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1960 Letter to Limited Partners

The 1960 letter is foundational, as Buffett formally outlines his "Ground Rules" for partners and categorizes the partnership's investment avenues into three distinct buckets. He also reviews a year where the partnership significantly outperformed a declining market.

📊 Performance Summary

  • Dow-Jones Industrials: -6.3% (including dividends).
  • Buffett Partnerships (7): +22.8%.
  • Key Insight: Buffett reinforces that his style "shines" in declining or static markets. He notes that while 90% of mutual funds beat the Dow this year, they struggled to do so in the bull market of 1959.

📜 The "Ground Rules" (A Word About Par)

Buffett establishes clear expectations for his partners:

  1. The Yardstick: The Dow Jones Industrial Average is the measure of "par."
  2. Time Horizon: Performance should be judged over a 3-to-5-year period, not annually.
  3. Relative Results: A "good year" is any year where the partnership outperforms the Dow, even if the absolute result is negative.
  4. Skin in the Game: Buffett emphasizes that his own net worth (along with his family's) is invested alongside the partners.

🏗️ The Three Categories of Investment

Buffett breaks down the portfolio into three avenues with different behavior characteristics:

  1. Generals: "Generally Undervalued Securities." The largest category. These have a significant Margin of Safety but their price movement usually correlates with the general market.
  2. Work-outs: Securities dependent on corporate actions (mergers, liquidations, etc.). These provide stable results regardless of market movement. Buffett occasionally uses leverage (up to 25% of net worth) to fund these.
  3. Control Situations: Positions where the partnership takes a large enough stake to influence or control company policy (e.g., Sanborn Map Co., Dempster Mill Manufacturing Company).

🏢 Key Entities & Holdings

🔗 Connections

🏛️ 1960 Shareholder Letter: "The Constitutional Convention"

"If in any year we fail to beat the Dow by a reasonable margin, my management of the partnership will have been unsatisfactory regardless of the absolute results." — Warren Buffett, 1960

🎭 The Narrative Context

The 1960 letter is the most structurally important document of the partnership era. The Dow fell 6.3%, yet the partnership gained 22.8% — a 29-point spread that validated every promise Buffett had made about his style. But the performance is secondary to the architecture. In this letter, Buffett codifies three innovations that would govern the next 65 years: (1) The Ground Rules — a formal contract of expectations between manager and owners; (2) The Three-Category Framework — dividing the portfolio into Generals, Work-outs, and Controls with explicitly different return drivers; and (3) The Sanborn Conclusion — proof that activist value investing could deliver outcomes independent of market direction. This letter is the founding charter of the Buffett operating system.

💡 Philosophical Gems

The Framework: The Three Categories

The Logic: By dividing the portfolio into Generals, Work-outs, and Control Situations, Buffett creates a system where different positions serve different functions:

  • Generals provide long-term capital appreciation through re-rating of undervalued securities. They correlate with the market.
  • Work-outs provide absolute returns through event-driven situations. They are market-independent.
  • Controls provide value realization through active management. They are self-catalyzing. The Mechanism: In a bear market, work-outs and controls carry the portfolio. In a bull market, generals drive returns. The blend produces the asymmetric return profile Buffett promised from the start. The Insight: This is not diversification in the modern portfolio theory sense — it is strategy diversification. Buffett is not spreading risk across assets; he is spreading risk across return mechanisms.

The Governance: The Ground Rules

The Premise: As the partnership grows (now 7 partnerships), Buffett recognizes the need to formalize expectations before they are needed. The Rules:

  1. The Dow Jones Industrial Average is the measure of "par"
  2. Performance should be judged over 3-to-5-year periods
  3. A year where the partnership outperforms the Dow is "good" even if the absolute result is negative
  4. The manager's own net worth is invested alongside the partners The Significance: These rules are the embryonic form of the "Owner-Related Business Principles" that Buffett would publish in the Berkshire annual report starting in 1983. The DNA is identical — transparency, accountability, long-term thinking, and alignment of interest.

The Proof: Sanborn Map Conclusion

The Strategy: Buffett's proxy fight at Sanborn Map Co. culminated in an exchange of Sanborn stock for underlying securities at a value far above the market price. The Lesson: This was the first large-scale proof that Buffett could create value rather than simply wait for the market to recognize it. The Sanborn outcome validated the "Control" category as a viable investment strategy. The Principle: When the gap between price and value is large enough, and the asset base is identifiable, the investor can become the catalyst. Patience is a virtue, but agency is also a virtue.

The Leverage Decision

The Disclosure: Buffett reveals that he uses borrowed funds (up to 25% of net worth) specifically to finance work-out positions. The Logic: Because work-outs have defined outcomes and timetables, the risk of leverage is bounded. This is categorically different from using leverage on speculative positions, where the downside is unbounded. The Discipline: Even at 29, Buffett draws a sharp distinction between leverage-for-arbitrage (acceptable) and leverage-for-speculation (catastrophic).

🗣️ Verbatim Masterclass

  • "If in any year we fail to beat the Dow by a reasonable margin, my management of the partnership will have been unsatisfactory regardless of the absolute results."
  • "Our investments are chosen on the basis of value, not popularity."
  • "A conservatively-valued portfolio in a declining market will always outperform a popularity-driven portfolio."

[!TIP] The 1960 letter is the constitutional founding of the Buffett method. Everything that follows — the Berkshire Hathaway takeover, the shift to quality businesses, the insurance float machine, the $1 trillion market cap — rests on the architectural foundation laid in this three-page document. The three-category framework, the ground rules, the leverage discipline, and the proof-of-concept at Sanborn Map are all here. If you want to understand why Buffett outperformed for six decades, start with the 1960 letter.

📚 Read Original Full Text

To respect the copyrights of Berkshire Hathaway (for shareholder letters) and CNBC (for annual meeting transcripts), we do not host or distribute the raw full-text documents. You can read the official records directly from the copyright holders:

📜 View Official Berkshire Hathaway Shareholder LettersRead on Berkshire ↗