In his 1965 Buffett Partnership Letter, Warren Buffett explains why he derives no comfort because important people, vocal people, or great numbers of people agree with him. Nor does he derive comfort if they don’t. A public opinion poll is no substitute for thought, he says. Here’s an excerpt from the letter:
In looking at the table of investment company performance, the question might be asked: “Yes, but aren’t those
companies run more conservatively than the Partnership?” If you asked that question of the investment company managements, they, in absolute honesty, would say they were more conservative.
If you asked the first hundred security analysts you met, I am sure that a very large majority of them also would answer for the investment companies. I would disagree.
I have over 90% of my net worth in BPL, and most of my family have percentages in that area, but of course, that only demonstrates the sincerity of my view – not the validity of it.
It is unquestionably true that the investment companies have their money more conventionally invested than we do.
To many people conventionality is indistinguishable from conservatism. In my view, this represents erroneous thinking. Neither a conventional nor an unconventional approach, per se, is conservative.
Truly conservative actions arise from intelligent hypotheses, correct facts and sound reasoning. These qualities may lead to conventional acts, but there have been many times when they have led to unorthodoxy. In some corner of the world they are probably still holding regular meetings of the Flat Earth Society.
We derive no comfort because important people, vocal people, or great numbers of people agree with us. Nor do we derive comfort if they don’t. A public opinion poll is no substitute for thought.
When we really sit back with a smile on our face is when we run into a situation we can understand, where the facts are ascertainable and clear, and the course of action obvious. In that case – whether other conventional or unconventional – whether others agree or disagree – we feel – we are progressing in a conservative manner.
The above may seem highly subjective. It is. You should prefer an objective approach to the question. I do. My suggestion as to one rational way to evaluate the conservativeness of past policies is to study performance in declining markets.
We have only three years of declining markets in our table and unfortunately (for purposes of this test only) they were all moderate declines. In all three of these years we achieved appreciably better investment results than any of the more conventional portfolios.
You can read the entire letter here:
1965 Buffett Partnership Limited Letter – (Search for “The Question of Conservatism”)
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