Market hero never quits
Even before he started buying up newspapers, Warren Buffett was my hero. America’s, no the world’s, richest investor rarely makes a bad call, and even when he does he always manages to make up for it. So if you’ll forgive an indulgence, the fact that he also likes newspapers enough to buy their owners makes my day.
Besides, his annual letter as chairman to Berkshire Hathaway shareholders has more investment insights than you’ll ever glean from a broker or a fund manager.
Don’t know about you, but his biggest problem is spending, as in not being able to. He’s sitting on a $42 billion-and-rising cash pile earning next to nothing.
That’s a dilemma all American investors face, if with more modest amounts. For them just about any sharemarket, but perhaps especially our high-dividend-yielding one, is an improvement.
Berkshire shares, perhaps out of their reach since they cost more than $150,000 each (though the B class are a steal at $101), have risen an average 20 per cent annually for 48 years and this has inspired many wannabe Buffetts.
They fail because they don’t realise he doesn’t always follow himself either.
Buffett’s avowed strategy is to pay less than the intrinsic value of a stock. Guess everybody thinks they’re doing that, but he puts a figure on expected future profits discounted into today’s dollars.
Except he doesn’t really. His long-time business partner Charlie Munger gave the game away when he joked he’d never seen him do one of those calculations.
Perhaps he does them mentally. More likely everybody second-guessing him has made it pointless.
Intrinsic value is an industrial stock trading on a nine or 10 times price-earnings (P/E) ratio. Any online broking site can tell you the P/E ratio of a stock. As we speak, the market is on about 14, so your average stock is 40 per cent too expensive.
Not to worry. He’s bought a big stake in IBM, breaking that rule too. He admits he paid top price.
The real secret is that for all his folksiness – this year’s best line: news is ‘‘what people don’t know that they want to know’’ – he’ll only invest in companies with an unassailable competitive advantage, preferably a monopoly or an oligopoly at worst. Unlike most fund managers, he doesn’t chop and change either. Most telling of all, he never quits the market. The lower it goes the more he buys.
Erratic it may be, but the market rises over time with economic growth. ‘‘Since the basic game is so favourable, Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of ‘experts’, or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it,’’ Buffett writes.
There’s even a hint about where you should be investing: the transport and energy sectors based on ‘‘our past experience and by the knowledge that society will forever need massive investment in both’’. So where do newspapers come in? He likes one-paper towns because nobody does local news better. ‘‘Berkshire’s cash earnings from its papers will almost certainly trend downward over time,’’ he says.
Oh dear, sorry I asked. Turns out he got them so cheaply that won’t even matter.
Twitter @moneypotts
Frequently Asked Questions about this Article…
Warren Buffett focuses on buying businesses with an unassailable competitive advantage (ideally a monopoly or at worst an oligopoly), holding them for the long term, and avoiding constant trading. He emphasizes paying less than a company's intrinsic value, prefers durable businesses, and famously "never quits" the market — buying more when prices fall. For everyday investors this translates into favouring quality companies with staying power and practising buy-and-hold rather than trying to time the market.
Berkshire Hathaway is sitting on a very large cash reserve — the article notes roughly $42 billion — which is earning almost nothing. Buffett finds it hard to spend that cash until the right opportunities arise. For investors this highlights the trade-off between safety and opportunity: holding cash can protect capital but may also sit idle until attractively priced investments appear.
The article explains Buffett’s idea of intrinsic value is similar to valuing an industrial stock at a low price-earnings multiple (around 9–10 times earnings). It notes the market average P/E at the time was about 14, suggesting many stocks looked roughly 40% too expensive by that yardstick. Everyday investors can use P/E ratios available on broking sites as a simple gauge of relative valuation, keeping in mind Buffett also looks for durable business quality, not just cheap multiples.
Buffett accepted that he broke his usual price rule when he bought a big stake in IBM, admitting he paid top price. The article uses this to show that even Buffett doesn't rigidly follow rules — he prioritises business quality and long-term prospects but will sometimes pay higher prices for companies he believes in. That underscores that valuations matter, but investors may make exceptions when convinced of a firm's competitive strengths.
No. The article quotes Buffett (via Charlie Munger) saying it’s a terrible mistake to try to "dance in and out" of the market based on experts or short-term predictions. They argue the risks of being out of the market are much larger than the risks of being invested. For everyday investors this supports a long-term, consistently invested approach rather than frequent market timing.
Buffett hints at transport and energy sectors as areas worth considering, based on the view that society will forever need massive investment in both. The article frames this as guidance grounded in past experience and long-term structural demand rather than short-term trends.
Buffett likes "one-paper towns" because local news businesses often have a strong, defensible local franchise that competitors can’t easily displace. Although he acknowledges the cash earnings from newspapers will likely trend downward over time, he bought them so cheaply that declining earnings "won't even matter". In short, he valued the franchise and purchase price more than short-term earnings trends.
Key takeaways are: focus on companies with durable competitive advantages, use valuation measures (like P/E) as a guide to intrinsic value, favour long-term buy-and-hold over frequent trading or market timing, and be prepared to hold cash until attractive opportunities emerge. The article also highlights looking at structurally important sectors (transport, energy) and recognising that even skilled investors like Buffett sometimes pay premium prices for businesses they deeply trust.
Call 1300 880 160
Start a chat
Schedule a call
