as part of our
Author: John Gerard Lewis,
In June, Warren Buffett made some eyebrow-raising news by
purchasing 63 newspapers from Media General (
). Instantly came the twin reactions that the old man had finally
lost his mind, or that he was once again shrewdly pouncing on an
I'll go with the latter, with the caveat that there's a
speculative cast to the deal. The question for investors is whether
it's a reason to invest in Buffett's Berkshire Hathaway (BRK.B) or
to mimic the investment. The answer to the first question is no.
The answer to the second question is that you shouldn't even
The tempting and logical premise is that Buffett sees a quiet
bargain in yet another old industry that would appear to have been
eclipsed by technology. Thus immediately came headlines like, " Did
Warren Buffett Just Save the Newspaper Industry?"
No, he didn't save the newspaper industry. What Buffett did was
mentally bifurcate that industry, and then invest in one segment of
it: community, as opposed to metropolitan, newspapers. He drew a
critical distinction between the two.
What he saw is what Bert saw.
In the mid-1990s, I asked a budding entrepreneur named Bert why
he had recently chosen to start his first newspaper in Eudora,
Kansas instead of De Soto, Kansas - the latter being a similarly
sized town that is five miles closer to metropolitan Kansas
Bert told me that after evaluating both towns, he concluded that
Eudora "had a better sense of community."
Fast forward to May 29 of this year, and here's Warren Buffett
speaking to CNN Money: "In towns and cities where there is a strong
sense of community, there is no more important institution than the
There it is in a nutshell: Buffett is one of the world's great
investors because, among other traits, he sees the big picture by
being willing to step into the same shoes as an entrepreneur who is
only concerned about his mom & pop enterprise. Just as the
linchpin for Bert was a "sense of community," so did it also become
for the great Warren Buffett.
But Buffett drilled down even further, and found that this
community characteristic does not apply to large, metropolitan
newspapers. Therefore, he effectively signaled "no interest" to the
Los Angeles Times when he told one its reporters, "If you live in
South Central Los Angeles, you're not interested in who dies in
"In Grand Island, Nebraska, everyone is interested in how the
football team does," Buffett observes. "They're interested in who
And they're interested in seeing pictures of their kids at the
school picnic or the Cub Scouts awards ceremony - pictures that
were probably taken by mom or dad and then submitted to the paper
with a little homespun write-up. They're interested in such
meaningful small-town news items as the Joneses having Sunday
dinner with the Johnsons.
They're interested in knowing that Fred, who owns the hardware
store, caught a three-pound catfish last Tuesday evening using
night crawlers as bait. And they enjoy seeing a picture of Fred
with his catch, a picture that would be deemed un-newsworthy by any
big city paper.
Buffett has clearly in his life ventured a few miles outside of
Omaha to burgs like Ashland, Blair and Wahoo, Nebraska. He knows
the important and differentiated role that the local newspaper
plays in those communities. He understands that with a "sense of
community" comes a sense of "community ownership of the local
It's the community's diary, its photo album, its chronicle of
present-day history. And because he rigorously eschews
generalizations in his analysis, he perceptively distinguished
between those papers and big-city papers.
Sure, Buffett remains invested in some metropolitan newspapers,
The Washington Post (
) and The Buffalo News, but those are legacy holdings bought years
ago. He even bought his hometown Omaha World-Herald last year, and
that may have been little more than a civic-minded gesture.
But his buy from Media General was a hard-nosed business
decision, if a rather speculative one. It jibes with his "moat"
criterion - his preference for investments that are effective
monopolies. And at a valuation multiple under 5x, half that of the
prevailing P/E of a few years ago, he doesn't appear to be
But even Buffett isn't sure about that. He knows he's not buying
undervalued hard assets or a discounted current revenue stream. He
even admits that most of his new papers will continue to lose money
for a while. Moreover, he's aware that community newspapers are
trying to figure out a business model that at once co-opts and also
competes with the Internet, just as their big-city brethren
"I do not have any secret sauce," Buffett told the New York
Times. "There are still 1,400 daily papers in the United States.
The nice thing about it is that somebody can think about the best
answer and we can copy him. Two or three years from now, you'll see
a much better-defined pattern of operations online and in print by
That's a speculation that Warren Buffett can afford, especially
on (for him) a tiny $142 million outlay. But an ordinary investor
just can't prudently ride the Oracle's coattails this time.
First of all, there is simply no reason to invest in Berkshire
as a direct result of this minor foray. Buffett, himself, said that
while he believes it is a good investment for his company, "It's
not going to move the needle at Berkshire."
Secondly, there's no replicable investment that is available, at
least none that should be appealing to an ordinary investor. The
closest thing to a pure-play in non-metro newspapers is GateHouse
), which lost $1.6 million last year and has a book value of
minus-$14.15 per share. Taking a flier on that semi-pure-play is a
thoroughly-pure speculation, not an investment.
Other mostly-newspaper public companies are simply too
dissimilar from Buffett's Media General buy. They're primarily
big-metro paper outfits, like A.H. Belo Corp. (
)-which lost $10.9 million last year-Lee Enterprises (
)-lost $146.8 million last year-and The McClatchy Company (MNI),
which actually made $54.4 million last year but is seen only
growing its earnings at only a 5% rate over the next five
If McClatchy's modest earnings forecast is a compelling prospect
for you, fine, but there are better investment ideas out there.
Besides, McClatchy's metro-paper orientation (Charlotte, Kansas
City, Sacramento and Fort Worth) is the very element that Buffett
has excised from his newspaper theme.
It's a fashion to monitor Buffett and then replicate his moves.
This time, however, what is a good investment for him is simply not
available to others. Nor should it be misread as a buy signal for
the entire newspaper industry.
Stable High Yield
This commentary does not constitute individualized investment
advice. The opinions offered herein are not personalized
recommendations to buy, sell or hold securities.
Covestor Ltd. is a registered investment advisor. Covestor
licenses investment strategies from its Model Managers to
establish investment models. The commentary here is provided as
general and impersonal information and should not be construed as
recommendations or advice. Information from Model Managers and
third-party sources deemed to be reliable but not guaranteed.
Past performance is no guarantee of future results. Transaction
histories for Covestor models available upon request. Additional
important disclosures available at
http://site.covestor.com/help/disclosures. For information about
Covestor and its services, go to http://covestor.com or contact
Covestor Client Services at (866) 825-3005, x703.