Blog Archives

Back in 1969, billionaire investor Warren Buffett wrote a letter to his investing partners that is now quite famous. In this letter he told his investing partners that he was not able to find any value in the marketplace and he believed it best to return their money and dissolve the partnership.

In the letter he came to the conclusion that only two businesses possess relative value, and one of those was Berkshire Hathaway. As part of an option to his company liquidation, he offered the investing partners the choice of owning pro rata shares of both of these companies.

Warren Buffett’s tremendous personal wealth is evidence to the success of those who stuck with him. Plus, he is the antithesis to the typical greed you hear about on Wall Street, and he has pledged to the Bill and Melinda Gates Foundation a total of $30 billion.

Over the next 50 years, Warren Buffett has been a major powerhouse in the investing world. He is obviously the most famous investor the world has known, and certainly the most successful in the eyes of many. When the technology boom came along, he backed away because he didn’t understand this business model. Luckily or strategically, he was capable of avoiding the dot com bust altogether.

You know Warren Buffett owns stocks, he doesn’t invest in them. When he invests, he does so in the companies and the value that they bring. He’s also known to ignore the emotions and attention of the marketplace.

Warren Buffett has been buying newspapers as of late. It’s funny because this medium is looked at as yesterday’s media. But he has a specific way of investing in newspapers. He only buys small-market, hometown newspapers with a loyal following. Does he know something that the rest of us do not?

In the year 1986, Bill Kovach was hired by the Atlanta Journal-Constitution, and became their new editor. He was previously the Washington bureau chief of the New York Times.

This new appointment brought about a turbulent two years, and the investigative journalism brought two Pulitzer prizes and many more nominations. That’s not a normal occurrence for a newspaper like the Atlanta Journal-Constitution.

They proceeded to ramp up their reporting, and decided to cover more international and national news stories. They also covered critical business stories that revolve around the city of Atlanta. They even picked a fight with the mighty Coca-Cola. This resulted in a proud community, who enjoyed their vastly improve newspaper.

But like all good things, they must come to an end. And Bill Kovach was fired in November 1988.

The city was in an uproar, and they were very upset over this decision. There was even a protest march that went all away down Marietta Street, and went past the front of the newspaper’s office. Such important intellectual leaders like Pat Conroy and Morehouse professor Michael Lomax even participated in this event.

This situation became national news, and the newspaper owners, Cox Enterprises, were vilified in the media. The event gained a lot of attention, and all of it was overwhelmingly in favor of Bill Kovach.

But Cox wanted to return to its regular style of journalism. They weren’t interested in becoming a competitor of USA Today or the New York Times. So Bill Kovach was out. That’s just the way it goes sometimes.

Fuhrman Bisher, a sports reporter for the newspaper during that time, said: “Maybe now we can get back to covering Dixie like the dew” – the tagline of the newspaper.

The message in that saying is quite simple: the local news is still important and it still sells, and the local newspaper has to completely serve the market if it’s going to survive.

As a newspaper editor, you need to realize that a person could get their national and international news from so many different media sources at this point. But there aren’t many ways to get the local news, except for the local newspaper in many cases. There will always be a tremendous demand for comprehensive coverage of local business, local sports, local festivities and the local lifestyle.

It’s fairly straightforward at the empirical level: the life force of a newspaper is always going to be the advertising revenue. If you plan to give advertisers their money’s worth, you have to get in touch with their target audience. If the target audience is local readers, then you have to provide local information. It’s that simple.

According to the way Warren Buffett thinks, this is always going to be a profitable business model.

The media is saying that print newspapers are dying, and national newspapers and news magazines are having a tough time surviving at this point because of the Internet.

At the time of this writing, Time Warner has done something practically unthinkable. They have spun off Time Inc., the company’s magazine portfolio, and turned it into its own standalone company.

In the meantime, Warren Buffett has shrewdly found value in a largely ignored investment that the rest of Wall Street seems to have overlooked. At the time of this writing, Berkshire Hathaway currently owns 28 newspapers. It wouldn’t be surprising if other people seem to recognize this opportunity and eventually follow suit.

