In his 1968 Buffett Partnership Letter, Warren Buffett discusses the widespread financial phenomenon of chain-letter type stock promotions, where substantial amounts of money are made through various roles in the process.
He describes how these activities rely on illusions created through accounting distortions and other means, leading to profitable outcomes. He acknowledges his own indirect benefit from this trend but expresses concern about its impact on the availability of fundamentally sound investments.
He predicts that this phenomenon may be recognized as a major historical event in stock market history, though it is often dismissed by mainstream investment perspectives driven by hope, credulity, and greed.
Here’s an excerpt from the letter:
Quite candidly, our own performance has been substantially improved on an indirect basis because of the fallout from such activities.
To create an ever widening circle of chain letters requires increasing amounts of
corporate raw material and this has caused many intrinsically cheap (and not so cheap) stocks to come to life.
When we have been the owners of such stocks, we have reaped market rewards much more promptly than might
otherwise have been the case.
The appetite for such companies, however, tends to substantially diminish the number of fundamentally attractive investments which remain.
I believe the odds are good that, when the stock market and business history of this period is being written, the phenomenon described in Mr. May’s article will be regarded as of major importance, and perhaps characterized as a mania.
You should realize, however, that his “The Emperor Has No Clothes” approach is at odds (or dismissed with a “SO What?” or an “Enjoy, Enjoy”) with the views of most investment banking houses and currently successful investment managers.
We live in an investment world, populated not by those who must be logically persuaded to believe, but by the hopeful, credulous and greedy, grasping for an excuse to believe.
You can read the entire letter here:
1968 Buffett Partnership Letter
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