The year 1961 was one of significant fluctuation in the stock market. The Dow-Jones Industrial Average rose from 616 at the beginning of the year to a high of 731 in April, then fell back to 664 by mid-year. It rebounded to 733 in September and finally closed the year at 733. Overall, the Industrial Average advanced approximately 19%, and with dividends included, the total return was about 21.6%. This performance stands in sharp contrast to the previous year's decline. The number of advancing issues on the New York Stock Exchange outpaced declining issues by a margin of 840 to 616. This was a reversal of the 1960 pattern, where declining issues had outnumbered advancing ones by 653 to 404.

 

I continue to aim for a long-term performance record that surpasses the Dow-Jones Industrial Average. If we fail to do so, there's no justification for the existence of our partnership. I've emphasized that our outperformance, if achieved, won't be through consistent yearly superiority. Instead, it's more likely to come from above-average performance in stable or declining markets and average or below-average performance in rising markets. In 1961, our seven partnerships achieved a 21.1% gain, slightly trailing the 21.6% overall return of the Industrial Average. However, over the four years from January 1, 1958, to January 1, 1962, we've seen the Industrial Average rise about 12% cumulatively, while our partnerships have gained approximately 65%. This suggests that our strategy of buying undervalued securities and profiting from corporate actions rather than market movements is working. I want to highlight to our partners that short-term performance shouldn't be overemphasized. Investment success should be measured over years, not months. While 1961 wasn't our best year relative to the market, the long-term trend remains positive.

We currently manage seven separate partnerships. This setup has worked well, but it's become administratively cumbersome. I'm considering consolidating them into one or two larger partnerships. This would simplify operations and reduce expenses. I'll seek partners' opinions on this matter.

Our investment in Sanborn Map Company has been eventful. We acquired a controlling interest and worked to separate the company's investment portfolio from its map business. This involved a complex process of negotiations and stock exchanges. Ultimately, we aimed to unlock the value of the investment portfolio and revitalize the map business. The investment portfolio, valued around $7 million, was distributed to shareholders, and the map business was restructured to focus on its core operations.

Our investment in Sanborn is an example of a "control situation." Such opportunities are rare and require significant capital and effort. However, they can be highly rewarding. We continue to look for similar opportunities where we can influence a company's operations to enhance value.

The stock market's performance in 1961 was strong, but we remain cautious. We believe that the market values of quality companies will continue to appreciate over time. Our focus remains on finding undervalued securities and special situations where we can achieve profits through corporate actions rather than market fluctuations.

I appreciate your continued trust and support. If you have any questions about this letter or our financial statements, please don't hesitate to contact me.

Warren E. Buffett