Warren Buffett, CEO and chairman of Berkshire Hathaway, just announced today that he wrote a personal donation check to the United States treasury in an effort to comply with “The Buffett Rule.” In another interesting turn of events, every Berkshire Hathaway investor is going to have 30% of their capital gains and dividends withheld. This money will then be sent directly to Washington.

The Buffett Rule was championed by congressional Democrats and Pres. Barack Obama, and it proposed that everyone would an income over $1 million pay a 30% tax.

Warren Buffett is going to personally unveil the three-foot by six-foot donation check on the Treasury steps in a press conference this afternoon. According to the press release put out for the event, Warren Buffett said, “As I wrote in the New York Times, ‘My friends and I have been coddled long enough by a billionaire friendly Congress. It’s time for our government to get serious about shared sacrifice.’ Today, I, Warren Buffett, and personally getting serious about shared sacrifice.”

Buffett’s actions received a lot of praise from the White House, and Pres. Barack Obama said, “Let me be clear. This puts to rest any GOP driven allegations that Warren Buffett was a hypocrite on the tax issue or was just engaging in a bit of moral preening.”

According to the Joint Tax Committee, if The Buffett Rule is enacted, over the next decade, it would raise $31 billion worth of tax revenue. As a way to put this in context, that is only less than 1/10 of 1% of the federal spending that will take place in the next 10 years.

Back on October 16, 2008, CEO, chairman and value investor Warren Buffett wrote an op-ed piece that was published in the New York Times. The piece was titled “Buy American. I am.”

This op-ed piece first appeared in print on October 17 of the same year, right during the height of the financial crisis. Stock prices were swinging wildly from day to day, and the market was plummeting.

As a matter of fact, on the day Warren Buffett wrote the piece, on October 16, the S&P 500 swung 4% from the lowest value to the highest value in that single day. The S&P opened at 909, dropped to 865 and then surged in value to 947 before it closed at 946. The Dow Jones had a very similar volatile day. At its height, it traded at 9013 and then closed at 8979. That is a 5% swing during the day.

Even in the middle of all of the noise and scary volatility, Warren Buffett urged people to stay calm.

He wrote:

“The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So… I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100% in United States equities.

Why?

A simple rule dictates my buying: be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But the most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower in a month – or a year – from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”

Warren Buffett predicted his buying movement a little bit too early. The stock markets actually hit their bottom on March 9, 2009.

But if you paid attention to the market close on the date of his op-ed piece, which was October 17, 2008, to yesterday’s close on February 12, 2013, and you followed his advice and bought the S&P 500 and the Dow, you would currently be up 61.6% in the S&P and 58.4% in the Dow Jones.

Did you take Warren Buffett’s advice and buy as many stocks as you could during those dark days in 2008 and 2009?

Did you learn anything about your own risk tolerance during the Great Recession?

According to Warren Buffett, he claims to follow the specific advice to “never invest in a business you cannot understand.”

But he may not have taken his own advice in this instance…

During a Congressional hearing a few years ago, Warren Buffett mentioned that he did not necessarily know a lot about the credit rating agency Moody’s. He also said that he didn’t understand the credit rating market in general. This was reported in the New York Times at the time of the statements being made.

It may appear that those gaps in knowledge have come back to haunt Warren Buffett. Last Wednesday, Bloomberg reported that the Berkshire Hathaway investment in Moody’s could have potentially lost up to $291.5 million in value for the holding.

Bloomberg tells us that Berkshire Hathaway owns a 13% stake in this company as of September 30, 2012. But the stock price of the credit rating agency took a major hit last week. The government recently took out a lawsuit against S&P, and Moody’s is their main competitor and they got hit in the crossfire. The government is alleging the S&P inflated its mortgage bond ratings during the time leading up to the financial crisis.

No one is saying that the stock will not bounce back. It could definitely happen. It does not appear that the government is going to sue Moody’s. When the Justice Department first decided to do a three-year investigation, Moody’s was initially included. But they later on dropped Moody’s from the probe, we learned from a source that is familiar to the investigation.

