One of the best returns – maybe even the best – that Warren Buffett has enjoyed came from his 1973 investment in shares of The Washington Post Company (WPC), which is now known as Graham Holdings Company. Back then, it was the publisher of the influential US-based newspaper, The Washington Post.
Buffett did not invest much in WPC. He controls Berkshire Hathaway and in 1973, he exchanged just US$11 million of Berkshire’s cash for WPC shares. But by the end of 2007, Buffett’s stake in WPC had swelled to nearly US$1.4 billion. That’s a gain of over 10,000%.
There are two fascinating facts behind Buffett’s big win with the newspaper publisher.
First, WPC’s share price fell by more than 20% shortly after Buffett invested, and then stayed there for three years.
Second, WPC was a great bargain in plain sight when Buffett started buying shares. In Berkshire’s 1985 shareholders’ letter, Buffett wrote:
“We bought all of our WPC holdings in mid-1973 at a price of not more than one-fourth of the then per-share business value of the enterprise. Calculating the price/value ratio required no unusual insights. Most security analysts, media brokers, and media executives would have estimated WPC’s intrinsic business value at $400 to $500 million just as we did. And its $100 million stock market valuation was published daily for all to see.
Our advantage, rather, was attitude: we had learned from Ben Graham that the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values.”
How many investors do you think have the patience to hold on through three years of losses? Buffett did, and he was well rewarded. Patience is the key to successful investing. It is necessary, even if you have purchased shares of the best company at a firesale-bargain price.
Warren Buffett has investing acumen that many of us do not have. But there are also times when common sense and patience is more important than acumen in making a great investment. Buffett himself said that no special insight was needed to value WPC back in 1973. What was needed to earn a smashing return with the company was the right attitude and patience.
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Ser Jing, purchase of good businesses is a fairly straight forward exercise, relative to competition, size of market, growth rate of the business sector / category, competition, profitability of the business, tech disruptions etc. etc. Understanding the unknown; underlying business values and putting a number to it, is the trick and requires us to make a number of assumptions, which could easily go wrong. I wonder how many times Buffet was wrong with his evaluation of ‘underlying business values’. Just curious.
Hi Arjun! I think Buffett has got it wrong many times in his evaluation of “underlying business value”. But the times he got it right has more than made up for the times he got it wrong. There are only a few things that are certain in the world of finance, but I guarantee that every investor – no matter how good – will make mistakes throughout their career. This is why diversification is important! – Ser Jing
Just read this in the NYT Deal Book: Warren Buffett has lost billions (on paper). Berkshire Hathaway has erased $90 billion in market cap so far this year, the fund manager Will Hershey of Roundhill Investments pointed out. That’s among the biggest declines of any publicly traded company.
Thanks for pointing this out Arjun! I read the article too. I find the article does not contain any useful information fo 2 reasons.
First, the article mentions the *decline* in market capitalisation of Berkshire Hathaway in absolute dollars. Berkshire Hathaway is a huge company with a market capitalisation over US$466 billion currently. A relatively mundane 10% fall in its share price will wipe out US$46.6 billion in market cap. From this perspective, talking about decline in market cap in absolute dollars makes no sense. Percentages should be used.
Second, the article talks about the decline in Berkshire’s market cap, which, over the short run, has nothing to do with the returns generated by Berkshire’s investment activities.
– Ser Jing
Great post! Buffett always has a knack for making things look really easy. Just to share some context on the situation. When he bought the shares, the Post was fighting a prolonged battle with their labor unions. 1975-1976 was the pressmen strike and the union had very unreasonable demands that would have significantly impact the Post’s profitability if management ceded to their demands. That was probably one of the reasons why the share price was depressed.
These were times when the unions had very strong bargaining power against their companies and the union leaders took full advantage of it. There were days where the printing mills were not operating because the workers were on strike. Katherine Graham herself had to help out at the mill to make sure tomorrow’s papers will be out in time. Management decided to tough it out for a few years and won in the end, but the outcome was far from a sure thing. Buffett made a good judgement call which I think not many people could have made given the circumstances. (Katherine Graham’s book ‘Personal History’ is a great book which describes the history of the Post very vividly if you are interested.)
Another point would be that 10 million sounds like a small figure for Buffett now but back then, Berkshire’s book value was roughly 80-100 million. So 10 million was a sizeable investment relative to the equity of the firm. Not many people I know would put 10% of their fund in a situation like this. It goes back to your point on his investment acumen. His ability to make decisions under uncertainty with a high level of conviction is what separates him from the rest of us.
Hey Calvin! Thanks for sharing more details about Washington Post and what happened with the company in the 1970s. It’s truly fascinating stuff! Never knew about Katherine Graham’s book, but now it sounds like something interesting! – Ser Jing