Warren Buffett on Pensions (1975)

This is the full text letter from Warren Buffett to Katherine Graham discussing pensions, as released by Fortune. I find this easier to read on things like Instapaper than the PDF version.

PENSIONS

There are two aspects of the pension cost problem upon which management can have a significant impact: (1) maintaining rational control over pension plan promises to employees and (2) increasing investment returns on pension plan assets.

The Irreversible Nature of Pension Promises

To control promises rationally, it is necessary to understand the basic arithmetic and practical rules governing pension plans.

The first thing to recognize, with every pension benefit decision, is that you almost certainly are playing for keeps and won’t be able to reverse your decision subsequently if it produces subnormal profitability.

As a practical matter, it is next to impossible to decrease pension benefits in a large profitable company—or even a large marginal one. The plan may embody language unequivocally declaring the company’s right to terminate at any time and providing that contributions shall be solely at the option of the company. But the law has eroded much of the significance such “out” clauses were presumed to have, and operating practicalities render any residual rights to terminate moot.

So, rule number one regarding pension costs has to be to know what you are getting into before signing up. Look before you leap. There probably is more managerial ignorance on pension costs than any other cost item of remotely similar magnitude. And, as will become so expensively clear to citizens in future decades, there has been even greater electorate ignorance of governmental pension costs. Actuarial thinking simply is not intuitive to most minds. The lexicon is arcane, the numbers seem unreal, and making promises never quite triggers the visceral response evoked by writing a check.

In no other managerial area can such huge aggregate liabilities—which will be reflected in progressively increasing annual costs and cash requirements—be created so quickly and with so little immediate financial pain. Like pressroom labor practices, small errors will compound. Care and caution are in order. Continue reading “Warren Buffett on Pensions (1975)” →

Why Buffett Didn’t Buy the Post

There have been many speculations about why Warren Buffett — a long time shareholder, admirer, and one-time delivery boy of the Washington Post — opted not to purchase the company. Berkshire Hathaway has over $35 billion in cash and they’ve been purchasing local papers recently, so passing on the Post is curious at first glance.

Followers of Buffett have pointed to the fact that he has a policy of not buying into money-losing businesses in a shrinking industry.

But I think the real reason is that Buffett believes the Post will be better off in the hands of Bezos. For the Post to stop losing money, it needs some serious changes — changes that would be difficult for Berkshire to provide. The company would be only a tiny part of the massive conglomerate, and there wouldn’t be a figurehead leader to guide the paper during such a turnaround.

Buffett admires and respects Jeff Bezos.* He also loves the Washington Post enough to look past his own desires so it can have a brighter future. Don Graham no doubt sought Buffett’s advice before making this decision, and I’d like to believe this is what he told him.

* It’s also worth noting that the admiration is mutual. One of the major aspects of Buffett’s success is his ability to realize talent in others. It’s easy to see that talent in someone who knows strategy, history, product, and capital allocation so well.

Dear Mrs. Graham

In 1973, the Washington Post Company couldn’t have been a more widely revered media company. The Watergate scandal, which Bob Woodward and Carl Bernstein begun reporting on in mid-1972, came to a spectacular end with President Nixon’s resignation in August 1974. But the reverence of the publication didn’t match the company’s popularity on Wall Street. The Post—along with many other stocks at that time—was trading at historic lows.

Below is the letter that Warren Buffett wrote to Katharine Graham in June 1973 after he had acquired over 5% of the stock. By the end of the year his stake had increased to 10%. The letter gives a lot of insight into how Buffett viewed the Post—not only as an investment, but as a business with noble purposes that brings out his sentimental side.

This purchase represents a sizable commit ment to us—and an explicitly quantified compliment to the Post as a business enterprise and to you as its chief executive. Writing a check separates conviction from conversation. I recognize that the Post is Graham-controlled and Graham-managed. And that suits me fine.

Some years back, a partnership which I managed made a significant investment in the stock of Walt Disney Productions. The stock was ridiculously cheap based upon earnings, asset values and capability of management. That alone was enough to make my pulse quicken (and pocketbook open), but there was also an important extra dimension to the investment. In its field, Disney simply was the finest—hands down. Anything that didn’t reflect his best efforts—anything that might leave the customer feeling short-changed—just wasn’t acceptable to Walt Disney. He melded energetic creativity with a discipline regarding profitability, and achieved something unique in entertainment.

I feel the same way about The Washington Post. The stock is dramatically undervalued relative to the intrinsic worth of its constituent properties, although that is true of many securities in today’s markets. But, the twin attraction to the undervaluation is an enterprise that has become synonymous for quality in communications. How much more satisfying it is going to be to watch an investment in the Post grow over the years than it would be to own stock in some garden variety company which, though cheap, had no sense of purpose.

I am additionally impressed by the sense of stewardship projected by your communications to fellow shareholders. They are factual, complete and interesting as you bring your established newspaper standards for integrity to the newer field of corporate reporting.

You may remember that I was in your office about two years ago with Charles Munger, discussing the New Yorker. At the time I mentioned to you that I had received my financial start delivering the Post while attending Woodrow Wilson High in the mid 1940’s. Although I delivered about 400 Posts per day, my record of loyalty is slightly tarnished in that I also had the Times-Herald route (much smaller—my customers were discriminating) in the Westchester. This was perhaps the first faint sign to keenly perceptive Washingtonians that the two organizations eventually would get together.

I should mention that Berkshire Hathaway has no radio or television properties, so that we will not be a complicating factor with the FCC. Our only communications property is the ownership of Sun Newspapers of Omaha, a group of financially (but not editorially) insignificant weekly newspapers in the metropolitan Omaha area. Last month our whole organization, seventy people counting printing, went into orbit when we won a Pulitzer for our reporting on Boys Town’s undisclosed wealth. Incidentally, Newsweek and Time used approximately equal space in covering the story last year, but Newsweek’s reporting job was far superior.

You can see that the Post has a rather fervent fan out in Omaha. I have hopes that, as funds become available, we will add to our holdings, at which time I will send along amended 13-D filings.

Cordially,
Warren E. Buffett

This letter was taken from Katharine Graham’s wonderful autobiography, Personal History.

Warren Buffett & The Washington Post

By Max Olson

PDF Version of “Warren Buffett & The Washington Post”

Warren Buffett and Katherine Graham

There is no question that Warren Buffett is one of the greatest investors of all time. To study his investment methods, there are the Berkshire Hathaway annual letters, biographies, and dozens of other books written on the subject of value investing. But, Buffett’s specific investments are rarely examined within the context of the time he made the purchase—and without the benefit of hindsight. To more fully understand Buffett’s past successes, “reverse engineering” his purchases is essential. One investment in particular interested me, both because I like the business and because it is one of the only investments Buffett made where he disclosed an estimate of intrinsic value. That business is The Washington Post Company.

Background

Buffett began acquiring shares of the Washington Post in early 1973, and by the end of the year held over 10 percent of the non-controlling “B” shares. After multiple meetings with Katherine Graham (the company’s Chairman and CEO), he joined the Post’s board in the fall of 1974.

According to Buffett’s 1984 speech The Superinvestors of Graham-and-Doddsville, in 1973, Mr. Market was offering to sell the Post for $80 million. Buffett also mentioned that you could have “…sold the (Post’s) assets to any one of ten buyers for not less than $400 million, probably appreciably more.” How did Buffett come to this value? What assumptions did he make when looking at the future of the company? Note: All numbers and details in this article are from the 1971 and 1972 annual reports and “Buffett: The Making of an American Capitalist” by Roger Lowenstein.

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