There’s no reason to feel bad for Warren Buffett. He is the fourth richest man in the world and is worth $52.4 billion. We learned this according to the Bloomberg Billionaires Index.

Within the business community, Warren Buffett is the greatest ally of President Barack Obama. There is even a proposal to raise taxes brought about by President Obama named the Buffett Rule, which obviously bears the name of the billionaire entrepreneur and investor.

And more often than not, President Obama appeals to the authority and business savvy of Warren Buffett when he needs someone to defend his policies. But some of the statements that Buffett made this week potentially tell us that he’s not completely sold on the policies of our current president.

In this past Sunday’s edition of the New York Times, they published an op-ed piece where some of Warren Buffett’s opinions differed on topics that both he and President Obama are both concerned. For starters, Buffett opposes an increase in taxes on those people making less than $500,000 a year. As of right now, President Obama is currently negotiating a tax deal where Republicans will have to accept rate hikes in households making $250,000 a year or more.

And in a personal interview that Warren Buffett gave on TV with Charlie Rose of PBS, he sang the praises of Jamie Dimon, CEO of J.P. Morgan Chase Bank. Buffett thinks he would make an excellent Treasury Secretary. The interesting thing is that Mr. Dimon very clearly opposes the economic policies of the president and has openly criticized them. I’m particularly talking about financial regulations brought about from the 2010 Dodd-Frank law.

But during his interview, Warren Buffett said that Jamie Dimon is “terrific” and also mentioned to Charlie Rose that “if we did run into problems in markets, I think he actually be the best person you could have in the job.”

Even though Warren Buffett is considered President Obama’s biggest cheerleader throughout the business community, it is apparent that they do not agree on everything. This is particularly true of tax and regulatory policies that are a big part of the president’s agenda.

Is Warren Buffett a hypocrite because of this? I don’t believe so, not anymore then his advocacy of the Buffett Rule, since he exposes very little of his own fortune to taxation.

During the month of June, Warren Buffett raised some eyebrows when the news told us that he was purchasing 63 newspapers from media conglomerate Media General. There were two different camps in regards to this purchasing decision. Some people thought that Warren Buffett finally lost his mind. While others believed that he noticed an opportunity that nobody else seems to recognize.

Since Warren Buffett has been such a successful investor for the last 50 or more years, I would believe that he knows a good opportunity when he sees one. The only caveat that I’ll mention is that this is definitely a speculative potential opportunity. What investors need to look at is this: do you invest in Berkshire Hathaway because of this move, or do you mimic their investment choices and begin to buy into newspapers? The answer is basically no to both questions, and I’d like to share why I feel this is so.

It’s very tempting to follow the lead of Warren Buffett because you believe he noticed another anomaly that most people didn’t understand. When this happens he’ll cause the headlines to go crazy, and people even believe that he’ll currently save the newspaper industry.

But the truth is that he didn’t actually save the newspaper industry. But he did decide to invest in the community aspect of newspapers, because he is buying small-town papers that really cannot be replaced, as opposed to big, metropolitan newspapers. This is very distinct to his investing strategy, and you need to recognize this.

He recognized what a gentleman named Bert saw.

Throughout the mid-1990s, an entrepreneur named Bert started his first newspaper in Eudora, Kansas, as opposed to the bigger and supposedly better option of De Soto, Kansas which is right on the outskirts of Kansas City. Bert said the reason he made this choice after carefully evaluating both towns is that he believed Eudora “had a better sense of community.”

If you fast-forward to May 29th of 2012, here’s what Warren Buffett said when talking to CNN Money: “in towns and cities where there is a strong sense of community, there is no more important institution than the local paper.”

So that’s what Warren Buffett based his investments off of in a nutshell: Warren Buffett is one of the best investors in this world because he has the ability to take a long look at the big picture, and he will really get into the head of the local entrepreneur to try and understand what they are thinking and what they are going through. Bert opened his newspaper because of a “sense of community,” and the great Warren Buffett bought his newspapers for the exact same reason.

