“It’s one of the things that makes me optimistic about America because when I look at what we have accomplished using half our talent for a couple of centuries, and now I think of doubling the talent that is effectively employed — or at least has the chance to be — it makes me very optimistic about this country.”
Navigating through life can be a dangerous and intimidating journey without the guidance of those who have already traveled on the same path. The world is a complex place and trying to learn everything through direct experience is simply not possible. Much can be learned vicariously through a study of the lives of those who have succeeded in the areas we are interested in pursuing. Very few successful people have enjoyed lives free of adversity and trouble. It would be crazy to not leverage the lessons they have learned.
The finance industry has traditionally been dominated by men for a variety of reasons and women have often found it difficult to break into the field. Lighthouse: Women Leading the Way in Finance is an engaging compilation of the life stories of nineteen women who have found their path and are determined to help others follow in their footsteps. Maya Peterson wrote the book to inspire and empower women to study “female lighthouses in the world of finance.” While these women have navigated different paths, what they have in common is the shared experience of being women in a male-dominated field and how they found ways to overcome challenges. Although young women embarking on their careers will find the stories highly relevant, all readers should be able to draw lessons from the book. Those who are established in their careers might be inspired to give a helping hand to younger colleagues who could benefit from some guidance.
Writing this book review from the perspective of a man, it is obviously not possible to directly relate to several examples of obstacles that the women describe. However, the challenges of balancing a career in finance with having a family is one that has been highlighted over many years as being particularly problematic. The traditional career trajectory in finance involves taking an entry level job after college graduation to gain experience and to return to school to pursue an MBA, usually in your mid to late 20s. This is followed by an intense period of work into your early 30s, necessitated by a need to pay off heavy student loan debt and to prove worthy of greater responsibilities.
Of course, these career demands coincide with the age when most people want to get married and start having children. A failure to account for these challenges creates an environment in which a company can lose promising female talent to competitors. Being cognizant of these family challenges is not only a matter of ethics but also can be a competitive advantage if talented female employees can be retained.
Although navigating family challenges is a common thread in many of the profiles presented in the book, there are also other examples of obstacles that I have seen in office environments. In particular, as Lauren Templeton describes, many women are not assertive enough in business environments:
“I think women are bad at raising money because few of us have the confidence to go ask for it. I am not good at raising capital. Do you know why? Because I have never asked for any of it. I don’t ever ask. Our business has grown organically. That is a wonderful way to grow a business — by referral — but the business could be a lot better if I did what men do. Men slide a presentation across the table and say, ‘I want you to invest with me.’ Women are more like, ‘How can I help you?'”
Lauren Templeton is an accomplished investor who was mentored by her uncle, the famous Sir John Templeton, but still has trouble asking for business. Part of this has to do with cultural expectations with men who aggressively seek business being viewed as “go getters” while women might be perceived as “difficult.” Templeton recounts a situation in which she had to call out her prime broker for overcharging her and their tone was immediately aggressive. She believes that labels are often thrown at assertive women such as “Gosh, she’s a bitch to work with”, whereas men who assert themselves would be held in greater respect.
Many of the women who are profiled did not set out to build a career in finance. For example, Lisa Shalett was inspired to learn Japanese and major in East Asian studies after visiting Japan during high school. However, when she eventually developed an interest in business and earned a Harvard MBA, her background in Japanese and her years of working in Japan proved to be a differentiating factor that qualified her for a Wall Street position focusing on Japanese equities. An understanding of Japanese culture, language, and business practices was more important than an understanding of markets, which she was able to learn on the job. Eventually, Shalett became a partner at Goldman Sachs and, at one point, she was the only woman partner in the equities division.
Shalett’s insight regarding leveraging all of her skills in different contexts is particularly valuable:
“I suddenly got this insight that people tend to define themselves and their skills by the context in which they have used them to date. They don’t stop and think. The skills that have made me successful in the current [role] could also be useful in this new, totally different role. I had to learn to separate the skills I had from the way I had used them to that point … ”
Some of the profiles involve women who were clearly interested in finance from an early age. Erin Lash bought her first shares of stock at the age of ten and learned a valuable lesson when her pick, Blockbuster Video, fell victim to the rise of Netflix. Her first-hand experience with industry disruption led her to value sustainable competitive advantages, otherwise known as “moats”, which served her well when she joined Morningstar as an equity analyst focusing on consumer staples. Morningstar is well known for their focus on deep research to assess the quality of a company’s moat. Lash eventually moved into a director role and was the only female director in the company’s North American sector.
I have purposely not mentioned the fact that Maya Peterson is only seventeen years old until now because the quality of her work far surpasses what one would expect from a teenager and should be viewed on its merits. Peterson previously published Early Bird: The Power of Investing Young, which I reviewed a couple of years ago, and has inspired many young people to start investing.
In January 2019, Peterson gave a talk at Markel Corporation and a transcript is provided at the end of Lighthouse. There’s a great deal of wisdom in the transcript, but what stands out to me is her understanding of humility, making mistakes, and learning vicariously from the errors of others:
“Investing has also taught me to work hard on analysis. I like to call it nerdiness. Making mistakes is part of the process, it happens to everyone. But not everyone learns from their mistakes. Wouldn’t you rather learn how I lost money on Mattel and know not to make that same mistake yourself? Nerdiness allows you to keep your mind open to new information and have an ongoing desire to learn from others.
Peterson has made important contributions to the cause of financial literacy and helping women achieve their professional goals in the field of finance. Both of her books deserve to be widely read by young people interested in finance and investing. Lighthouse also deserves to be read by older professionals, both men and women, who want to better understand the challenges facing young women as they navigate the industry. As Warren Buffett has said, women are key to America’s prosperity so we all have a stake in the outcome.
