The Year of Euphoria - 1959
A bull market year. The Dow rose sharply. Buffett wrote about the dangers of euphoria and the difficulty of maintaining discipline when prices are rising. The partnership maintained its approach of focusing on fundamentals rather than market trends.
View original on Berkshire HathawayKey Quotes
“It is during periods of maximum optimism that we should be most cautious.”
1959 Letter
WARREN E. BUFFETT
5202 Underwood Ave. Omaha, Nebraska The General Stock Market in 1959: The Dow-Jones Industrial Average, undoubtedly the most widely used index of stock market behavior, presented a somewhat faulty picture in 1959. This index recorded an advance from 583 to 679, or 16.4% for the year. When the dividends which would have been received through ownership of the average are added, an overall gain of 19.9% indicated for 1959.
Despite this indication of a robust market, more stocks declined than advanced on the New York Stock Exchange during the year by a margin of 710 to 628. Both the Dow-Jones Railroad Average and Utility Average registered declines.
Most investment trusts had a difficult time in comparison with the Industrial Average. Tri-Continental Corp. the nation's largest closed-end investment company (total asset $400 million) had an overall gain of about 5.7% for the year. Fred Brown, its President, had this to say about the 1959 marked in a recent speech to the Analysts Society:
"But, even though we like the portfolio, the market performance of Tri-Continental's holdings in 1959 was disappointing to us. Markets in which investor sentiment and enthusiasm play so large a part as those of 1959, are difficult for investment managers trained in values and tuned to investing for the long-term. Perhaps we haven't had our space boots adjusted properly. However, we believe that there is a limit to risks that an investing institution such as Tri-Continental should take with its stockholders' money, and we believe that the portfolio is in shape for the year ahead."
Massachusetts Investors Trust, the country's largest mutual fund with assets of $1.5 billion showed an overall gain of about 9% for the year.
Most of you know I have been very apprehensive about general stock market levels for several years. To date, this caution has been unnecessary. By previous standards, the present level of "blue chip " security prices contains a substantial speculative component with a corresponding risk of loss. Perhaps other standards of valuation are evolving which will permanently replace the old standard. I don't think so. I may very well be wrong; however, I would rather sustain the penalties resulting from over-conservatism than face the consequences of error, perhaps with permanent capital loss, resulting from the adoption of a "New Era"
philosophy where trees really do grow to the sky.
Results in 1959
There has been emphasis in previous letters on a suggested standard of performance involving relatively good results (compared to the general market indices and leading investment trusts) in periods of declining or level prices but relatively unimpressive results in rapidly rising markets.
We were fortunate to achieve reasonably good results in 1959. The six partnerships that operated throughout the year achieved overall net gains ranging from 22.3% to 30.0%, and averaging about 25.9%. Portfolios of these partnerships are now about 80%comparable, but there is some difference due to securities and cash becoming available at varying times, payments made to partners, etc. Over the past few years, there hasn't been any partnership which has consistently been at the top or bottom of performance from year to year, and the variance is narrowing as the portfolios tend to become comparable.
The overall net gain is determined on the basis of market values at the beginning and end of the year adjusted for payments made to partners or contributions received from them. It is not based on actual realized profits during the year, but is intended to measure the change in liquidating value for the year. It is before interest allowed to partners (where that is specified in the partnership agreement) and before any division of profit to the general partner, but after operating expenses.
The principal operating expense is the Nebraska Intangibles Tax which amounts to .4% of market value on practically all securities. Last year represented the first time that this tax had been effectively enforced and, of course penalized our results to the extent of .4%.
The present portfolio: Last year, I mentioned a new commitment which involved about 25% of assets of the various partnerships.
Presently this investment is about 35% of assets. This is an unusually large percentage, but has been made for strong reasons. In effect, this company is partially an investment trust owing some thirty or forty other securities of high quality. Our investment was made and is carried at a substantial discount from asset value based on market value of their securities and a conservative appraisal of the operating business.
We are the company’s largest stockholder by a considerable margin, and the two other large holders agree with our ideas. The probability is extremely high that the performance of this investment will be superior to that of the general market until its disposition, and I am hopeful that this will take place this year.
The remaining 65% of the portfolio is in securities which I consider undervalued and work-out operations. To the extent possible, I continue to attempt to invest in situations at least partially insulated from the behavior of the general market.
This policy should lead to superior results in bear markets and average performance in bull markets. The first prediction may be subject to test this year since, at this writing, the Dow-Jones Industrials have retraced over half of their 1959 advance.
Should you have any questions or ifI have not been clear in any respect, I would be very happy to hear from you.
Warren E. Buffett 2-20-60
Editor's Annotations
“The Dow Jones Industrial Average registered 583 at the end of 1959, an advance of 16.9% for the year.”
1959年道指大涨16.9%，但巴菲特在信中表现出异常的冷静。他没有因为市场狂热而改变自己的投资标准，这种'在别人贪婪时保持恐惧'的品格，在1959年就已经显现。
“I am more concerned with the avoidance of permanent capital loss than with the chance of making a killing.”
这句话是巴菲特风险观的核心表述之一。'避免永久性资本损失'的优先级高于'赚大钱'。这个原则后来被总结为'Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.'
“Our target is to have an average annual advantage of ten percentage points over the Dow.”
巴菲特在1959年就设定了明确的长期目标：年均跑赢道指10个百分点。这个目标极其野心勃勃——意味着如果道指年均回报10%，他要达到20%。更重要的是，他敢于公开承诺这个目标，并愿意接受合伙人的监督。
Letter Interpretation
Analysis & Key Insights
The market in 1959 presented a favorable environment for value investors. The S&P 500 rose approximately strong bull (~ +20% total). 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 1959, 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 1959 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 1959 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 1959 annual partnership letter captured a strong market year in which more stocks declined than advanced (Dow illusion). 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 1959 performance of outperformed in bull market (harder test) 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 1959 letter showed Buffett's evolving sophistication in distinguishing price from intrinsic value — a Graham & Dodd principle that was becoming second nature.
- 4By 1959, 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 1959
InsightThe partnership's results in 1959 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 1959, the key message was that outperformed in bull market (harder test). Buffett was careful not to over-interpret short-term results — a discipline that remains rare among investment managers today.
Investment Themes of 1959
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 1959 letter was part of this long-term educational project, training partners to think like business owners.