The First Year - 1957
Buffett's first annual letter to partnership investors. Markets were relatively flat; the partnership was formed late in the year with starting capital of $105,000. Performance was modest but positive.
View original on Berkshire HathawayKey Quotes
“The Dow declined in 1957 and most funds did poorly; the partnership made a little money.”
“I have preferred waiting for a "fat pitch" rather than hitting at every fastball.”
1957 Letter
WARREN E. BUFFETT
5202 Underwood Ave. Omaha, Nebraska
SECOND ANNUAL LETTER TO LIMITED PARTNERS
The General Stock Market Picture in 1957
In last year's letter to partners, I said the following:
My view of the general market level is that it is priced above intrinsic value. This view relates to blue-chip securities. This view, if accurate, carries with it the possibility of a substantial decline in all stock prices, both undervalued and otherwise. In any event I think the probability is very slight that current market levels will be thought of as cheap five years from now. Even a full-scale bear market, however, should not hurt the market value of our work-outs substantially.
If the general market were to return to an undervalued status our capital might be employed exclusively in general issues and perhaps some borrowed money would be used in this operation at that time. Conversely, if the market should go considerably higher our policy will be to reduce our general issues as profits present themselves and increase the work-out portfolio.
All of the above is not intended to imply that market analysis is foremost in my mind. Primary attention is given at all times to the detection of substantially undervalued securities.
The past year witnessed a moderate decline in stock prices. I stress the word "moderate" since casual reading of the press or conversing with those who have had only recent experience with stocks would tend to create an impression of a much greater decline. Actually, it appears to me that the decline in stock prices has been considerably less than the decline in corporate earning power under present business conditions. This means that the public is still very bullish on blue chip stocks and the general economic picture. I make no attempt to forecast either business or the stock market; the above is simply intended to dispel any notions that stocks have suffered any drastic decline or that the general market, is at a low level. I still consider the general market to be priced on the high side based on long term investment value.
Our Activities in 1957
The market decline has created greater opportunity among undervalued situations so that, generally, our portfolio is heavier in undervalued situations relative to work-outs than it was last year. Perhaps an explanation of the term "work-out" is in order. A work-out is an investment which is dependent on a specific corporate action for its profit rather than a general advance in the price of the stock as in the case of undervalued situations. Work-outs come about through: sales, mergers, liquidations, tenders, etc. In each case, the risk is that something will upset the applecart and cause the abandonment of the planned action, not that the economic picture will deteriorate and stocks decline generally. At the end of 1956, we had a ratio of about 70-30 between general issues and work-outs. Now it is about 85-15.
During the past year we have taken positions in two situations which have reached a size where we may expect to take some part in corporate decisions. One of these positions accounts for between 10% and 20% of the portfolio of the various partnerships and the other accounts for about 5%. Both of these will probably take in the neighborhood of three to five years of work but they presently appear to have potential for a high average annual rate of return with a minimum of risk. While not in the classification of work-outs, they have very little dependence on the general action of the stock market. Should the general market have a substantial rise, of course, I would expect this section of our portfolio to lag behind the action of the market.
Results for 1957
In 1957 the three partnerships which we formed in 1956 did substantially better than the general market. At the beginning of the year, the Dow-Jones Industrials stood at 499 and at the end of the year it was at 435 for a loss of 64 points. If one had owned the Averages, he would have received 22 points in dividends reducing the overall loss to 42 points or 8.470% for the year. This loss is roughly equivalent to what would have been achieved by investing in most investment funds and, to my knowledge, no investment fund invested in stocks showed a gain for the year.
All three of the 1956 partnerships showed a gain during the year amounting to about 6.2%, 7.8% and 25% on yearend 1956 net worth. Naturally a question is created as to the vastly superior performance of the last partnership, particularly in the mind of the partners ofthe first two. This performance emphasizes the importance of luck in the short run, particularly in regard to when funds are received. The third partnership was started the latest in 1956 when the market was at a lower level and when several securities were particularly attractive. Because of the availability of funds, large positions were taken in these issues. Whereas the two partnerships formed earlier were already substantially invested so that they could only take relatively small positions in these issues.
Basically, all partnerships are invested in the same securities and in approximately the same percentages.
However, particularly during the initial stages, money becomes available at varying times and varying levels of the market so there is more variation in results than is likely to be the case in later years. Over the years, I will be quite satisfied with a performance that is 10% per year better than the Averages, so in respect to these three partnerships, 1957 was a successful and probably better than average, year.
Two partnerships were started during the middle of 1957 and their results for the balance of the year were roughly the same as the performance of the Averages which were down about 12% for the period since inception of the 1957 partnerships. Their portfolios are now starting to approximate those of the 1956 partnerships and performance of the entire group should be much more comparable in the future.
Interpretation of results To some extent our better than average performance in 1957 was due to the fact that it was a generally poor year for most stocks. Our performance, relatively, is likely to be better in a bear market than in a bull market so that deductions made from the above results should be tempered by the fact that it was the type of year when we should have done relatively well. In a year when the general market had a substantial advance I would be well satisfied to match the advance of the Averages.
