In his 1962 Buffett Partnership Letter, Warren Buffett reflects on conservative investing, cautioning against blindly following conventional methods. He notes that buying long-term bonds, once considered safe, often fails to preserve real buying power due to inflation.
Similarly, he warns against overpaying for blue-chip stocks based on high price-earnings ratios, calling it speculative rather than conservative. Buffett emphasizes that true conservatism stems from sound hypotheses, accurate facts, and logical reasoning, not from popular opinion or the approval of influential figures.
He stresses that unconventional portfolios are not inherently more or less conservative; their success depends on the methods used and the results achieved over time.
Here’s an excerpt from the letter:
The above description of our various areas of operation may provide some clues as to how conservatively our portfolio is invested.
Many people some years back thought they were behaving in the most conservative manner by purchasing medium or long-term municipal or government bonds. This policy has produced substantial market depreciation in many cases and most certainly has failed to maintain or increase real buying power.
“Conscious, perhaps overly conscious, of inflation, many people now feel that they are behaving in a conservative manner by buying blue-chip securities almost regardless of price-earnings ratios, dividend yields, etc.
Without the benefit of hindsight as in the bond example, I feel this course of action is fraught with danger. There is nothing at all conservative, in my opinion, about speculating as to just how high a multiplier a greedy and capricious public will put on earnings.
You will not be right simply because a large number of people momentarily agree with you. You will not be right simply because important people agree with you.
In many quarters, the simultaneous occurrence of the two above factors is enough to make a course of action meet the test of conservatism.
You will be right, over the course of many transactions, if your hypotheses are correct, your facts are correct, and your reasoning is correct. True conservatism is only possible through knowledge and reason.
I might add that in no way does the fact that our portfolio is not conventional prove that we are more conservative or less conservative than standard methods of investing. This can only be determined by examining the methods or examining the results.
You can find the entire letter here with a collection of Buffett Partnership Letters:
Buffett Partnership Letters – Collection
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