Be Careful If You Plan On Following Buffett’s Lead Into The Newspaper Business

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.

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