Disclosure: The Rational Walk LLC received a review copy of the book.
Warren Buffett has often applauded share repurchase programs instituted by companies in which Berkshire holds significant equity positions, but his attitude toward Berkshire Hathaway repurchasing its own shares has always been more complicated. In early 2000, at a time when Berkshire shares were severely depressed, Buffett expressed an interest in repurchases below $45,000 per Class A share but noted that he was not doing so merely in order to “support” the stock. At the time, he admitted that he had made errors prior to that point by not repurchasing shares.
During the Berkshire Hathaway annual meeting held on May 2, 2020, which was covered in the Rational Reflections newsletter, Warren Buffett seemed very worried about the COVID-19 pandemic and general economic conditions. During the meeting, he disclosed that Berkshire halted all repurchase activity after March 10 despite the stock price plunging well below the level of Berkshire’s recent repurchase activity. The transcript of the meeting is worth reviewing in order to understand the level of Buffett’s caution in early May. He clearly stated that the range of possible economic outcomes resulting from shutting down large segments of the economy remained “extraordinarily wide”. The fact that Buffett was repurchasing shares as late as March 10 before halting activity reveals that a change in his thinking might have taken place at that point. Perhaps it was related to his discussions with Bill Gates and Dr. Anthony Fauci around that time.
In light of Buffett’s comments only ten weeks ago, it was surprising to learn that Berkshire Hathaway almost certainly repurchased a significant amount of stock at some point between the annual meeting and July 8 when Buffett submitted a regulatory filing to the Securities and Exchange Commission documenting his annual charitable donations of Berkshire Hathaway stock. Sharp-eyed investors and journalists picked up on the implications of the filing which disclosed Buffett’s holdings as a percentage of shares outstanding. Here are the facts that were included in the filing:
Buffett owned 248,734 Class A shares and 10,188 Class B shares as of July 8.
Each Class B share has 1/1500 of the economic rights of a Class A share.
We can calculate that Buffett owned 248,740.8 Class A equivalents as of July 8.
Buffett’s ownership of Berkshire was 15.54% of the economic interest of the company.
Dividing 248,740.8 by 0.1554, we calculate that there were 1,600,649 Class A equivalents as of July 8.
The 10-Q report reveals that there were 1,620,023 Class A equivalents outstanding as of March 31.
This shows that 19,374 fewer Class A equivalents were outstanding on July 8 than on March 31.
The average closing price of the more liquid Class B shares between May 4 and July 7 was approximately $180, which is equivalent to $270,000 per Class A share. If we assume that repurchases were made at around that average price of $270,000, this would imply that Berkshire allocated approximately $5.2 billion to repurchases over that two month span. It is very doubtful that these repurchases started immediately after the annual meeting given Buffett’s clear indication that he was very concerned at that time and not eager to allocate capital. Given Buffett’s reputation for integrity, it’s inconceivable that he “talked down” the stock on Saturday, May 2 only to repurchase shares on Monday, May 4. But he might have changed his mind a couple of weeks later. We will not know the exact amount allocated to repurchases until Berkshire’s second quarter 10-Q report is filed in early August, but the repurchase amount is likely to be in the $5 – $5.5 billion ballpark.
Reading the tea leaves regarding repurchase activity at Berkshire is hazardous business. In Berkshire Hathaway and the Coronavirus Crash, published on March 22, I noted that Berkshire was trading at a price-to-book level significantly below the old 1.2x limit and that it was possible that Buffett could find shares attractive. The key question of how much of Berkshire’s large cash balance was truly deployable was the subject of another article, Thoughts on Berkshire’s Deployable Cash, published on April 21. Along with many Berkshire shareholders, I was surprised by Buffett’s cautious tone at the annual meeting and by the lack of repurchase activity even as shares fell far below valuation levels that had previously prompted repurchase activity. However, as Buffett said, his view of the range of possible outcomes of the COVID pandemic were very wide and clearly he wanted to reduce risk to the business by maintaining significant cash.
Based on commentary in the financial media and on Twitter, it seems like many Berkshire shareholders were disappointed with the lack of repurchase activity and the stock declined immediately after the annual meeting. Although the stock price has recovered since then, Berkshire has badly lagged the S&P 500 this year and remains far below its record high level of $344,970 reached on January 17, 2020. Although the explicit price-to-book limit of 1.2x was eliminated in mid-2018, many shareholders still erroneously viewed that level as a “floor”, a mentality that I criticized in 2016 in Berkshire’s Repurchase Level is not a “Floor”. Buffett has made it abundantly clear that he will never “support” the stock and initiate repurchases merely because it is falling and he wishes to stop a further decline.
So what can we infer based on the apparent ~$5 billion of repurchases that likely took place over the past two months?
It seems likely that Buffett’s views of the range of possible economic outcomes related to COVID have narrowed somewhat, and that he might view the very worst outcomes as less likely than he did when he spoke at the annual meeting on May 2. To be more precise, his views were likely more positive at the time the repurchases were made, and we do not know the exact timing. At the time of this article, published on July 13, the level of COVID infections, the rate of tests turning up positive, and other metrics have again taken a turn for the worse and several states have implemented new social restrictions and business closures.
Many commentators have noted that Berkshire’s equity portfolio, as reported on Form 13-F, appreciated strongly during the second quarter and into the first half of July. This appreciation has been driven by the extraordinary move in Apple shares which are close to breaching the $400 level. Berkshire owned 245,155,566 shares of Apple as of March 31, a position that is now valued at nearly $97 billion, up from $62.3 billion on March 31. Due to recent changes in accounting rules, the tens of billions of dollars of market appreciation in Berkshire’s equity portfolio will show up as tens of billions of dollars of “net income” when second quarter earnings are released.
