In his 1960 Partnership Letter, Warren Buffett outlines his goal of achieving long-term performance superior to the Industrial Average, emphasizing that this superior performance will not be consistently evident compared to the Average.
He explains that outperformance is likely in stable or declining markets, while performance may be average or below average in rising markets.
Buffett values significant outperformance in bad years over equal performance in good years and stresses the importance of overall superior performance rather than focusing on individual yearly results.
Here’s an excerpt from the letter:
My continual objective in managing partnership funds is to achieve a long-term performance record superior to that of the Industrial Average. I believe this Average, over a period of years, will more or less parallel the results of leading investment companies. Unless we do achieve this superior performance, there is no reason for the existence of the partnerships.
However, I have pointed out that any superior record we might accomplish should not be expected to be evidenced by a relatively constant advantage in performance compared to the Average. Rather, it is likely that if such an advantage is achieved, it will be through better-than-average performance in stable or declining markets and average, or perhaps even poorer-than-average performance in rising markets.
I would consider a year in which we declined 15% and the Average 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 threes and par fives.
The above dose of philosophy is being dispensed since we have a number of new partners this year, and I want to make sure they understand my objectives, my measure of attainment of these objectives, and some of my known limitations.
You can find the entire letter here:
1960 Buffett Partnership Letter
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