It’s been a humbling week for Warren Buffett, sort of.
On Wednesday, the Berkshire Hathaway CEO announced he was selling his beloved but flagging collection of local newspapers. Next day came news that Ginni Rometty, the CEO of IBM was stepping down. Buffett once owned a boatload of IBM during Rometty’s largely ineffectual tenure. It was an investment that didn’t pan out, and Rometty’s departure serves as a reminder of that failure.
To his credit, I’m sure Buffett would readily acknowledge these unhappy ventures. (Buffett declined comment for now, telling me we’d catch up later.) He’s usually quick to point out his fumbles and foibles, even as some chortle about them.
To the chortlers, I suggest giving the man a break.
Yes, Warren Buffett was wrong about newspapers and IBM, but the world’s greatest investor is still right more often than he’s wrong. And things usually work out in the wash for him, which in a way is the case here, as I’ll explain below.
Still, it’s worth Monday-morning-quarterbacking what went wrong in both instances. Let’s start with newspapers.
Buffett’s love affair with newspapers goes back at least nine decades to the early 1940s when he worked as a paperboy delivering the Washington Post. Waking up at 4:30 a.m. as a 13-year-old, Buffett made a small fortune—$2000—off his route. Buffett was also the original news junkie. He devoured newspapers; news, sports and of course especially the business pages. Later he would say he read five newspapers a day, and was looking for a sixth.
Buffett was also greatly taken by the business model, seeing newspapers as holding a near monopoly over local classified, auto and retail advertising. In 1973 he began buying stock in that same Washington Post. Four years later he bought the Buffalo News too, but the Post would be his true passion. It was his childhood paper after all, and it also connected him to the seat of power. As a Post board member, Buffett developed a deep and confidant relationship first with owner Katharine Graham, and then her son Don Graham, with whom he’s still close.
Of course the writing was on the wall for years, (“The Internet is destroying the newspaper business!”) and Buffett hasn’t been blind to it. Still, as late as 2012, Buffett was buying more newspapers.
That same year, perhaps to celebrate the purchase of his hometown Omaha World-Herald, Buffett began a newspaper tossing contest at Berkshire Hathaway’s annual meeting, in the convention center adjacent to the meeting where Berkshire companies display their wares. Buffett, along with pal Bill Gates, would see who could hit the doormat of a model Clayton Homes from 35 feet or so away. As you can imagine, the pair drew quite a crowd of competitors.
More recently though, Buffett began to resign himself to the inevitable. If we were paying close attention, we could have seen the signs. Two years ago, Buffett and Gates stopped participating in the newspaper toss. According to the paper: “Buffett’s office said the main reason is that so many people wanted to compete (those who out-tossed Buffett won a free Dilly Bar), there wasn’t enough time to get through the line, leaving people disappointed.” (I also heard that Gates’s security people were concerned about the huge throng.) Or was this an augury?
Media analyst Ken Doctor and author of the “Newsonomics” column for the Nieman Journalism Lab, saw a more tangible sign. “I wasn’t surprised [when Buffett sold his week] because basically it was a phased exit from the newspaper business,” Doctor said. “In June 2018 Buffett outsourced management of BH newspapers. He was signaling he didn’t think a turnaround was possible and that cost efficiencies were paramount.”
And even more directly, last year I asked Buffett about newspapers and he famously uttered the “T” word.
“The world has changed hugely,” Buffett said to me. “And it did it gradually. [Newspapers] went from monopoly, to franchise, to competitive, to...toast.”
Clear enough for you?
The toasting Buffett referenced wasn’t so much The New York Times, The Wall Street Journal and Washington Post which seem to be transitioning, through fits and starts, to sustainable digital media platforms. He was really talking about local papers. Unfortunately, local papers are what Buffett owned.
And so this week Buffett bit the bullet and sold his BH media business and its 30 newspapers to Lee Enterprises, (the company Doctor mentioned that has been operating the businesses.) The papers Buffett sold include the Winston-Salem (N.C.) Journal, Greensboro (N.C.) News & Record, The Buffalo News (N.Y.), The Press of Atlantic City (N.J.), the Tulsa (Okla.) World, The Florence (S.C.) Morning News, The Eagle in Bryan-College Station (Texas), Waco (Texas) Tribune-Herald, the Richmond (Va.) Times-Dispatch and the Omaha World-Herald.
It’s a decades long, still-in-process train wreck.