It is not likely that the appreciation of Berkshire’s equity portfolio alone prompted Buffett to repurchase Berkshire stock. Although it is true that Berkshire’s book value is now far greater than the $229,358 per A share reported as of March 31, Buffett almost certainly has his own assessment of the intrinsic value of Berkshire’s equity portfolio. His own assessment of the intrinsic value of the portfolio, as well as the intrinsic value of Berkshire’s operating companies, is what will inform his thinking when it comes to calculating Berkshire’s intrinsic value. If shares can be purchased at a sufficient discount to that value, and if he views the range of overall economic outcomes as being acceptable from a risk standpoint, it is likely that he will repurchase shares. If the discount is not wide enough, or if he views the range of outcomes as too wide or skewed to the negative side, he will hoard cash.
Although Buffett does give periodic interviews, he has been notably quiet over the past ten weeks since the annual meeting. Few businessmen in America have a collection of companies in as many diverse sectors of the economy and Buffett is well positioned to personally observe the impact of COVID. He also has direct access to Bill Gates, Anthony Fauci, and other expects regarding pandemics. The repurchase activity implied by the recent SEC filing is good news in the sense that Buffett must have been more optimistic when he initiated those repurchases than he was on May 2. However, shareholders should not make too many assumptions beyond that until the second quarter report is released in early August. The COVID pandemic is by no means over and Buffett has demonstrated that he will change his mind as the facts change.
Disclosure: Individuals associated with The Rational Walk LLC own shares of Berkshire Hathaway.
“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”
— Benjamin Franklin
Oliver Wendall Holmes famously said that “taxes are what we pay for a civilized society.” As a widely admired Supreme Court Justice, such words carried a great deal of weight for many citizens and his statement is frequently quoted to this day. Holmes was not a mere virtue signaler when it came to the necessity of funding the government. He voluntarily paid a very high “tax rate” when he left his estate to the United States upon his death in 1935. There is no doubt that Holmes was correct regarding the fact that some level of taxation is required for government to function and that some level of government is required for any large and complex civilization to flourish.
But the devil is in the details.
It might be possible to get over ninety percent of the people to agree that some level of taxation is necessary. But it is difficult to get even a bare majority to agree on the overall level of taxation that is appropriate to say nothing of which level of government — federal, state, or local — should be levying the tax. Even if you can achieve a consensus regarding the overall level of taxation and at what level to levy the tax, the question of who should pay the bulk of the taxes will be controversial.
Taxes are inherently emotional for many people and it is very easy to make serious errors in a state of mind that is not grounded in facts and reason. Those who generally disapprove of the size and scope of government are more likely to view taxes negatively and to seek ways to minimize their personal tax burden. However, even people who approve of a strong and forceful government rarely enjoy paying taxes themselves and will usually not pass up opportunities to reduce their payments. It is important to note that I am referring to legal methods of tax planning here rather than tax evasion.
Regardless of your views regarding the role of government, the level of taxation, or who should bear the brunt of the tax burden, it seems clear that viewing the subject of taxation in a rational manner is desirable. When it comes to making investment decisions, it is critical to keep the issue of taxes in mind but to not allow taxes to be the primary driver of decisions. The old Wall Street quip that one should not let the “tax tail wag the investment dog” is worth keeping in mind because it is all too common for tax driven decision making to lead to serious errors in the long run. Taxes should be viewed as just one of many factors feeding into a coherent decision making process.
The Proof is in the Pudding
As an investor, are you making rational decisions when it comes to taxes?
Everyone obviously likes to think that they are rational, but it is quite likely that tax considerations have hurt your results over time. However, hindsight bias and a human tendency to remember triumphs while relegating errors to the deep recesses of memory makes it likely that we have forgotten cases where tax considerations hurt us.
So, forget about theory and take a look at your results.
If you are like many investors based in the United States, you probably have accounts that enjoy tax free or tax deferred status along with accounts that are fully subject to current income taxes. In my case, I have both traditional and Roth IRA accounts as well as my taxable investment account. Both the traditional and Roth IRA do not incur any current-year tax based on decisions to buy or sell securities, or decisions to invest in securities that pay dividends. The Roth IRA has the additional benefit of offering tax free distributions for people over the age of 59 1/2. My regular investment account has no such tax benefit. Dividends, interest, and capital gains taxes are due on an annual basis.
If my decision making is rational with respect to taxes, then it would follow that the pre-tax results of my IRA accounts and my regular taxable account should not be very different. However, to my surprise, a few years ago when I examined my returns based on the tax status of the account, I found that my IRA accounts had significantly outperformed my taxable account on a pre-tax basis! The difference was not insignificant and because my taxable account is significantly larger than my IRAs, the aggregate lag in dollar terms was very large.
A thorough examination of my transaction activity revealed that I was more likely to sell securities in my IRA accounts than in my taxable account. Although turnover in the IRA accounts was not particularly high, it was materially higher than in my taxable account. I was far more willing to take capital gains in my IRA accounts knowing that I could reinvest the full proceeds of the sale in a new investment without facing the prospect of paying the capital gains tax. As a result, when securities held within my IRA accounts approached my assessment of intrinsic value, I was more likely to at least trim back on the position or sell it entirely when more attractive opportunities existed for reinvestment.
