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Generals

Generals (or "Generally Undervalued Securities") is the largest investment category in the early Buffett Partnership. These are stocks selling at a significant discount to their Intrinsic Value, where the primary catalyst for profit is a re-rating by the general market.

📍 Origin

The strategy was first detailed in the 1957 Letter under the category of "Undervalued Securities."

"This category consists of undervalued stocks... where the development is likely to be a result of the general market. In these cases we are looking for a significant discrepancy between market price and intrinsic value."

📅 Chronological Evolution

  • 1960 Letter: Buffett formally categorizes these as "Generals" to distinguish them from Work-outs and Control Situations.

    • Context: Buffett notes that while these are the "largest and most rewarding" group, they are also most sensitive to market swings.
    • Shift: He emphasizes the Margin of Safety, noting that "we have a margin of safety here that should prevent any permanent loss of capital."

  • 1961 Letter: Buffett refines the definition to "Generals - Private Owner Basis."

    • Quote: "We try to buy these at a price that would be attractive to a private owner, regardless of whether a public market for the stock exists or not."

  • 1962 Letter: Introduction of the "Coattail Riding" subgroup.

    • Shift: Buffett describes a specific type of General where the Partnership follows a "dominating stockholder group" (like himself) that intends to unlock value through asset conversion or management change.

  • 1964 Letter: The Fourth Category — "Generals - Relatively Undervalued."

    • Innovation: Buffett splits the original "Generals" into two sub-categories: (1) "Private Owner Basis" — deeply discounted issues where the margin of safety comes from paying less than liquidation value; and (2) "Relatively Undervalued" — higher-quality, larger-cap companies that are cheap relative to peers of similar quality.
    • Significance: This is the earliest evidence of Buffett's migration from pure Graham (buy below net asset value) toward Munger (buy quality at a fair relative price). The "Relatively Undervalued" category would eventually absorb the "Private Owner Basis" category entirely as the partnership's capital base grew.

🔗 Connections

📚 Historical Mentions & Citations (3)

Click a reference document below to expand and read the exact paragraph(s) containing this concept in the archive.

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1960 LetterReference Only
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Mentioned in this document.

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1962 LetterExcerpt Available
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Valuing Dempster at $50 per share, our overall gain (before any payments to partners) to October 31st for the Partnership has been 5.5%. This 22.3 percentage-points advantage over the Dow, if maintained until the end of the year, will be among the largest we have ever had. About 60% of this advantage was accomplished by the portfolio other than Dempster, and 40% was the result of increased value at Dempster. I want all partners and prospective partners to realize the results described above are distinctly abnormal and will recur infrequently, if at all. This performance is mainly the result of having a large portion of our money in controlled assets and workout situations rather than general market situations at a time when the Dow declined substantially. If the Dow had advanced materially in 1962, we could have looked very bad on a relative basis, and our success to date in 1962 certainly does not reflect any ability on my part to guess the market (I never try), but merely reflects the fact that the high prices of generals partially forced me into other categories or investment. If the Dow had continued to soar, we would have been low man on the totem pole. We fully expect to have years when our method of operation will not even match the results of the Dow, although obviously I don't expect this on any long-term basis or I would throw in the towel and buy the Dow. I’ll cut this sermon short with the conclusion that I certainly do not want anyone to think that the pattern of the last few years is likely to be repeated; I expect future performance to reflect much smaller advantages on average over the Dow. The first section consists of generally undervalued securities (hereinafter called “generals”) where we have nothing to say about corporate policies and no timetable as to when the undervaluation may correct itself .Over the years, this has been our largest category of investment, and more money has been made here than in either of the other categories. We usually have fairly large positions (5% to 10% of our total assets) in each of five or six generals, with smaller positions in another ten or fifteen.
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📜
1964 LetterExcerpt Available
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Our Method of Operation In past annual letters I have always utilized three categories to describe investment operations we conduct. I now feel that a four-category division is more appropriate. Partially, the addition of a new section - "Generals Relatively Undervalued" - reflects my further consideration of essential differences that have always existed to a small extent with our "Generals" group. Partially, it reflects the growing importance of what once was a very small sub-category but is now a much more significant part of our total portfolio. This increasing importance has been accompanied by excellent results to date justifying significant time and effort devoted to finding additional opportunities in this area. Finally, it partially reflects the development and implementation of a new and somewhat unique investment technique designed to improve the expectancy and consistency of operations in this category. Therefore, our four present categories are: 1. “Generals -Private Owner Basis” - a category of generally undervalued stocks, determined by quantitative standards, but with considerable attention also paid to the qualitative factor. There is often little or nothing to indicate immediate market improvement. The issues lack glamour or market sponsorship. Their main qualification is a bargain price; that is, an overall valuation of the enterprise substantially below what careful analysis indicates its value to a private owner to be. Again, let me emphasize that while the quantitative comes first and is essential, the qualitative is important. We like good management - we like a decent industry - we like a certain amount of “ferment” in a previously dormant management or stockholder group. But, we demand value.
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