The Year of the Recession - 1958
Markets fell sharply in 1958 amid recession fears. The partnership posted gains while the Dow declined. Buffett introduced the concept of "Mr. Market" - the market as a bipolar personality offering daily prices.
View original on Berkshire HathawayKey Quotes
“It is much better to have a conviction about value and wait for the market to recognize it than to try to predict what the market will do next.”
1958 Letter
Warren E Buffett 5202 Underwood Ave. Omaha, Nebraska
THE GENERAL STOCK MARKET IN 1958
A friend who runs a medium-sized investment trust recently wrote: "The mercurial temperament, characteristic of the American people, produced a major transformation in 1958 and ‘exuberant ’ would be the proper word for the stock market, at least".
I think this summarizes the change in psychology dominating the stock market in 1958 at both the amateur and professional levels. During the past year almost any reason has been seized upon to justify “Investing” in the market. There are undoubtedly more mercurially-tempered people in the stock market now than for a good many years and the duration of their stay will be limited to how long they think profits can be made quickly and effortlessly. While it is impossible to determine how long they will continue to add numbers to their ranks and thereby stimulate rising prices, I believe it is valid to say that the longer their visit, the greater the reaction from it.
I make no attempt to forecast the general market - my efforts are devoted to finding undervalued securities.
However, I do believe that widespread public belief in the inevitability of profits from investment in stocks will lead to eventual trouble. Should this occur, prices, but not intrinsic values in my opinion, of even undervalued securities can be expected to be substantially affected.
RESULTS IN 1958
In my letter of last year, I wrote:
“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 will. In a year when the general market had a substantial advance, I would be well satisfied to match the advance of the averages.” The latter sentence describes the type of year we had in 1958 and my forecast worked out. The Dow-Jones Industrial average advanced from 435 to 583 which, after adding back dividends of about 20 points, gave an overall gain of 38.5% from the Dow-Jones unit. The five partnerships that operated throughout the entire year obtained results averaging slightly better than this 38.5%. Based on market values at the end of both years, their gains ranged from 36.7% to 46.2%. Considering the fact that a substantial portion of assets has been and still is invested in securities, which benefit very little from a fast-rising market, I believe these results are reasonably good. I will continue to forecast that our results will be above average in a declining or level market, but it will be all we can do to keep pace with a rising market.
TYPICAL SITUATION
So that you may better understand our method of operation, I think it would be well to review a specific activity of 1958. Last year I referred to our largest holding which comprised 10% to 20% of the assets of the various partnerships. I pointed out that it was to our interest to have this stock decline or remain relatively steady, so that we could acquire an even larger position and that for this reason such a security would probably hold back our comparative performance in a bull market.
This stock was the Commonwealth Trust Co. of Union City, New Jersey. At the time we started to purchase the stock, it had an intrinsic value $125 per share computed on a conservative basis. However, for good reasons, it paid no cash dividend at all despite earnings of about $10 per share which was largely responsible for a depressed price of about $50 per share. So here we had a very well managed bank with substantia1 earnings power selling at a large discount from intrinsic value. Management was friendly to us as new stockholders and risk of any ultimate loss seemed minimal.
Commonwealth was 25.5% owned by a larger bank (Commonwealth had assets of about $50 Million – about half the size of the First National in Omaha), which had desired a merger for many years. Such a merger was prevented for persona1 reasons, but there was evidence that this situation would not continue indefinitely. Thus we had a combination of: 1. Very strong defensive characteristics; 2. Good solid value building up at a satisfactory pace and; 3. Evidence to the effect that eventually this value would be unlocked although it might be one year or ten years. If the latter were true, the value would presumably have been built up to a considerably larger figure, say, $250 per share.
Over a period ofa year or so, we were successful in obtaining about 12% of the bank at a price averaging about $51 per share. Obviously it was definitely to our advantage to have the stock remain dormant in price. Our block of stock increased in value as its size grew, particularly after we became the second largest stockholder with sufficient voting power to warrant consultation on any merger proposa1.
