After recently announcing he wouldn't seek re-election as a board member of the Washington Post, Warren Buffett made it clear that Berkshire Hathaway isn't abandoning its longtime investment in the company.
"We're going to keep every share of stock we have," he said. "I would never sell a share of the Post."
What's interesting about his comment is that the newspaper industry isn't protected by an enduring moat like, say, Coca-Cola. It's a dying business with little hope of turning around. How do we know? Buffett said so himself two years ago:
Twenty to 40 years ago, [newspapers] were essential to customers and advertisers. They had pricing power, but [it] essentiality has eroded. Erosion accelerated dramatically, and it won't end based on anything on the horizon. We do not see anything to reverse it. They are essential to advertisers only as long as they're essential to readers.
Ten years ago, the head of The Buffalo News said that on an economic basis, Berkshire should sell The Buffalo News. We could have sold the business for hundreds of millions. Not so today.
Buffett then gave his stance on selling newspaper investments: "As long as we're not losing money forever and there are no union problems, we won't sell. … We'll play it out as long as we can."
To be fair to the Washington Post, a decade of diversification has turned it into more than a newspaper. For-profit education and cable TV now make up substantially all of its operating profit.
This, though, doesn't exactly turn the company into a durable franchise. If there are two industries in the U.S. whose futures look as scary as newspapers, it's for-profit education and cable TV.
So why, then, does Buffett hold a till-death-do-us-part attitude? His comment underlines a key reason Berkshire has been so successful. To a certain extent, Berkshire will stick with lousy investments because it has made a commitment to the company, its managers, and its employees.
Consider what Buffett once said about why businesses should sell to Berkshire instead of Wall Street:
You can sell it to Berkshire, and we'll put it in the Metropolitan Museum; it'll have a wing all by itself; it'll be there forever.
Or you can sell it to some porn shop operator, and he'll take the painting and he'll make the boobs a little bigger and he'll stick it up in the window, and some other guy will come along in a raincoat, and he'll buy it.
Or this line, when a reporter asked Buffett why businesses looking to sell should come to him first: "If they care about the business and how the people are treated afterwards, Berkshire will be the best option."
Come to Buffett
That attitude is why Berkshire has been able to buy so many grade-A businesses at favourable terms. Businesses come to him.
They want Berkshire to buy them because they know Buffett will respect the company and stick with the investment even when it languishes.
Let's go back to the Washington Post. When Berkshire began buying Post stock in 1973, nerves began rattling after the late Chairwoman Katharine Graham feared Buffett was attempting to gain control over the company her family built.
"He's going to take over the Washington Post," she worried to friends, according to Buffett's biography The Snowball.
Buffett knew how worried Graham was. "When I first met with Kay, she was wary and scared. She was terrified by me. … I could see that even though she had all the A [voting] stock, she was afraid of me. I mean, they had spent their whole life dreaming up and putting defences around the stock."
He then reassured her in writing:
I also know that it is so important to you in this world that you're going to worry about it no matter what you've got. It's your whole life. I'm telling you that even though these teeth look like Little Red Riding Hood's wolf fangs, they really are baby teeth. … I'll never buy another share of stock unless you're OK with it.
Snowball author Alice Schroeder continues: "That afternoon, Buffett — who had spent $10,627,605 to buy twelve percent of the company — signed an agreement with Graham not to buy any more of the Post stock without her permission."
Graham could have pursued any number of poison-pill actions to prevent Berkshire from making a significant investment in the Post. Instead, Buffett's don't-worry, I'm-not-here-to-harm-you attitude made him allies with Graham and the company's board.
The result: While the Post's future might look dim today, the investment is still a 63-bagger for Berkshire, not including dividends. In percentage terms, it might be Berkshire's best investment ever. And it may have never materialised without Buffett convincing the Post that he was a good guy.
When we first heard Buffett's comments about vowing to never sell a share of a dying company, we thought maybe he was losing it.
Maybe his sentimental values were too strong. Maybe his technophobia put him in denial of newspapers' demise. But whenever we find ourselves second-guessing a great investor like Buffett, we stop and say, Look, there's a reason he's a billionaire and we're not.
As we think about it more, it becomes clearer: Buffett's rich because he thinks about businesses as businesses — commitments backed by people he trusts, and people who trust him — not as tradable shares that can be bought or sold with abandon.
Does that mean that Berkshire Hathaway shares are underpriced or sure to go up, especially after he's gone? Of course not, but, more than anything, his business focused long-term investing style is what has made him so successful so far.
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