Warren Buffet is known as the Sage of Omaha. He hasn’t become the world’s smartest investor without learning quite a bit along the way.
His company, Berkshire Hathaway last year added around $US17 billion dollars in new value (realised and unrealised) through some old fashioned ideas: investing in companies and staying invested for long periods of time; buying companies and industries unwanted by others (one of his insurance companies bought all the old liabilities of Lloyds of London last year) and by following some old fashioned rules: always look for value and never pay too much, and keep good managers.
That near $US17 billion, he claimed, was the largest ‘one year gain in net worth’ by any American coming ‘leaving aside boosts that have occurred through mergers’.
“Our gain in net worth during 2006 was $16.9 billion, which increased the per-share book value of both our Class A and Class B stock by 18.4%. Over the last 42 years (that is, since present management took over) book value has grown from $19 to $70,281, a rate of 21.4% compounded annually.
“We believe that $16.9 billion is a record for a one-year gain in net worth – more than has ever been booked by any American business, leaving aside boosts that have occurred because of mergers (e.g., AOL’s purchase of Time Warner). Of course, Exxon Mobil and other companies earn far more than Berkshire, but their earnings largely go to dividends and/or repurchases, rather than to building net worth.”
That’s from his 2006 letter to Berkshire Hathaway shareholders in the 2006 annual report that is just out.
There’ll be more from the Berkshire Hathaway annual report later in the week in a special Buffett edition of Air Weekly.
Its entertaining reading and he makes a lot of sense (and wouldn’t be too worried about what was happening in the markets right now except to see if he could spot some value in some of his pet stocks).
One of his earliest and longest areas of interest (outside of insurance) has been the media, especially newspapers. He’s also been an investor in TV and radio, but newspapers remain in the portfolio, especially the Buffalo News, a monopoly paper in upstate New York
Despite this long held fascination with the finances of newspapers (especially in the US where thousands of local monopolies abound) Buffett is gloomy on the future of newspapers:
He believes the glory days of easy money are gone; a message that should be required reading in the boardrooms of Fairfax, APN and News Corp: not because these companies have dud investments in papers but as Buffet warns the fat profits are gone (something he warned of back in 1991!)
With Australia about to undergo another over inflated orgy of media reshuffling, Buffett’s words should be absorbed by anyone with an interest in the media, not just newspapers.
“Fundamentals are definitely eroding in the newspaper industry, a trend that has caused the profits of our Buffalo News to decline,” Buffett wrote in his letter.
“The skid will almost certainly continue.
“When Charlie (Munger, his partner in BH) and I were young, the newspaper business was as easy a way to make huge returns as existed in America. As one not-too-bright publisher famously said, ‘I owe my fortune to two great American institutions: monopoly and nepotism’.
” No paper in a one-paper city, however bad the product or however inept the management, could avoid gushing profits.
“The industry’s staggering returns could be simply explained. For most of the 20th Century, newspapers were the primary source of information for the American public. Whether the subject was sports, finance, or politics, newspapers reigned supreme. Just as important, their ads were the easiest way to find job opportunities or to learn the price of groceries at your town’s supermarkets.
“The great majority of families therefore felt the need for a paper every day, but understandably most didn’t wish to pay for two. Advertisers preferred the paper with the most circulation, and readers tended to want the paper with the most ads and news pages. This circularity led to a law of the newspaper jungle: Survival of the Fattest.
“Thus, when two or more papers existed in a major city (which was almost universally the case a century ago), the one that pulled ahead usually emerged as the stand-alone winner. After competition disappeared, the paper’s pricing power in both advertising and circulation was unleashed.
“Typically, rates for both advertisers and readers would be raised annually – and the profits rolled in. For owners this was economic heaven. (Interestingly, though papers regularly – and often in a disapproving way – reported on the profitability of, say, the auto or steel industries, they never enlightened readers about their own Midas-like situation. Hmmm . . .)
“As long ago as my 1991 letter to shareholders, I nonetheless asserted that this insulated world was changing, writing that ‘the media businesses . . . will prove considerably less marvelous than I, the industry, or lenders thought would be the case only a few years ago’.”
“Some publishers took umbrage at both this remark and other warnings from me that followed. Newspaper properties, moreover, continued to sell as if they were indestructible slot machines.
“In fact, many intelligent newspaper executives who regularly chronicled and analyzed important worldwide events were either blind or indifferent to what was going on under their noses.
“Now, however, almost all newspaper owners realize that they are constantly losing ground in the battle for eyeballs. Simply put, if cable and satellite broadcasting, as well as the internet, had come along first, newspapers as we know them probably would never have existed.
“In Berkshire’s world, Stan Lipsey does a terrific job running the Buffalo News, and I am enormously proud of its editor, Margaret Sullivan