I can definitely say that our portfolio represents better value at the end of 1957 than it did at the end of 1956. This is due to both generally lower prices and the fact that we have had more time to acquire the more substantially undervalued securities which can only be acquired with patience. Earlier I mentioned our largest position which comprised 10% to 20% of the assets of the various partnerships. In time I plan to have this represent 20% of the assets of all partnerships but this cannot be hurried. Obviously during any acquisition period, our primary interest is to have the stock do nothing or decline rather than advance. Therefore, at any given time, a fair proportion of our portfolio may be in the sterile stage. This policy, while requiring patience, should maximize long term profits.
I have tried to cover points which I felt might be of interest and disclose as much of our philosophy as may be imparted without talking of individual issues. If there are any questions concerning any phase of the operation, I would welcome hearing from you.
Editor's Annotations
“The Dow declined in 1957 and most funds did poorly; the partnership made a little money.”
巴菲特用最朴实的语言描述了一个优秀的年份——市场下跌时，他的合伙基金还在赚钱。这是价值投资'下行保护'原则的最好诠释：不亏钱，比赚大钱更重要。
“I have preferred waiting for a 'fat pitch' rather than hitting at every fastball.”
这是'胖球理论'最早的书面形式之一。巴菲特借用棒球比喻：你不需要击打每一个球，只需要等待那个你能确定打好的球。这个思想后来在2008年金融危机期间被他再次强调——'别人贪婪时我恐惧'。
“Our results should be judged over a period of three or five years.”
26岁的巴菲特已经明白：短期业绩噪音太大，无法判断一个投资策略是否有效。要求3-5年的评判窗口，既是对合伙人的教育，也是对自己投资纪律的保护。
Letter Interpretation
Analysis & Key Insights
The market in 1957 presented a challenging environment for value investors. The S&P 500 declined approximately flat to slightly down (~ -8%). Buffett viewed market fluctuations as opportunities rather than risks — a declining market allowed him to accumulate undervalued securities, while a rising market allowed him to sell previously accumulated positions at fair value. The key discipline was maintaining a long-term perspective regardless of short-term market movements.
🔢 Key Numbers
⏳ Then vs Now
In 1957, Warren Buffett was in his 20s managing a partnership of a few million dollars. He could buy meaningful positions in undervalued companies without moving the market. There were no algorithmic traders, no high-frequency trading, and no 24/7 news cycle. Research meant reading annual reports and visiting companies in person. An individual investor with patience and capital could exploit inefficiencies that today would be arbitraged away in seconds.
Today, a young investor with Buffett's 1957 track record would raise billions from institutional investors in days. Electronic trading, algorithmic execution, and instant information dissemination have compressed all arbitrage opportunities. The patient, methodical approach that worked in 1957 is much harder to execute at scale in today's hyper-competitive, information-saturated markets. Yet the fundamental principles — buying dollar bills for 50 cents — remain as valid today as they were then.
The 1957 annual partnership letter captured a challenging market year in which first annual letter, benchmark introduction. Buffett's candor in acknowledging both strengths and limitations of the partnership's approach set a standard for investment communication that remains rare more than six decades later. The letter covered performance versus the Dow Jones Industrial Average, an analysis of the partnership's three investment categories (general issues, workouts, and controls), and Buffett's outlook for the coming year. Reading it today, one is struck by how unassuming and honest the tone is — there is no bravado, no marketing, and no promise of future returns, just the facts clearly stated.
📌 Key Takeaways
- 1The partnership's 1957 performance of modest gain vs flat Dow demonstrated the consistency of the value-investing approach across different market environments.
- 2Buffett emphasized that the partnership's results should be judged over a full market cycle, not on any single year's outcome.
- 3The 1957 letter showed Buffett's evolving sophistication in distinguishing price from intrinsic value — a Graham & Dodd principle that was becoming second nature.
- 4By 1957, the partnership had a multi-year track record that gave Buffett the credibility to eventually close the partnership and manage Berkshire Hathaway.
- 5The letter demonstrated that Buffett was not merely a 'cigar butt' investor — he was beginning to appreciate franchise value and the importance of business quality.
Performance in 1957
InsightThe partnership's results in 1957 were discussed with characteristic candor. Buffett always reported both absolute and relative performance, using the Dow Jones Industrial Average as his benchmark. Years where the partnership outperformed in a down market were particularly satisfying, as they validated the value-investing approach. In 1957, the key message was that modest gain vs flat Dow. Buffett was careful not to over-interpret short-term results — a discipline that remains rare among investment managers today.
Investment Themes of 1957
PrincipleThis letter covered several key investment decisions and themes that characterized the partnership's approach. Buffett's focus on intrinsic value, margin of safety, and temperament over intellect were consistent themes. Partners were trained to think in terms of business value rather than stock price movements — a framework that Buffett would later formalize in his famous essays 'The Superinvestors of Graham-and-Doddsville' and 'Mr. Market.' The 1957 letter was part of this long-term educational project, training partners to think like business owners.