In contrast, a review of my taxable account revealed that I would tend to hold securities in that account even as they approached or exceeded my assessment of intrinsic value. Make no mistake about it, a buy-and-hold approach is usually a good one provided that the companies in a portfolio are steadily growing intrinsic value over time. Owning a security that trades at intrinsic value, or even slightly above it, can be perfectly fine if the intrinsic value of the security is also growing at a nice clip. But the fact is that not all companies fall into this category and usually there are opportunities to reinvest capital in undervalued opportunities. The requirement to take advantage of such opportunities, when fully invested, is to sell a security that is trading at or above intrinsic value. But you have to be willing to do it even if it involves paying taxes.
The Lure of Tax Deferred Compounding
Let us step back for a minute to consider the power of tax deferred compounding and why the prospect of it lures so many investors into making poor decisions.
In a taxable account, a legitimate goal should be to hold securities that will successfully compound intrinsic value over long periods of time, preferably without paying out much in the way of taxable dividends. If you can find a company that can compound capital internally at an attractive rate, your results will be superior to what you would get if you had to identify a different company offering the same rate of return every year. In addition to not having to pay capital gains taxes until you eventually sell, holding a stock for a long period of time relieves the investor of making multiple decisions and the work required to do so successfully.
A simple example should illustrate this point. Investing in a company that can compound intrinsic value at 8 percent per year for twenty years will result in turning a $100,000 investment into over $466,000 prior to paying taxes. If the capital gains tax is 20 percent at the end of this period, the investor will be left with nearly $373,000 after paying the tax.
In contrast, if an investor must change companies every year to earn a 8 percent return, paying a 20 percent capital gains tax along the way, the effective rate of compounding is reduced from 8 percent to 6.4 percent. This investor’s initial $100,000 investment will turn into just under $346,000 at the end of twenty years. In this example, we assume that each of the twenty investments were held for at least one year to qualify for long term capital gains tax treatment. If the holding period was under a year, the lag would be worse.
So, identifying a “compounding machine” that allows for a twenty year holding period produces a difference in the ending balance of $27,000 which is not an insignificant sum relative to the initial $100,000 investment. However, the key caveat is that the single stock must be able to deliver performance over a long period of time. Additionally, the investor would have to forego opportunities to sell and reinvest in better opportunities along the way.
Have I Learned Anything?
In my case, the reason my IRA accounts outperformed my taxable accounts is because I stubbornly refused to sell securities in my taxable account that would incur current year capital gains taxes. I often held the same securities in my IRAs and did sell those shares in order to reinvest in more attractive opportunities. My refusal to pay capital gains taxes resulted in long term underperformance of my taxable account relative to what I know my investment skill was capable of producing, as shown in the results of my IRAs. I would have been far better off making identical decisions in my taxable account and my IRAs, paying the taxes, and reinvesting.
I conducted this analysis of my accounts a few years ago. Have I learned anything from my mistakes?
Apparently I have not learned much given my behavior early this year.
I had held shares of a company in both my IRA and taxable accounts since 2018 that appreciated sharply during the course of 2019. By February 2020, the shares traded materially above my assessment of intrinsic value. I sold the shares that were held in my IRA accounts and redeployed the funds. But in my taxable account, I stubbornly refused to sell more than a token number of shares because doing so would have resulted in a very steep capital gains tax and the loss of other tax benefits.
Fast forward to April 2020. The COVID-19 crisis not only brought the shares of the company in question down to earth, but the fundamental business conditions facing that company had deteriorated to the point where my intrinsic value estimate had declined significantly and the level of risk involved had increased. The range of potential outcomes for the business widened to the point where I was no longer comfortable that a reasonable margin of safety existed. I sold the shares in my taxable account. I still realized a gain on my sale but the large amount of outperformance relative to the S&P 500 that I would have locked in back in February was almost entirely given up. My IRA again outperformed my taxable account due to aversion to realizing taxable income.
Combatting Psychological Pitfalls
It is not possible to change the past and self-recriminations serve no useful purpose. However, we should always try to learn from past mistakes and avoid repeating these errors in the future. The irrational aversion to taxes is a problem facing many investors but perhaps there are ways to frame the problem in a way that is likely to lead to better decisions.
One approach is to reframe how we think about taxes. Those of us who believe that the government wastes a great deal of money are prone to dislike paying taxes because we believe that our money will be wasted. Rather than thinking about our tax money as going into a large void, however, we can reframe the situation. Let’s say that you have realized a $100,000 capital gain and now face a $20,000 federal tax as a result. Rather than framing that $20,000 as going into the government’s general fund, there is no reason that we cannot think of it as funding a specific relative’s social security or Medicare benefits for the year. Alternatively, you can pick any other program and think of your money as funding that program.
If that idea sounds naive, and it might be a stretch for many people to think of taxes in that way, consider a change to how you track your net worth. The reality is that when we refuse to sell an appreciated security to avoid paying current-year taxes, we are not avoiding the eventual tax on the gain. We are only deferring it. If a company, such as Berkshire Hathaway, holds appreciated securities, accounting statements are required to account for a deferred tax liability that recognizes the amount of tax that would be due on the security if the gain was realized immediately.
Individuals should be doing the same for their holdings and recognizing deferred tax liabilities. If you purchased a security years ago for $100,000 and today it is worth $1 million, I am sorry to tell you that you have a silent partner and that entire $1 million is not yours. You have a $900,000 capital gain. And your “partner”, Uncle Sam, “owns” about $180,000 of that $1 million position. You should be carrying a $180,000 deferred tax liability against that $1 million position.
