1957 Letter
WARREN E. BUFFETT
5202 Underwood Ave. Omaha, Nebraska
SECOND ANNUAL LETTER TO LIMITED PARTNERS
The General Stock Market Picture in 1957
In last year's letter to partners, I said the following:
My view of the general market level is that it is priced above intrinsic value. This view relates to blue-chip
securities. This view, if accurate, carries with it the possibility of a substantial decline in all stock prices, both
undervalued and otherwise. In any event I think the probability is very slight that current market levels will be
thought of as cheap five years from now. Even a full-scale bear market, however, should not hurt the market
value of our work-outs substantially.
If the general market were to return to an undervalued status our capital might be employed exclusively in
general issues and perhaps some borrowed money would be used in this operation at that time. Conversely, if
the market should go considerably higher our policy will be to reduce our general issues as profits present
themselves and increase the work-out portfolio.
All of the above is not intended to imply that market analysis is foremost in my mind. Primary attention is given
at all times to the detection of substantially undervalued securities.
The past year witnessed a moderate decline in stock prices. I stress the word "moderate" since casual reading of
the press or conversing with those who have had only recent experience with stocks would tend to create an
impression of a much greater decline. Actually, it appears to me that the decline in stock prices has been
considerably less than the decline in corporate earning power under present business conditions. This means that
the public is still very bullish on blue chip stocks and the general economic picture. I make no attempt to
forecast either business or the stock market; the above is simply intended to dispel any notions that stocks have
suffered any drastic decline or that the general market, is at a low level. I still consider the general market to be
priced on the high side based on long term investment value.
Our Activities in 1957
The market decline has created greater opportunity among undervalued situations so that, generally, our
portfolio is heavier in undervalued situations relative to work-outs than it was last year. Perhaps an explanation
of the term "work-out" is in order. A work-out is an investment which is dependent on a specific corporate
action for its profit rather than a general advance in the price of the stock as in the case of undervalued
situations. Work-outs come about through: sales, mergers, liquidations, tenders, etc. In each case, the risk is that
something will upset the applecart and cause the abandonment of the planned action, not that the economic
picture will deteriorate and stocks decline generally. At the end of 1956, we had a ratio of about 70-30 between
general issues and work-outs. Now it is about 85-15.
During the past year we have taken positions in two situations which have reached a size where we may expect
to take some part in corporate decisions. One of these positions accounts for between 10% and 20% of the
portfolio of the various partnerships and the other accounts for about 5%. Both of these will probably take in the
neighborhood of three to five years of work but they presently appear to have potential for a high average annual
rate of return with a minimum of risk. While not in the classification of work-outs, they have very little
