1966 Letter to Limited Partners

The 1966 letter covers a year where the market declined, allowing the partnership to showcase its defensive strength. It also highlights the first complete negotiation-based acquisition of an entire business, Hochschild, Kohn & Co..

📊 Performance Summary

Dow-Jones Industrials: -8.7% (first half results - full year table not yet reached in source).
Buffett Partnerships: +8.2% (first half).
Key Insight: Buffett uses this period of market decline to distinguish between "conventionalism" (tracking others) and true "conservatism" (losing less than others during downturns).

🏢 Landmark Acquisition: Hochschild, Kohn & Co

In the first half of 1966, BPL and two partners purchased 100% of Hochschild, Kohn & Co., a privately owned Baltimore department store.

Milestone: This was the first time in the partnership's history that an entire business was purchased through negotiation.
Philosophy: No new principles were involved; it was a quantitative and qualitative evaluation against price.
The "Iceberg Approach": Buffett notes that while HK is a major public move, there are individual marketable security positions three times larger that remain completely undisclosed.

🕰️ Market Forecasting Refutation

Buffett "resurrects" his market-guessing section specifically to address partner inquiries during the 100-point market drop in early 1966.

The Logic: He points out the absurdity of partners asking to "sell and wait" after a drop, asking why they didn't know to sell before the drop if they are so sure now.
Graham Influence: He cites Chapter 2 of "The Intelligent Investor" (The Investor and Stock Market Fluctuations) as the most important piece of investment literature ever written.

🏢 Berkshire Hathaway Corporate Operations (1966)

Earnings & Sales: Sales totaled $49.4 million. The last half of the year faced depressed textile markets (imports and overproduction of acetate fabrics), leading to a one-week shutdown of the Box Loom and Synthetic Divisions in October to avoid inventory build-up.
Capital Allocation & Working Capital: Working capital stood at $23,158,187 ($22.76/share). This included $5.4 million in marketable securities. Buffett stated the directors' intent to shift these liquid funds into marketable common stocks to participate in non-textile earnings.
Share Repurchases: Over the 1961–1966 period, Berkshire repurchased 607,972 shares (a 37% reduction), raising net worth per share from $23.37 to $28.99 despite net worth declining from $38.0M to $29.5M.
Dividend Policy: Declared a dividend of 10¢ per share, reflecting the restoration of the company's financial position.

🏢 Key Entities & Holdings

Hochschild, Kohn & Co.: Baltimore-based department store.
Berkshire Hathaway Inc.: Continued as a core control holding.
Ken Chace: President of Berkshire Hathaway, praised for his management.

💰 1966 Shareholder Letter: Conventionalism vs. Conservatism

"If you have a group of copycats doing something foolish, and you join them, you are conventional, but you are certainly not conservative." — Warren Buffett, 1966 Partnership Letter

🎭 The Narrative Context

The year 1966 was a test of nerve. The Dow fell 8.7% in the first half of the year, provoking anxiety among partners who begged Buffett to "sell and wait" for a market bottom. Buffett used this moment to deliver a sharp rebuke of market timing, pointing to Benjamin Graham's Chapter 2 of The Intelligent Investor as the ultimate guide to market fluctuations. Meanwhile, Berkshire Hathaway's corporate side was undergoing a quiet transformation. Buffett began using Berkshire's excess working capital to purchase marketable common stocks—the first step in converting Berkshire from a pure textile mill into an investment vehicle. Additionally, BPL completed its first negotiated acquisition of a private company, Hochschild, Kohn & Co., utilizing the "Iceberg Approach" to keep its much larger public investments hidden.

💡 Philosophical Gems

The Philosophy: Conservatism vs. Conventionalism

Buffett reframes the definition of "conservatism" which Wall Street has distorted into index-hugging and herd behavior.

The Logic: True conservatism is measured by results, specifically the preservation of capital during downturns. Wall Street defines conservatism as "conventionalism"—acting in a way that minimizes personal career risk by doing what everyone else is doing.
The Mechanism: By maintaining a concentrated portfolio of undervalued, high-conviction assets, BPL outperformed during market declines. Buffett argues that matching the market's losses because of conventional diversification is actually reckless.
The Quote: "We don't want to be conventional. We want to be right."

The Strategy: The Iceberg Approach and Secrecy

Buffett explains why the partnership's most significant investments must remain completely invisible to the public.

The Mechanism: The acquisition of Hochschild, Kohn & Co. was a highly visible, public transaction. Yet Buffett notes that BPL had individual marketable security positions three times larger that remained completely undisclosed.
The Lesson: In investing, publicity is a cost. Bidding for stocks in the public eye drives up the purchase price, whereas private negotiations or quiet market accumulation protect the buyer's cost basis.
The Quote: "Our 'iceberg' approach... means the visible portion is only a fraction of the total substance."

The Discipline: The Futility of Market Timing

Buffett addresses partners' panic during the 100-point Dow correction, dissecting the psychological error of selling after a drop.

The Thesis: If an investor did not know enough to sell before the market fell, they cannot logically claim to know that it will continue to fall after it has already declined. Trying to guess short-term market direction is a fool's errand.
The Remedy: Buffett directs partners to Chapter 2 of Benjamin Graham's The Intelligent Investor (The Investor and Stock Market Fluctuations), calling it the most important piece of investment literature ever written.
The Quote: "If they didn't know the market was going down when it was at 990, how do they know it's going further down now that it is at 890?"

🗣️ Verbatim Masterclass

"We do not buy and sell based on what we think the market is going to do. We buy based on what we think the business is worth."
"Ben Graham's Chapter 2... is the foundation of all rational investment behavior."
"A dividend of 10 cents per share was declared... consistent with the need for preserving the strength of our present financial position."

🔗 Evolutionary Links

Entities: Hochschild, Kohn & Co., Berkshire Hathaway Inc., Ken Chace
Concepts: The Iceberg Approach, Conventionalism vs. Conservatism, Market Timing, Mr. Market, Capital Allocation, Share Repurchases

[!TIP] 1966 illustrates that the best defense during a market downturn is not to try and time the market, but to hold concentrated, undervalued businesses. At the same time, it shows the first structural step of using an operating company's excess working capital to build a marketable securities portfolio, initiating Berkshire's conglomerate structure.

Preceded by: 1965 Letter
Followed by: 1967 Letter
Index: index