From a mental accounting perspective, if you are carrying a deferred tax liability and thinking of your net worth net of that liability, you are far more likely to be willing to recognize the capital gain and actually pay the tax than if you pretend that the liability does not exist. It is easier from a psychological perspective and leads to more rational decision making outcomes.
Investors should attempt to find companies that are capable of compounding intrinsic value at satisfactory rates for long periods of time without paying taxable distributions to shareholders. Finding such companies, however, is difficult because it is rare for a company to be able to redeploy capital at a high incremental return on equity unless they have and maintain significant moats. Every investor is looking for companies with moats that will protect attractive returns from being competed away. So the valuation of companies that have obvious reinvestment opportunities tends to be high.
If we take Warren Buffett’s approach to heart and view owning shares of a company as owning an interest in the underlying business, we should not have a hair trigger when it comes to selling. The instinct to buy and hold securities of great companies is a good one, but we need to face up to the fact that holding even a great business through periods of significant overvaluation can result in unsatisfactory returns.
When a company gets significantly overvalued, it makes sense to take profits if there are other opportunities that offer brighter prospects going forward. Even Warren Buffett expressed regret in his 2004 letter to shareholders regarding his decision to not sell shares of stock he considered overvalued during the bubble years of the late 1990s.
Those of us who have made serious errors related to irrational tax aversion can take some comfort in knowing that the greatest investor of the past seventy years has grappled with the same problem.
“News, to put it simply, is what people don’t know that they want to know. And people will seek their news – what’s important to them – from whatever sources provide the best combination of immediacy, ease of access, reliability, comprehensiveness and low cost.”
Human beings have an innate curiosity and desire to know what is happening in the wider world beyond their immediate circle of family, friends, neighbors, and co-workers. In peaceful and prosperous societies, the type of information most people seek might be mundane details about a vote in the city council, the fortunes of the local high school football team, job openings at the new factory, what’s on sale at the supermarket, or the weather forecast for their picnic on Saturday. In times of crisis, we have a desperate need to know the current state of affairs in order to take action ourselves or just to understand what is happening around us.
From the end of the Second World War until almost the end of the twentieth century, almost all Americans got this type of information from one of three sources: television, radio, and the local newspaper. Events of the day were curated by professional journalists who, for the most part, attempted to report the news accurately. The news was disseminated by large organizations that, while not without occasional controversy, were mostly trusted by the majority of people. Some of my earliest memories as a child include the evening ritual of my parents turning on the television to watch Walter Cronkite provide his summary of the news. In the morning, I would hear the familiar CBS Radio chime and know it was the top of the hour. As a teenager, I delivered the local newspaper starting with the afternoon edition and later moving to a larger morning route. Serious people took the news very seriously.
Then the internet changed everything.
Suddenly, in the final years of the twentieth century, anyone with a computer and an internet connection had an unlimited supply of news provided first by hundreds and soon by thousands of publishers. Not only did we have access to newspapers from around the world but we gained access to less formal sources of information written by ordinary people. For the most part, this information was not only abundant but was also free. Within the span of a few years, the comfortable culture of journalism was completely upended, never to be the same again.
The massive upside of diversity of sources, freedom of speech, and lower economic costs were initially all that we focused on but it slowly became apparent that something has been lost as well. Whereas society previously relied on journalists to decide what constituted information as opposed to mere noise, we now must take much more responsibility for differentiating between the signal and noise for ourselves. Journalism became too insular and comfortable and did not react quickly enough to make the case for its crucial role in a free society. With few exceptions, newspapers have been unable to charge customers for content online and total circulation (print and digital) has fallen precipitously to levels not seen since before 1940 when the U.S. population was less than half of today’s level.
Not surprisingly, the drop in circulation has been accompanied by a precipitous decline in advertising revenue for almost all newspaper publishers. According to the Pew Research Center, U.S. newspaper advertising revenue peaked at $49.4 billion in 2005 and dropped to $14.3 billion by 2018. The decline in circulation revenue has been less severe, peaking at $11.2 billion in 2003 and coming in at just under $11 billion in 2018. In inflation adjusted terms, of course, the circulation revenue decline has been more significant.
Newspapers face a vicious cycle: As circulation declines, they must increase the price of papers to customers to maintain circulation revenue, but the subsequent decline in readership dissuades more advertisers who gain access to fewer and fewer eyeballs every year.
Not surprisingly, newspapers have made major cuts to newsroom staff over the past twenty years.
Cutting investment in staffing inevitably results in degradation of the content needed to attract readers. Newspapers then must decide whether to attempt to maintain circulation revenue by raising prices for die-hard readers, who might be on the older side and continue subscribing simply by force of habit, but at the cost of losing less committed readers. Then as circulation counts drop again, advertisers will cut their orders since fewer eyeballs will see their promotions, and the vicious cycle continues.
A Man of Unlimited Confidence
The cacophony of views prevalent on the internet today has no equal in human history, but there was a time when traditional print newspapers were far more numerous and competitive. From Butler to Buffett: The Story Behind the Buffalo News provides a great example of the evolution of newspapers from the late nineteenth century up through the consolidation of the industry that was largely complete a hundred years later. Murray B. Light, who worked for the Buffalo News for a half century starting in 1949, provides a fascinating account of how the paper transformed from a scrappy startup founded by Edward Butler in 1873 into the only surviving newspaper in the city 110 years later. Light, who passed away in 2011, was asked to write a history of the newspaper by Warren Buffett who had purchased the Buffalo News in 1977. The book is both a history of the newspaper as well as the personal memoir of a longtime veteran of twentieth century journalism.
