When Warren Buffett dedicates three pages of his annual shareholder letter to the troubled business of newspapers, it's worth paying attention. In his May 2013 letter, Buffett said that Berkshire Hathaway (NYSE:BRK.B) had been on a newspaper-buying spree. The company's subsidiary -- BH Media Group -- purchased 28 daily newspapers at a cost of $344 million in just the last 15 months. Since then, the company has bought additional papers in Atlantic City and Roanoke.
These acquisitions quietly made Berkshire one of the biggest newspaper publishers in the country, with daily circulation of nearly one million. Now, Buffett isn't new to the newspaper business. For the past 35 years, Berkshire Hathaway has completely owned The Buffalo News. And he's seen the ups and downs in the newspaper business as the paper battled for control of the Buffalo news market.
But that's not his only long-term newspaper investment. Back in 1974, Buffett bought an 11% stake in The Washington Post for $11 million. The stock market had just fallen 50%, and stocks were cheap. So Buffett bought a big stake at a deep discount. He also advised the Graham family to buy back shares of The Washington Post (WPO) when the stock was cheap. And that increased the size of Berkshire's ownership to 23%. Even today, with shares of the Post trading 40% below their all-time high, Berkshire's $11 million investment is valued at just over $1 billion -- that's a 91,476% gain.
I think its fair to say that over the last 40 years, Buffett has developed a great understanding of newspaper economics. So what does Buffett say about the newspaper business today? From his latest letter to shareholders:
Newspapers continue to reign supreme in the delivery of local news. Charlie and I believe that papers delivering comprehensive and reliable information to tightly bound communities and having a sensible Internet strategy will remain viable for a long time.
Berkshire's cash earnings from its papers will almost certainly trend downward over time. Even a sensible Internet strategy will not be able to prevent modest erosion. At our cost, however, I believe these papers will meet or exceed our economic test for acquisitions. Results to date support that belief.
After my article yesterday -- "What Surprising Sector The 'Smart Money' Is Buying Today" -- you might be skeptical of the future for newspapers. After all, the purchase of The Washington Post by Bezos or The Boston Globe by Red Sox owner John Henry may simply be ego-driven investment decisions. But unlike Bezos and Henry, Buffett hasn't been purchasing big name papers. Instead, he's been buying small town daily and weekly newspapers serving local news to a local market, papers including The Charlottesville Daily Progress, The Richmond Times-Dispatch, and The Winston-Salem Journal.
Now, these aren't exactly high-profile or prized acquisitions. It says a lot that the world's best-performing value investor wants to own newspapers -- and he's buying them whenever they are priced attractively.
When companies like Media General (NYSE:MEG) are in a hurry to sell of their newspapers, this is a great time for an opportunistic buyer like Berkshire to step in. That's exactly what happened in 2012 when Buffett bought 63 daily and weekly papers from Media General. Investors like Buffett are successful because they are value-focused. In other words, they buy assets when they are attractively priced. As Buffett's teacher Ben Graham said, "Price is what you pay. Value is what you get."
In spite of the newspaper industry facing some strong headwinds, Buffett sees it as an attractive business. That's because at a deeply discounted price, even troubled newspapers are a good value. If you believe that the newspaper industry will recover and find a way to profitably publish in print and online, you might want to invest in the sector. I wouldn't hesitate investing in Berkshire, but the newspapers are a tiny portion of this huge company.
The better ways to invest would be directly in Gannett (NYSE:GCI), with 82 daily papers including USA Today. The company with a $6 billion market cap has a diverse group of print, digital and marketing assets that give investors direct exposure to the newspaper business.