How Warren Buffett made life easy for Amazon founder Jeff Bezos

The founder of online retail giant (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.

Buying high quality, dividend paying stocks at a discount to intrinsic value for the long-term is a proven strategy for investment success. Interested in our #1 dividend-paying stock? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.