When Edward H. Butler arrived in Buffalo in 1873, he saw an opportunity. Although the city had ten newspapers, none of them published a Sunday edition. This might seem odd in light of the much expanded Sunday newspapers that seemed to grow larger and larger during the twentieth century. Obviously, people would have more time to read on weekends. But 1870s Buffalo was a weird mix of vice — there were nearly a hundred saloons, numerous gambling parlors, and plentiful houses of ill repute — and virtue, with religious ministers united in saying that any commercial activity, including newspaper publication, on Sundays would degrade the sanctity of the Sabbath.
Butler, who was only 23 years old at the time of his arrival in the city, plowed ahead anyway. He firmly believed that any enterprise would succeed under his leadership. He was a man of unlimited confidence. So on December 7, 1873, the first issue of the Buffalo Sunday News was published despite the vociferous opposition. Unlike most the newspapers of his era, Butler took a non-partisan position. He was determined to not serve as a political party organ and he wanted to provide information relevant to everyone in the family. Butler’s strategy was immediately successful with rapid gains in circulation which brought about a virtuous cycle that would attract more advertisers, and in turn even more readers. Although Butler did not take an overtly political posture, his affiliation with the progressive politics of the era caused the paper to pay special attention to the plight of the poor at a time when few labor protections were enshrined into law.
By 1880, several competing newspapers had started Sunday editions and Butler decided to aggressively move into the market for daily newspapers. Employing a bold strategy, Butler rolled out his daily evening newspaper, named The Buffalo Evening News, at a bargain price of one cent per copy at a time when competitors were charging five cents. This highly promotional pricing attracted readers and the readers attracted advertisers — the classic economic model for newspapers that would last for another century. Butler was a man of seemingly unlimited energy who was involved in every facet of the enterprise until his death in 1914. By 1897, his paper claimed to have a larger circulation than the combined circulation of all competing Buffalo daily papers. Although this claim was somewhat dubious, Butler did have nearly twice as much circulation as his nearest competitor and dominated the field.
During the final decade of his life, Butler became more involved in politics and, in 1912, he turned over management of the paper to his son, Edward H. Butler Jr., who would run the newspaper until his death in 1956. The Buffalo News would remain in the hands of family members until Warren Buffett and Charlie Munger purchased the paper in 1977. Murray Light entered the scene in 1949 as a young copyeditor and, from that point forward in the chronology, the story benefits from his own eyewitness account of major developments within the company and the city of Buffalo.
Although the early history of Butler’s founding of the newspaper is fascinating and should hold any reader’s interest, Light’s later description of the many characters who shaped the paper from the 1950s into the 1990s is likely to be of more interest to a reader who is specifically interested in the individuals involved. Much of the narrative involves what could be thought of as “inside baseball” — stories of newspapermen who were “characters”, politics within the organization, and the many promotions and controversies that exist within any large organization.
Enter Buffett and Munger
After remaining in family control for over a hundred years, the estate tax finally compelled the Butlers to put the newspaper on the market following the death of Kate Butler in August 1974. Kate Butler had taken over management of the newspaper in 1956 when her husband, Edward H. Butler Jr., passed away and she stubbornly refused to transfer control of her interest in the paper prior to her death. Warren Buffett and Charlie Munger enter the narrative almost exactly halfway into the book where Light provides a summary of the steps the family took to sell the paper and how it came to be purchased by Blue Chip Stamps on April 15, 1977 for $35,509,000.
Blue Chip Stamps was one of the corporate entities that was partially owned by Berkshire Hathaway during its early years. Charlie Munger served as Chairman of Blue Chip Stamps, but both he and Buffett were actively involved in the decision to purchase The Buffalo News and had a role in dealing with the difficult early years of their ownership. Although Light does tell the familiar story of Berkshire’s troubles with the newspaper during the early years, a reader who is more interested in the specifics of the story would be well served to read Charlie Munger’s letters to Blue Chip shareholders that have been helpfully compiled by Max Olson.
Although Butler started out in Buffalo with a Sunday only publication and only later moved to daily publication, his successor decided to eliminate the Sunday issue in 1915. By the time Buffett and Munger took control, The Buffalo News had lacked a Sunday offering for over sixty years. Instead of a Sunday edition, The Buffalo News published an expanded Saturday “weekend” edition but this was a poor substitute for readers with leisure time available on Sunday mornings who did not want to read stale news. By 1977, Buffalo was a city with two newspapers — The Buffalo News which published in the afternoons from Monday to Friday as well as its Saturday weekend edition and The Buffalo Courier-Express which published a morning edition seven days a week. Buffett and Munger were convinced that to remain relevant, their newspaper had to publish seven days per week.
Warren Buffett is well known for his love of newspapers and he obviously took great pleasure in helping craft the advertising and circulation pricing strategy prior to the rollout of the Sunday paper. At the same time, Light says that Buffett took an entirely hands-off approach when it came to setting newspaper editorial policy. As Buffett wrote to a friend at the time, he was “having so much fun with this it is sinful.”
Publication of the first Sunday issue was set for November 13, 1977, but two weeks before launch, the Courier-Express filed an anti-trust lawsuit alleging that The Buffalo News was using its strong position during the week to subsidize a loss making paper on Sunday, with the intent of eventually driving The Courier-Express out of business. The Courier-Express was fortunate to find a friendly judge who imposed onerous conditions on the rollout of Sunday paper and this caused several years of struggles for The Buffalo News before an appeals court rejected the lower court’s findings. However, the troubled early years were not over for Buffett and Munger. They faced a strike in 1980 and an additional three years of heavy losses until The Courier-Express finally ceased publication in the fall of 1982. At that point, The Buffalo News started a morning edition and Buffalo became a one newspaper town.