Commonwealth only had about 300 stockholders and probably averaged two trades or so per month, so you can understand why I say that the activity of the stock market generally had very little effect on the price movement of some of our holdings.
Unfortunately we did run into some competition on buying, which railed the price to about $65 where we were neither buyer nor seller. Very small buying orders can create price changes of this magnitude in an inactive stock, which explains the importance of not having any "Leakage" regarding our portfolio holdings.
Late in the year we were successful in finding a special situation where we could become the largest holder at an attractive price, so we sold our block of Commonwealth obtaining $80 per share although the quoted market was about 20% lower at the time.
It is obvious that we could still be sitting with $50 stock patiently buying in dribs and drabs, and I would be quite happy with such a program although our performance relative to the market last year would have looked poor. The year when a situation such at Commonwealth results in a realized profit is, to a great extent, fortuitous. Thus, our performance for any single year has serious limitations as a basis for estimating long term results. However, I believe that a program of investing in such undervalued well protected securities offers the surest means of long term profits in securities.
I might mention that the buyer of the stock at $80 can expect to do quite well over the years. However, the relative undervaluation at $80 with an intrinsic value $135 is quite different from a price $50 with an intrinsic value of $125, and it seemed to me that our capital could better be employed in the situation which replaced it. This new situation is somewhat larger than Commonwealth and represents about 25% of the assets of the various partnerships. While the degree of undervaluation is no greater than in many other securities we own (or even than some) we are the largest stockholder and this has substantial advantages many times in determining the length of time required to correct the undervaluation. In this particular holding we are virtually assured of a performance better than that of the Dow-Jones for the period we hold it.
THE CURRENT SITUATION
The higher the level of the market, the fewer the undervalued securities and I am finding some difficulty in securing an adequate number of attractive investments. I would prefer to increase the percentage of our assets in work-outs, but these are very difficult to find on the right terms.
To the extent possible, therefore, I am attempting to create my own work-outs by acquiring large positions in several undervalued securities. Such a policy should lead to the fulfillment of my earlier forecast – an above average performance in a bear market. It is on this basis that I hope to be judged. If you have any questions, feel free to ask them.
WARREN E. BUFFETT 2-11-59
Editor's Annotations
“Whether the market is high or low is not the important factor in a purchase.”
这是巴菲特对'市场择时'最明确的否定。当时很多人说'股价太高了不能买'，但巴菲特说要看个股价值，而非大盘点位。这个思想后来在1987年致股东信中被再次强调。
“We will not follow the policy of investing in companies that are apt to be subject to the high pressure salesmanship of the investment banker.”
年轻的巴菲特已经对华尔街的销售文化保持警惕。他清楚地知道：投资银行家推销的股票，往往不是最好的投资机会。这种对'中介机构利益冲突'的敏感性，是巴菲特后来避免科技股IPO的重要原因。
“The partnership's performance in 1958 was satisfactory.”
巴菲特的'satisfactory'（令人满意）背后是真实的数据：合伙基金+32.2%，道指+38.5%。他跑输了指数，但没有任何自我辩护，只是平静地报告事实。这种对基准的诚实态度，在基金经理中极为罕见。
Letter Interpretation
Analysis & Key Insights
The market in 1958 presented a challenging environment for value investors. The S&P 500 declined approximately sharp decline (~ -10%), then partial recovery. 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 1958, 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 1958 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 1958 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 1958 annual partnership letter captured a challenging market year in which outperformed in down market, euphoria warning. 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 1958 performance of gain while Dow declined 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 1958 letter showed Buffett's evolving sophistication in distinguishing price from intrinsic value — a Graham & Dodd principle that was becoming second nature.
- 4By 1958, 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 1958
InsightThe partnership's results in 1958 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 1958, the key message was that gain while Dow declined. Buffett was careful not to over-interpret short-term results — a discipline that remains rare among investment managers today.
Investment Themes of 1958
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 1958 letter was part of this long-term educational project, training partners to think like business owners.