July 10, 1963 First Half Performance During the first half of 1963, the Dow Jones Industrial Average (hereinafter called the "Dow") advanced from 652.10 to 706.88. If one had owned the Dow during this period, dividends of $10.66 would have been received, bringing the overall return from the Dow during the first half to plus 10.0%. Our incantation has been: (1) that short-term results (less than three years) have little meaning, particularly in reference to an investment operation such as ours that devotes a portion of resources to control situations, and; (2) That our results relative to the Dow and other common-stock-form media, will be better in declining markets and may well have a difficult time just matching such media in bubbling markets. Nevertheless, our first-half performance, excluding any change in Dempster valuation (and its valuation did change --I'm saving this for dessert later in the letter) was plus 14%. This 14% is computed on total net assets (not non-Dempster assets) and is after expenses, but before monthly payments (to those who take them) to partners and allocation to the General Partner. Such allocations are academic on an interim basis, but if we were also plus 14% at yearend, the first 6% would be allocated to partners according to their capital, plus three- quarters of the balance of 8% (14% -6%), or an additional 6%, giving the limited partners a plus 12% performance. Despite the relatively pleasant results of the first half the admonitions stated two paragraphs earlier hold in full force. At plus 14% versus plus 10% for the Dow, this six months has been a less satisfactory period than the first half of 1962 when we were minus 7.5% versus minus 21.7% for the Dow. You should completely understand our thinking in this regard which has been emphasized in previous letters. During the first half we had an average net investment in "generals" (long positions in generals minus short positions in generals) of approximately $5,275,000. Our overall gain from this net investment in generals (for a description of our investment categories see the last annual letter) was about $1,100,000 for a percentage gain from this category of roughly 21%. This again illustrates the extent to which the allocation of our resources among various categories affects short-term results. In 1962 the generals were down for the year and only an outstanding performance by both of the other two categories, "work-outs" and "controls," gave us our unusually favorable results for that year.
Now this year, our work-outs have done poorer than the Dow and have been a drag on performance, as they are expected to be in rising markets. While it would be very nice to be 100% in generals in advancing markets and 100% in work-outs in declining markets, I make no attempt to guess the course of the stock market in such a manner. We consider all three of our categories to be good businesses on a long-term basis, although their short- term price behavior characteristics differ substantially in various types of markets. We consider attempting to gauge stock market fluctuations to be a very poor business on a long-term basis and are not going to be in it, either directly or indirectly through the process of trying to guess which of our categories is likely to do best in the near future. Investment Companies Shown below are the usual statistics on a cumulative basis for the Dow and