Here's a quick dose of advice doled out by Berkshire Hathaway's (BRK.B) Vice-Chairman Charlie Munger to investors thinking about investing in newspapers:
"Ordinary newspapers will come to perish. The microeconomics are too tough to overcome. It's not a place to invest your money."
Of course, the actions of the Berkshire Hathaway CEO Warren Buffett reveal a different story. In November 2011, Buffett agreed to buy his hometown newspaper, The Omaha World Herald for an estimated $200 million. A few weeks ago, Buffett bought 63 newspapers for $142 million from Media General (MEG), which includes papers such as The Richmond Times-Dispatch and The Winston Salem-Journal. And Buffett appears to be at it again, as a recent disclosure indicates that Berkshire Hathaway (BRK.A) owns 1.66 million shares of Lee Enterprises (LEE), the publisher of my hometown newspaper The St. Louis Post-Dispatch. In response to this disclosure, Lee Enterprises appears to have shot up 30% from $1.15 to about $1.50 in pre-market trading.
Buffett, long known for his famous comment to be "fearful when others are greedy and greedy when others are fearful", appears to be engaging in the ultimate maneuver of contrarian investing by buying stock in an industry that has faced stiff headwinds and deteriorating fundamentals for years.
As is the question anytime Buffett makes a purchase, an investor might surely wonder: should I follow Buffett into newspapers?
The short answer: No.
The longer answer: There are the three things that I'd hope investors keep in mind about Buffett's foray into newspapers.
The first is that, as we saw with Berkshire's investment in Goldman Sachs (GS) and General Electric (GE), Buffett is simply able make deals that those of us plain folk can only dream of. Buffett's deal with Media General is no different - Buffett is providing Media General financing to pay down its debts by extending a credit line of up to $400 million with an initial 10.5% interest rate. So it's foolish to think of Buffett as simply buying The Richmond Times-Dispatch and making a pure investment in newspapers - he is making a newspaper investment with strings attached that enable him to earn a 10.5% introductory rate on Media General's debt. That is a different story than merely buying community and regional newspapers.
And secondly, we should not lose sight of the scope of Buffett's newspaper investments. Buffett only bought about $2 million worth of Lee Enterprises. Before this huge 30% pre-market gain, the company was only worth $70 million total. The Media General newspaper investment was not much bigger. Let's consider this information within the context of Berkshire Hathaway as a whole - in a "normal" earnings month, Buffett will be receiving $1 billion in profits from his dividends and operating companies to deploy as he pleases. If he were to buy Lee Enterprises whole for around $100 million, that would only represent 10% of Berkshire's monthly profits. And considering his $2 million current investment in Lee, that only represents about 0.2% of Berkshire's monthly profits. So he's not exactly making an all-in wager here.
Lastly, and this is mostly my personal preferences, I tend to gravitate towards the Berkshire investments that rely on buying excellent companies at attractive prices - in essence, the investments where Buffett's thesis statement is essentially, "Just keep on doing what you've been doing, guys." When I look at Buffett's stakes in Coca-Cola (KO), IBM (IBM), and American Express (AXP), I appreciate them because they are not bets on something dramatic happening to drive up future profits that is materially different from the firms' current situations. This is obviously not the case with newspapers.
I am by no means saying that Buffett, or even you, won't do well with newspaper investments. But I am asking that you keep three things in mind - Buffett's Media General investment comes with a 10.5% interest loan that already puts the Oracle of Omaha a step ahead of you, these are very small investments by Berkshire standards, and they are bets that the mediocre business model of the present will improve in the future.