Tuesday, August 20, 2013

Buffett on Pensions: 1975

There have been dozens of books that have been written about Warren Buffett, and volumes of articles and media coverage have tracked nearly every phase of his life.

So you would not be alone in believing that you've probably read all you need about the Oracle. 

But last week Fortune carried an article about Buffett and the Washington Post that featured something that he wrote almost 40 years ago.

A little history:

Buffett had started investing in the Post in 1973, right after the newspaper had achieved fame (and notoriety, in some circles) for exposing the Watergate scandal in the Nixon White House. Newspaper stocks at the time were selling at a fraction of their worth, and the Post was no exception. 

Eventually Buffett wound up investing $11 million in the Post company, which represented approximately 10% of the company.  More importantly for the future, he became a close personal friend of Katherine Graham, who was CEO at the time.

At the time, Buffett wrote a letter to Graham, which she eventually reprinted in her excellent autobiography Personal History.  Here is an excerpt from the letter which shows his thinking:

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.


When Jeff Bezos bought the Post a couple of weeks ago, Buffett's $11 million investment was worth $1 billion - a compound annual return of nearly 12% for 40 years.

In any event, Buffett helped Graham in the financial side of running the Post, which is a little like having Tiger Woods help you with your golf game. 

In 1975, Buffett wrote a long memo to Graham talking about pensions.  More specifically, he discussed not only the potential hazards of pensions plans, but also alternatives to investing strategies.

His analysis was incredibly insightful, and anticipated the problems that many pension plans are facing today.  Because of his advice, however, the Post managed to keep its pension obligations in check.

Here's what the Fortune article from last week said:

One of the (many) things that surprised people about the recent $250 million sale of the Washington Post to Amazon (AMZN) founder Jeff Bezos was the health of the Washington Post's pension plan. At a time when most pension plans are struggling, the Post has $1 billion more than it needs. (As part of the deal, Bezos is getting $333 million for the new newspaper company's pension fund, which Post chairman Don Graham says is $50 million more than Bezos needs to meet his current obligations.) Graham told Fortune there are two words that explain why: Warren Buffett.

In October 1975, Buffett sent The Washington Post's (WPO) then chairman and CEO Katharine Graham a memo about the brewing problems in pension plans, and Buffett's suggestions for how the Post could avoid them. Graham took Buffett's advice, and the rest ... you know. For a story in the current issue of Fortune, Buffett talked about the story of the Washington Post's pension plan ("Kay Graham was a smart woman," says Buffett) and shared for the first time publicly the letter that he sent Graham.

The letter alone is quite amazing. In it, Buffett identifies the pension problems that others would key in on only a decade or so later. But he also lays out perhaps for the first time -- Buffett was 45 when he wrote it and years away from attaining the investment fame he has today -- his philosophy behind what it takes to be a successful investor. His main pieces of advice: Think like an owner, look for a discount, and be patient.


The entire 19 page memo is worth a read, but the part that struck home for me was the portion that described how difficult it is to find good money managers.

Buffett has long derided Wall Street's penchant for fads and gimmicks, and his words still ring true today.  I have written on numerous occasions in Random Glenings that so many pension fund strategies are illogical, and serve only to pay extraordinary fees for subpar performance, but Buffett says it much better than I ever could.

He notes, for example, that money managers tend to be chosen based on style rather than substance, which drives money management firms to the following:

In the short term, it frequently is better to look smart than to be smart, particularly if your employment is to be decided by a rather brief interview. If the fans are going to decide your hitting status based on only a few swings, it is prudent to develop a hitting style that will remind them of Joe DiMaggio or Ted Williams, even if long-range your percentage of solid hits with that style is small and you know you obtain better results batting cross-handed.