While Warren Buffett was doing his research, he noticed that there was no major sense of community in the large metropolitan newspapers. That’s why he really isn’t interested in purchasing a large paper like The Los Angeles Times. He told reporters, “if you live in South Central Los Angeles, you’re not interested in who dies in Beverly Hills.”

Buffett also observed that “in Grand Island, Nebraska, everyone is interested in how the football team does. They’re interested in who got married.”

They are also very interested in seeing pictures of their children and grandchildren accepting awards in the local paper, or going on class picnics and Cub Scout meetings. It’s not surprising that a lot of these pictures are often taken by the parents of the young children, and then submitted to the local paper with a little blurb about the event. The small-town news is obviously going to be interesting to anyone living in that particular small-town.

Buffett doesn’t only spend his time in Omaha, Nebraska. You can bet that he has gone to Wahoo, Ashland and Blair, Nebraska as well, so he understands the role of the local newspaper in regards to the small-town community. He also gets that a “sense of community” is all tied in with a “community ownership of the local paper.”

The local newspaper is the diary, chronicle and photo album of the local community. It provides you with a present-day history, and you get to see the perspective of people that live right in your hometown.

It’s no question that Warren Buffett is still invested in some of the larger metropolitan newspapers. He has legacy holdings in The Washington Post and The Buffalo News. He also bought the Omaha World-Herald last year, but it was most likely a civic minded gesture than a major investing opportunity.

The purchase that he made from Media General recently was a very well thought out, and hard-nosed business decision, even if it was one of high speculation. It fits right along with his “moat” criteria, since the local newspaper is basically a monopoly for that small section of the world, plus the valuation multiple fit in with the way that he likes to invest as well.

But the truth is that Warren Buffett really doesn’t know the total valuation of these newspapers at this time. He thinks he’s buying a hard asset that is currently undervalued. But he is also under the impression that a lot of these local newspapers are going to continuously lose money for the time being. Plus, he knows that the community newspapers are trying to figure out a way to stay relevant in the Internet world. Their business model has basically been turned on its head, and they have to come up with a plan that will allow them to compete.

Buffett recently told the New York Times that “I do not have any secret sauce. There are still 1400 daily papers in the United States. The nice thing about it is that somebody can think about the best answer and we can copy him. Two or three years from now, you’ll see a much better defined pattern of operations online and in print by papers.”

Warren Buffett can afford to make that particular speculation, since he only laid out $142 million, which for him is basically pocket change. The ordinary investor does not have the ability to ride the coattails of the Oracle of Omaha since they do not have the same kind of capital that he does.

There’s no particular reason for you to immediately invest in Berkshire Hathaway because of this newspaper investment. Warren Buffett said outright about this newspaper investment that “it’s not going to move the needle at Berkshire”

Second of all, there’s no way to really replicate this investment, at least in the sense that it will appeal to an ordinary investor. There is only one thing that even slightly resembles a pure play in non metro newspapers, and that is GateHouse Media. But that’s the kind of investment you want to stay away from since it lost $21.6 million last year, and their current book value is $-14.15 per share. If you were to invest in this company you would be certainly speculating, because there’s no reason to think that this investment is going to pay off anytime soon.

The other mainly newspaper public companies really aren’t all that close to the Media General buy that Buffett made. There’s mostly only big metro paper investment opportunities, like A. H. Belo Corp., but they lost $10.9 million last year. Then there is Lee Enterprises, who lost a total of $146.8 million last year. One investment that actually made money is the McClatchy Company, who brought in a total of $54.4 million last year. But it looks like their earnings are only going to grow at a rate of 5% during the next five years.

If you think the modest earnings forecast from McClatchy is very compelling, then that’s fine for you, but there are much better investment choices out there. But if you want to invest like Warren Buffett, then you need to realize that McClatchy’s Metro style newspapers are exactly what Warren Buffett has been staying away from.

I know many people find it fashionable to watch Warren Buffett and follow the moves that he makes, but it wouldn’t be a good idea for you to try and replicate this move at this time. And don’t look at this as a buy signal for the entire industry of newspapers because it’s not.