The founder of online retail giant Amazon.com (Nasdaq: AMZN) Jeff Bezos recently made headlines when he purchased the US newspaper The Washington Post for US$250 million from The Washington Post Co. (NYSE: WPO), a media company majority-owned by Warren Buffett's Berkshire Hathaway (NYSE: BRK.A).
The purchase by Bezos also brought to light a letter penned in 1975 by Buffett to then-CEO of The Washington Post Co., Katherine Graham. As reported in Fortune Magazine, the Post's pension plan is in exquisite condition, boasting around $1 billion in funds excess to requirement. It turns out the healthy state of the pension assets is thanks to this very letter, which until recently has been kept private.
Buffett played an instrumental part in Graham's leadership of the Post, taking it upon himself to explain many nuances of the business world to her. In the 1975 letter he discussed the issue of the Post's pension plan in his usual concise and easy-to-understand way. The letter covers two aspects: first, maintaining rational control over pension plan promises to employees, and second, increasing investment returns in pension plan assets.
While the first issue is of little relevance to Australian investors given our defined contribution (as opposed to defined benefit) system, the second issue reminds investors of the benefits of a long-term investment strategy. In the letter Buffett also covers what he views as the five different ways to approach the funding of and providing for future pension obligations. The fifth way was his preference:
"Stock market prices may bounce wildly and irrationally but, if decisions regarding internal rates of return of the business are reasonably correct — and a small portion of the business is bought at a fraction of its private-owner value — a good return for the fund should be assured over the time span against which pension fund results should be measured."
Buffett's advice ultimately shaped the Post's pension investment strategy. Compared with so many US companies that are struggling with underfunded pension obligations, the long-term investment strategy undertaken at the Post appears to have even surpassed Buffett's initial aims.
Long-dated liabilities are a risk investors need to be aware of. With CEO tenure on average only around five years, CEO concerns can often be out of line with long-term obligations. CSR (ASX: CSR) and James Hardie (ASX: JHX) are two firms that must manage asbestos obligations, for which it is hard to determine the ultimate cost. Likewise, insurers such as AMP (ASX: AMP) that offer life insurance or other forms of long-dated insurance where it could be potentially decades until a claim is paid, also need to be analysed carefully by investors.
Foolish takeaway
Thanks to Buffett's foresight, Bezos doesn't have to worry about the funding of The Washington Post's pension obligations. Buffett's letter is a reminder of just how profitable a long-term investment strategy can be.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