“You have to go back to the 90s,” says Doug Arthur, a media analyst at Connecticut-based equity research firm Huber Research Partners. “First the LinkedIns, Monster.coms, cars.coms of the world arrived on the scene. Next came the downturn in the economy hit in 2000/2001. Then classified advertising, which had been 40% of advertising revenue and was highly profitable, has basically gone to zero. And now the Amazonization of retail stores isn’t helping because retail advertising is a big last ditch source of revenues for a lot of local papers,”
Arthur recalls back in the 1990s, there were 20 newspaper analysts on Wall Street, (today there are five or so) including a young Sue Decker at Donaldson, Lufkin & Jenrette. Decker would go on to be president of Yahoo from 2007-2008 and is currently a board member of Berkshire Hathaway.
Meanwhile, niche digital properties may be finally gaining traction.
Axios recently reported that “Business Insider, Vox Media, The Information, Axios [yes its own self] and Politico all turned profits in 2019, in several cases for the first time ever, sources tell Axios. Others, like The Athletic, BuzzFeed and Vice, say they are expecting to do so this year.”
It certainly is a different model. "Success used to come from being broad-based with a geographic monopoly,” says the always astute Ben Thompson, author of the daily tech and media analysis note, The Stratechery. “The content of the vast majority of newspapers was largely duplicative (as the success of the wire services proved). On the Internet, though, success comes from being narrow while reaching the whole world. It is the exact opposite.”
Time has a way of switching things to the opposite sometimes.
The Big Blue mistake
Speaking of which, let’s now turn to IBM, once a king of the corporate world, along with the likes of G.E. and Boeing. Now not so much.
IBM actually had two golden eras. First the long, salad decades—from its founding in 1911 up until the 1980s. A period of decline followed, and then the company was revived under the velvet hammer, (or was it iron glove) leadership of CEO Lou Gerstner in the 1990s. (I recommend Gerstner’s book about his time at IBM, “Who Says Elephants Can’t Dance?”)
But lately IBM, the computing giant no longer much in computing—having sold its PC business to Lenovo in 2004 and its server business to the same company 10 years later (IBM still makes mainframes but demand for those beasts has flagged)—is back in the soup.
Rometty, who became CEO in January 2012, tried to position the company to succeed in the services and cloud businesses, but wasn’t terribly successful. As The Wall Street Journal notes, “IBM sales fell year-over-year in Ms. Rometty’s first 22 quarters in a row. After a brief three-quarter period of rising sales, they fell again for another six quarters. Sales rose in the latest quarter.” IBM’s sales also dropped and its stock price declined some 25% during Rometty’s tenure. This while the fortune’s of other large tech companies; Microsoft and the FANGs in particular, soared over the past eight years.
It was during this period that Buffett—who in hindsight would have to agree this looks ridiculous—owned the stock. The exact particulars are a little tricky to nail down, but broad brush, in the second and third quarters of 2011, Buffett reportedly “bought $10.7 billion worth of common stock in IBM, or 64 million shares, at an average price of $170,” according to CNBC.
Now the stock rose to over $215 in 2013, but dropped after that—to below $120 in 2016. It recovered some, but soon enough Buffett had apparently lost faith. By the end of 2017, Buffett had sold some 95% of his IBM. By the following May, Buffett said he was completely out of Big Blue, most likely selling at prices below $170.
In this unprofitable foray, Buffett violated one of the most famous Buffettisms: That he wouldn’t invest in technology because he didn't understand it. Sadly for Berkshire shareholders, he proved his own point.
So, yes newspapers, humbling. IBM, humbling. Millions and millions of dollars of losses.
Except there’s a bit of a qualifier here.
The call to buy Apple
Remember that point I made about Buffett being right more often than he’s wrong? Well, at the same time he was losing money on IBM and watching his papers flounder, Buffett was stocking up on Apple.
Beginning in early 2016, Buffett bought 9.8 million shares of Apple stock, worth about $1 billion. Later he increased the buying considerably. Now according to Investopedia, Apple is “Buffett's largest holding, with a whopping 249 million shares...as of November 2019.” That’s today worth over $75 billion. With Apple stock more or less doubling over the past year, Berkshire has made tens of billions of dollars in Apple stock, mitigating any losses in the newspapers and IBM many times over.
(Another point: It was likely Buffett’s investment lieutenants, Ted Weschler and Todd Combs who made the call to buy Apple, whereas IBM’s was likely Buffett’s alone. Goes to show how Buffett has been astute enough to identify and entrust highly competent overseers of Berkshire’s portfolio, and that he lets them have free reign.)
Nobody likes to lose, especially not publicly, including Warren Buffett. I’m sure what happened with the newspapers, in particular, pains him. On the other hand, having a multi-billion dollar Apple offset might ease the hurt a bit.
This article was featured in a Saturday edition of the Morning Brief on February 1, 2020. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter: @serwer.