Warren Buffett is obviously an incredible investor with a track record across many decades. And although he has made countless good investments, that track record is largely due to several great investments such as Coca Cola, American Express and Washington Post.
Value investing however, is not easy. Did you know that Buffett was down 25% on his Washington Post investment a full year and a half after making it ? I wonder how many Retail investors can wait that long for a thesis to play out ?
The wait was well worth it for Buffett though. The $10 million he invested in Washington Post is now worth well over $1 billion. And believe it or not, $10 million for Buffett when he invested it was a lot of money.
Washington Post was a perfect example of value investing. Buffett appraised assets based on information that was readily available to the anyone. He believed he was buying the Washington Post at 25% of fair value. Buffett had the courage to hold on while the stock market told him he was wrong (usually the hardest part). And Buffett had the patience to let the stock market finally realize the true value of the Post.
Here is how Buffett detailed the investment to his shareholders:
“We bought all of our WPC holdings in mid-1973 at a price of not more than one-fourth of the then per-share business value of the enterprise. Calculating the price/value ratio required no unusual insights. Most security analysts, media brokers, and media executives would have estimated WPC’s intrinsic business value at $400 to $500 million just as we did. And its $100 million stock market valuation was published daily for all to see. Our advantage, rather, was attitude: we had learned from Ben Graham that the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values.
Most institutional investors in the early 1970s, on the other hand, regarded business value as of only minor relevance when they were deciding the prices at which they would buy or sell. This now seems hard to believe. However, these institutions were then under the spell of academics at prestigious business schools who were preaching a newly-fashioned theory: the stock market was totally efficient, and therefore calculations of business value - and even thought, itself - were of no importance in investment activities. (We are enormously indebted to those academics: what could be more advantageous in an intellectual contest - whether it be bridge, chess, or stock selection than to have opponents who have been taught that thinking is a waste of energy?)
Through 1973 and 1974, WPC continued to do fine as a business, and intrinsic value grew. Nevertheless, by yearend 1974 our WPC holding showed a loss of about 25%, with market value at $8 million against our cost of $10.6 million. What we had thought ridiculously cheap a year earlier had become a good bit cheaper as the market, in its infinite wisdom, marked WPC stock down to well below 20 cents on the dollar of intrinsic value.
You know the happy outcome. Kay Graham, CEO of WPC, had the brains and courage to repurchase large quantities of stock for the company at those bargain prices, as well as the managerial skills necessary to dramatically increase business values. Meanwhile, investors began to recognize the exceptional economics of the business and the stock price moved closer to underlying value. Thus, we experienced a triple dip: the company’s business value soared upward, per-share business value increased considerably faster because of stock repurchases and, with a narrowing of the discount, the stock price outpaced the gain in per-share business value.”
