations and emotions. Investment decisions are made through in-depth analysis and judgment of the actual value of companies.

• Flexible, diligent, strong in execution, pragmatic, and efficient. Such managers can quickly adapt and implement policies and earn rewards through outstanding performance. This management style is crucial for the long-term development of the company and investment returns.