Timeless investing lessons from Warren Buffett's early partnership letters (1957-1969)

That Warren Buffett is an investing maven is indisputable. However, his role as one of the greatest teachers of investing deserves equal recognition. Over the years, his letters have served as a guiding light for many investors, providing them with critical knowledge and direction.

In this story, we have taken excerpts from Buffett's letters that he wrote while running his first investing venture Buffett Partnership Limited (BPL). Between 1957 and 1968, BPL generated an annualised return of about 25 per cent (net of fees) for its partners compared to a 9 per cent annual return of the Dow Jones. What a killing!

So, let's look at some key investing lessons shared by Buffett in his partnership letters:

The danger of overconfidence

"Widespread public belief in the inevitability of profits from investment in stocks will lead to eventual trouble."

Buffett expressed caution against believing that making money through stocks is easy. His words serve well to remind us that markets are influenced by sentiment as much as by intrinsic values.

The value of conservatism

"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."

Buffett was a proponent of a conservative investment approach, even if it meant missing out on some potential gains.

Suggested read: What is margin of safety and why do you need it?

The true test of a sound investment strategy...

...is outperforming during bad years, according to Buffett.

"I would consider a year in which we declined 15 per cent and the Average (Dow Jones Industrial Average Index) 30 per cent to be much superior to a year when both we and the Average advanced 20 per cent. 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."

Independent thinking and conservatism

"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.

...I feel the most objective test as to just how conservative our manner of investing is arises through evaluation of performance in down markets."

Buffett highlighted that popular opinion or endorsement by influential figures should not be mistaken for a conservative or safe investment. The true measure of conservatism, he argued, was how well investments perform in difficult markets.

Emphasis on fundamentals

The investing sage maintained that investors must not get swayed by the market's antics and keep their focus on what truly matters, which is fundamentals.

"The quantitative and qualitative aspects of the business are evaluated and weighed against price, both on an absolute basis and relative to other investment opportunities.

...The course of the stock market will determine, to a great degree, when we will be right, but the accuracy of our analysis of the company will largely determine whether we will be right. In other words, we tend to concentrate on what should happen, not when it should happen."

Investors' takeaway

In sum, Warren Buffett's early partnership letters provide timeless investment wisdom for investors. His caution against overconfidence emphasises that market success is not guaranteed and is often driven by sentiment. His advocacy for a conservative approach reflects the importance of long-term capital preservation over short-term profits. He also stressed the value of independent thinking and rigorous evaluation of business fundamentals over following popular opinion. Sticking to these lessons will help investors navigate market complexities with greater confidence and success.

Also read: Does stock market volatility worry you?