1964 Letter to Limited Partners

The 1964 letter reflects on a strong bull market where the partnership achieved index-beating results, though with a narrower margin than in previous years. It introduces the final evolution of Buffett's investment categories and a clear stance on tax management.

📊 Performance Summary

Dow-Jones Industrials: +18.7% (including dividends).
Buffett Partnerships: +27.8%.
Key Insight: Buffett is "not depressed" by the narrowing margin (9.1 points), as he expects "raging bull markets" to be the most difficult environments to outperform.

🏗️ The Fourth Category: Generals - Relatively Undervalued

Buffett expands his classification system from three categories to four:

Generals - Private Owner Basis: (The original "Generals") Deeply discounted issues.
Generals - Relatively Undervalued: (NEW) Large-cap securities selling cheap relative to peers of similar quality. This category is less about "asset value" and more about relative mispricing.
Work-outs: (Unchanged) Timetabled corporate actions.
Control Situations: (Unchanged) Controlling blocks.

⚖️ Policy on Taxes

Buffett clarifies that BPL's policy is to maximize investment gains, not minimize taxes.

Philosophy: He argues that avoiding a profitable sale purely for tax reasons is a "nullification of investment management."
Quote: "We will do our level best to create the maximum revenue for the Treasury—at the lowest rates the rules will allow."

🏢 Key Entities & Holdings

Mid-Continent Tab Card Co.: A "non-marketable" local company Buffett has held since 1960.
First Beatrice Corp.: Noted for its large portfolio of marketable securities after the Dempster turnaround.
Swap Funds: Critique of funds like Federal Street and Westminster, which he views as "test-tubes" that prove the difficulty of managing money while constrained by tax-avoidance mandates.

🔗 Connections

Previous Year: 1963 Letter
Next Year: 1965 Letter
Concept: Relative Valuation
Concept: The Joys of Compounding
Concept: Work-outs
Concept: Control Situations
Concept: Generals
Entity: First Beatrice Corp.

🎯 1964 Shareholder Letter: "The Final Architecture"

"We will do our level best to create the maximum revenue for the Treasury — at the lowest rates the rules will allow." — Warren Buffett, 1964

🎭 The Narrative Context

The 1964 letter is the capstone of the partnership era's intellectual development. The Dow gained 18.7%; the partnership gained 27.8% — a solid but narrower margin (+9.1 points) than previous years. Buffett is characteristically unbothered: "I am not depressed by the narrowing margin," he writes, noting that raging bull markets are the most difficult environment for his style. But the real significance of this letter is architectural. Buffett expands his investment framework from three categories to four, adding "Generals — Relatively Undervalued" as a distinct class. This fourth category — large-cap securities selling cheap relative to peers of similar quality — is the bridge between the Graham-era focus on absolute cheapness and the Munger-era focus on relative quality. The 1964 letter also delivers Buffett's definitive philosophy on taxes, a position he has never retreated from in 60 years.

💡 Philosophical Gems

The Framework: The Fourth Category

The Innovation: Buffett adds "Generals — Relatively Undervalued" to the existing framework of Generals (Private Owner Basis), Work-outs, and Control Situations. The Distinction: The original "Generals" are deeply discounted issues where the margin of safety comes from paying less than liquidation value. The new "Generals — Relatively Undervalued" are higher-quality, larger-cap companies that are merely cheap relative to their peers. The Significance: This is the first sign of Buffett's migration from pure Graham (buy below net asset value) toward Munger (buy quality at a fair relative price). The fourth category would eventually absorb the entire first category as Buffett's capital base grew too large for micro-cap cigar butts. The Evolution: By the time Buffett wrote the 1967 letter, "Generals — Relatively Undervalued" had become the dominant category. By the time he took over Berkshire, it was essentially the only category for equity investments.

The Philosophy: Tax Maximization

The Principle: "We will do our level best to create the maximum revenue for the Treasury — at the lowest rates the rules will allow." The Logic: Buffett argues that avoiding a profitable sale purely for tax reasons is a "nullification of investment management." Taxes are a cost of doing business, not a reason to avoid doing business. The Critique: He dissects the "swap fund" concept — vehicles like Federal Street and Westminster that allowed investors to exchange appreciated stocks for diversified portfolios without triggering capital gains taxes. Buffett calls these "test-tubes" that prove the difficulty of managing money when constrained by tax-avoidance mandates. The Insight: The swap funds underperformed the market precisely because their investment decisions were distorted by tax considerations. This is the same argument Buffett would later make against hedge funds, endowments, and pension funds that allow fee structures to dictate investment behavior.

The Prediction: Narrowing Margins

The Warning: Buffett cautions that the partnership's margin over the Dow will likely continue to narrow in strong bull markets. He expects his best relative performance in flat or declining markets. The Logic: The partnership's edge comes from buying below intrinsic value. In a rising market, everything goes up — the cheap stocks and the expensive stocks — so the edge is diluted. In a declining market, cheap stocks have a floor (their asset value) while expensive stocks have no protection. The Honesty: This is remarkable candor from a money manager. Most fund managers promise outperformance in all conditions. Buffett explicitly tells his partners when to expect underperformance.

The Holding: Mid-Continent Tab Card Co.

The Detail: Buffett mentions holding shares of Mid-Continent Tab Card Co. since 1960 — a "non-marketable" local company. This illiquid position, held for 4+ years, illustrates his willingness to accept illiquidity in exchange for value. The Principle: If the price is right and the business is sound, the lack of a daily market quote is a feature, not a bug. Without a market price to obsess over, the investor is forced to think like a business owner.

🗣️ Verbatim Masterclass

"We will do our level best to create the maximum revenue for the Treasury — at the lowest rates the rules will allow."
"The most awkward thing about the narrowing of our margin has been its accompaniment by a 'raging bull market,' which tends to make our partners regard the performance as quite satisfactory on an absolute basis, when in fact it is only reasonably satisfactory on a relative basis."
"I am not depressed by a narrowing margin. In a year of substantial market advance, I would be well satisfied merely to match the advance of the Dow."

🔗 Evolutionary Links

Entities: Warren Buffett, First Beatrice Corp., Dow Jones Industrial Average
Concepts: Generals, Relative Valuation, Work-outs, Control Situations, The Joys of Compounding, Eating Your Own Cooking

[!TIP] The 1964 letter is the last before Buffett takes control of Berkshire Hathaway, making it the final statement of the pure partnership-era philosophy. The four-category framework represents the most sophisticated version of Buffett's investment approach, and the tax philosophy ("maximize gains, not minimize taxes") is a permanent principle that still governs Berkshire's capital allocation 60 years later. Read 1957-1964 together and you have a complete investment education: measure against a benchmark, buy below intrinsic value, compound patiently, let time work, and never let tax considerations override investment judgment.

Preceded by: 1963 Letter
Followed by: 1965 Letter
Index: index