It is doubtful that Buffett and Munger in any way expected the kind of turmoil they faced immediately after purchasing the newspaper. For several years, Charlie Munger warned Blue Chip shareholders that The Buffalo News could be forced to cease publication and liquidate if the legal situation did not improve and labor relations worsened. Even in his valedictory letter to shareholders in early 1983, on the eve of Berkshire acquiring full ownership of Blue Chip, Munger characteristically refuses to brag about the turnaround that was already underway and states that he and Buffett might just have been lucky:
Finally, our shareholders should recognize that if our 1977 purchase of the News has now worked out acceptably from their viewpoint, which contrary to our prediction last year may now be true even after taking into account time delays, the conclusion does not follow that we made a sound managerial decision buying the News when we did for the price we paid. In retrospect, we were strongly influenced because we liked the newspaper, its people and the city, and we may simply have gambled shareholders’ money against the odds and won. Our stewardship may have been, at best, dubious in this instance. We know that the financial outcome we now report could with slightly different breaks just as well have been either (1) a large loss on closure of the News or (2) the expectation of much more money-losing in continued operation, as part of the only defensive strategy with reasonable prospects.
Charlie Munger’s 1982 Letter to Blue Chip Stamps Shareholders
Charlie Munger was being modest. From 1983 through the end of the century, when Berkshire stopped breaking out reporting for the newspaper in its annual reports, the business provided consistently excellent results when viewed in light of the initial acquisition cost:
Nothing Lasts Forever
Berkshire continued to own The Buffalo News for another two decades after the newspaper became too small for the growing conglomerate to break down its results in a granular manner. Buffett and Munger, although fully aware of the internet and the changing competitive landscape, never ceased to love the newspaper business, perhaps due to the wonderful economics that The Buffalo News eventually produced along with Berkshire’s experience owning shares of The Washington Post. During the early 2010s, Berkshire began purchasing additional newspapers at distressed prices, as Buffett discussed at length in his 2012 annual letter. His hope was that the acquisitions were made at prices that fully reflected the inevitable continued decline that he regarded as inevitable.
From 2012 to 2017, Berkshire reported circulation figures for its newspaper properties, and the tabulation of this data confirms the decline. During this period, The Buffalo News saw its daily circulation drop by nearly 27 percent. The table below is a compilation of circulation data taken from Berkshire’s annual reports before the presentation was discontinued in the 2018 annual report (click on the image for a larger view):
Finally, in January 2020, Berkshire announced that its newspaper holdings would be sold to Lee Enterprises for $140 million, marking a rare instance where Warren Buffett has sold businesses within the Berkshire conglomerate. Lee had previously taken over management of Berkshire’s newspapers in 2018 with the exception of The Buffalo News. However, The Buffalo News was included in the sale to Lee which closed in March. Berkshire continues to have an interest in the success of the newspapers having extended Lee $576 million of long-term financing at an interest rate of 9 percent.
Taking the long view, it is clear that Berkshire Hathaway is far better off because Buffett and Munger saw the enviable economics of the newspaper industry back in the 1970s and decided to get involved in a big way, both directly via The Buffalo News and indirectly as a longtime shareholder of The Washington Post. This early positive experience clearly influenced Buffett’s decision to purchase his collection of papers in the 2010s, but these purchases were made at distressed prices that discounted continued decline. However, the decline obviously proceeded faster than Buffett anticipated and the media group might have become a distraction. Berkshire has not so much exited the newspaper industry as exchanged its equity ownership position for high yielding debt in the form of financing to Lee. Time will tell whether this commitment works out for Berkshire shareholders in the long run.
Murray Light clearly loved The Buffalo News and spent his entire professional career at the newspaper. The rough and tumble of the internet in the 21st century makes the world Light inhabited seem almost foreign in comparison. We should not necessarily wish for a return to those times. The concentrated nature of news delivery in the twentieth century provided the impression of greater stability, but only because fewer voices were being heard.
The chaos of the internet in the 2020s produces tremendous noise but also an unlimited variety of perspectives. However, it is our jobs as consumers of the news to separate the wheat from the chaff. And lately, it seems like there has been an abundance of chaff and little wheat when it comes to feeding our daily need for information.
Disclosure: Individuals associated with The Rational Walk LLC own shares of Berkshire Hathaway.
Summer is a great time to get away from the business world. Although taking a vacation during a pandemic can involve overcoming a number of issues, it is always possible to take a virtual vacation through the pages of a great book. This idea was the inspiration for a list of book recommendations published a decade ago. The Rational Walk has published many book reviews over the years, most of which have to do with business in one way or another. The following mini-reviews cover a range of topics, most unrelated to the business world, and hopefully a few of them will spark an interest this summer.
Emily Wilson’s new translation of The Odyssey makes Homer’s epic poem more accessible to readers who might have been intimated by prior English translations. I first read Homer’s epic poems as a student but I did not take the time to fully appreciate these classics. More than two decades later, I read Robert Fitzgerald’s translations of The Iliadand The Odyssey. Both are very readable and enjoyable but the language and interpretation still presents somewhat of an obstacle to modern eyes. Wilson’s ingenious translation, in contrast, can be read with as much ease as a modern novel. It is important to note that Wilson has not in any way “dumbed down” the book, but she has used much more direct language requiring less interpretation. Reading her translation is a very enjoyable experience.
