Berkshire Hathaway 2013 Annual Meeting Audience Question # 25

Why Warren bought the Omaha World-Herald

Warren Buffett:

Andrew?

Andrew Ross Sorkin:

This following question comes from a shareholder who asked to remain anonymous.

They write, “I’m from Omaha, and I’m thrilled you bought our newspaper as a local citizen, but not so much as an investor in Berkshire.

“I read your reasons for acquiring newspapers, but it still doesn’t make sense to me, economically, given the downward trends in the industry.”

“Don’t you think there are other businesses with higher rates of return that you could buy?”

“Why would you buy such a small business, since you always say you want to buy elephants?”

“Please quantify exactly what rate of return you expect from the newspapers.”

Warren Buffett:

Yeah. I would say that we will get a decent rate of return.

Whether it’s… most of them, incidentally, have been bought, and they were either S corporations or partnerships of some sort.

So they… compared to buying a Heinz, for example, or a BNSF or something of the sort… they actually have a certain structural advantage in terms of the eventual return after tax, because we get to write off the intangibles we’re purchasing.

That affects the after-tax return, compared to the pretax return that would come from this.

But I would say that our after-tax return, with declining earnings, which I expect, would be at least 10 percent after tax, but I think… and it could well be somewhat higher.

I think it’s very unlikely that it would be significantly lower.

And everything we have seen to date, and it hasn’t been that long, but we have a number of papers now, would indicate that we will meet or beat the 10 percent.

It doesn’t have… it’s not going to move the needle at Berkshire.

You know, the papers we have bought now, we’re probably getting close to maybe having 100 million of pretax earnings, a good bit of which is… fair amount of which… we get a favorable tax treatment on, because they were bought from S corporations.

You know, and 100 million is real money, but it doesn’t move the needle at Berkshire.

But it will end up being a very… I think it will be a perfectly decent return in relation to capital employed.

Now, we wouldn’t have done it in any other business. I mean, there’s no question… the questioner is right about that.

But, it doesn’t… you know… doesn’t require an extra ounce of effort by me or Charlie or people at headquarters. We will get a decent return and we like newspapers and…

Although, the one thing I’ll promise to do with you is I will be glad to give you figures, annually, as to how we are doing relative to investment.

We are buying the papers at very, very low prices compared to current earnings, and we must do that because the earnings will go down.

Now, the interesting thing is, of course, is that we see books from investment bankers on all kinds of businesses, and always the projected earnings go up in the book.

A lot of times they don’t… you know, in reality… they don’t go up. The difference is that we expect them to go down in the newspapers, and whatever the investment salesmen expect, they certainly don’t project that any business they sell will have declining earnings.

Charlie?

Charlie Munger:

Well, I think what you’re saying is that it’s an exception and you like doing it.

Warren Buffett:

I wish I hadn’t asked. OK.

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