Paulo Coelho’s book about his pilgrimage on The Camino de Santiago is a classic on par with The Alchemist which appeared in last year’s list of holiday book recommendations. Coelho is a natural storyteller and his pilgrimage story is a combination of autobiography and elements that will strike many readers as embellishments. But no matter how you approach the book, or whether you view it from a religious perspective or not, Coelho’s account of the Way of Saint James is a classic travel adventure story. I had an opportunity to walk part of The Camino last year on a trip to Spain and I passed through many of the small towns and villages that Coelho describes. Much has changed since he wrote the book. The way is more crowded and there are far more services for tourists but the path retains its charm.
Warren Buffett often jokes that investors would have saved billions of dollars if someone had shot down the Wright Brothers’ plane back in 1903. Buffett is well versed in the woes of the capitalist who enters the airline industry but no doubt admires the life story of Wilbur and Orville Wright. At a time when the idea of aviation was thought of as a fantasy or science fiction, these men had a dream and were determined to succeed despite limited formal education and access to capital. Their work with bicycles and endless tinkering convinced them that heavier-than-air aircraft could be built and controlled by human pilots. I read this book a few years ago and found it well researched and a quick read. It is a very good choice for younger readers given the topic and the relatively brief length of the book.
Walter Isaacson is one of my favorite biographers and his account of the life and times of Albert Einstein is one of his best books. Attempting to delve into the mind of any accomplished human being is a huge challenge, and that is even more true when describing a genius who is most known for his extensive scientific contributions. Isaacson manages to do justice to the life of Einstein and the basic outlines of the science while keeping the book accessible to the average reader. Isaacson’s biographies of Steve Jobs and Leonardo DaVinci are also well worth your time. Isaacson’s books are long and detailed but fascinating enough to avoid getting bogged down or intimidated. My notes indicate that I read the Einstein book in just under a week in the fall of 2017.
I recently read William Shirer’s account of the Rise and Fall of the Third Reich, which I mentioned in a related article on World War II. I have long been fascinated by World War II and Shirer’s book provides many answers regarding how Hitler came to power. However, it is not possible to fully understand the rise of Hitler without studying World War I. Barbara Tuchman’s book, The Guns of August, is an account of the first month of World War I. Tuchman wrote this book in the early 1960s at a time when the First World War was still not ancient history. She was not an academic historian and wrote compellingly for a general audience. Her work influenced President Kennedy and many others around the time of the Cuban Missile Crisis. Perhaps Tuchman’s narrative of the human follies that led to the outbreak of war in 1914 prevented the outbreak of war in 1962.
Ari Shavit’s family history in Israel dates back to 1897 when his great-grandfather visited Ottoman-controlled Palestine on a Zionist-organized tour. Shavit recounts this personal history which is intertwined with Palestine’s history under British control followed by the establishment of the State of Israel in 1948. I read this book four years ago and found the author’s approach to be honest and not at all dogmatic. It is difficult to gain an appreciation for the small size of Israel without visiting the country. As an American visiting Israel in 2012, I was struck by how quickly I was able to drive from Ben Gurion Airport to the far northern reaches of the country in the Galilee. For readers seeking a more complete history of Israel, I recommend Israelby Daniel Gordis.
I recently published a long-form essay on Robert Moses, the subject of Robert Caro’s book, The Power Broker. Jane Jacobs was one of many citizens of New York who saw the problems associated with the road building and slum clearance programs that Moses advocated and imposed on the region from the 1930s through the 1960s. Jacobs was difficult to pigeonhole into any broad political ideology but I think it is fair to say that she was an advocate of localism. She had disdain for “master plans” developed by people who did not have an understanding of the fabric of the communities that would be irrevocably altered and, in many cases, ruined by such “master plans”. This collection of essays is a good introduction to the philosophy of development and planning advocated by Jacobs which strikes me as a far more enlightened and balanced approach to city planning.
Stephon Alexander is a tenor saxophonist and physicist. Based on reading his book, it is difficult to tell which subject he finds more fascinating. Perhaps that is because he views music and physics as, in a very real sense, two sides of the same coin. Heavily influenced by both Albert Einstein and the great jazz saxophonist John Coltrane, Alexander makes some fascinating discoveries regarding the structure of music and how it might relate to the structure of the universe. Alexander’s book is not always an easy read but it is accessible and comprehensible to the reader with limited scientific background who is willing to expend some effort. The book will be most appealing to readers who have an interest in music, specifically jazz music, and at least some desire to explore how music, science, and the universe might be related.
Dumas Malone spent a lifetime researching and writing about Thomas Jefferson and The Sage of Monticello is the final book in his six volume biography. Malone himself was elderly when he wrote about Jefferson’s final years and perhaps one of the reasons the book is so fascinating is because the biographer could more fully relate to his subject. Jefferson’s retirement years at his beloved Monticello estate were probably the most creative years of his life. Jefferson was a planter and a politician but also a scientist and a family man who delighted in the presence of his daughter and grandchildren. Jefferson also had many human flaws and his spendthrift ways over a long lifetime, combined with some bad luck, marred his retirement years due to oppressive levels of debt. When Jefferson died on July 4, 1826, he knew that Monticello would eventually have to be sold to satisfy his massive liabilities.
Daniel Silva is the modern master of the spy novel, as the popularity of his Gabriel Allon series attests. The New Girlis the latest book in the nineteen volume series and will not disappoint enthusiasts of the spy genre whether they have read prior books in the series or not. Silva provides enough background in each book to make them stand on their own. Gabriel Allon is the Israeli version of James Bond, except much more of a Renaissance man, quite literally. Allon’s “cover” is that of an art restorer which was his trained profession before being recruited into the Israeli spy game as a young man. Silva’s books are entertaining and quick to read. I picked up this book before leaving on a trip to Europe and finished it during the long flight and subsequent train ride. Book twenty, The Order, comes out on July 14.