Newspapers are going the way of the horse and buggy

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Strategies & Market Trends
Newspapers are going the way of the horse and buggy

An SI Board Since November 2011

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Introduction Compact

Warren Buffett (Value investor) and Willaim O'Neil (CANSLIM growth investor) both agreed on the same thing; that what drives a stock price higher is earnings.

According to Warren Buffett, "The single most important decision in evaluating a business is pricing power.If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”

In 1917, Forbes published a list of the 100 largest U.S. companies. Over the next 71years there was the Great Depression, World War II, the infl ation of the 1970s, and the spectacular postwar boom. When Forbes reviewed the original list in 1987, 61 of the companies no longer existed for one reason or another. Of the rest, 21 still were in business but no longer were in the top 100.

Only 18 were, and with the exception of General Electric and Kodak, they all had underperformed the market indexes. Since then, Kodak has had serious difficulties so GE is the sole, truly successful survivor. In 1997, Foster and Kaplan checked the endurance record of the Standard & Poor ’ s 500 Stock Index since it was created 40 years earlier. Only 74 of the original companies were still in the select 500, and that group had underperformed the overall index by 20 % .

In another study cited by Beinhocker, two academics, Robert Wiggins and Tim Ruefl i, created a database of the operating performance of 6,772 companies across 40 industries in the postwar era. They sorted for persistent , superior business, not stock market, performance lasting 10 years or more relative to the industry the company was in. They discovered that there was no safe industry. The pace of change was faster in the high - tech groups than in the more mundane ones, but the velocity was increasing in all industry groups over time. They also found that only fi ve percent of the companies achieved a period of superior performance that lasted 10 years or more, and a mere half of one percent sustained competitive advantages of 20 years. Only three companies, American Home Products, Eli Lilly, and 3M reached the 50 - year mark.

Charles Darwin in The Origin of the Species wrote: It is not the strongest of the species that survives, not the most intelligent, but the one most responsive to change.

Buffett earlier held the view that dominant newspapers would continue to churn out excellent profits whether their contents were first-class or third-class. "That is not true of most businesses: inferior quality generally produces inferior economics. But even a poor newspaper is a bargain to most citizens simply because of its 'bulletin board' value," he wrote.

“When the facts change, I change my mind. What do you do, sir?” - Keynes

Warren Buffett, the Oracle of Omaha himself, said that it “blows your mind” how fast the newspaper industry has slipped into decline at his annual shareholder meeting in Omaha, Nebraska 2011.

About three-fourths of all newspaper’s revenues came from advertisers. Buffett said that as readership falls, so does the attraction of newspapers for advertisers, and for investors in the companies that publish them.

"For most newspapers in the United States, we would not buy them at any price," Buffett said. "They have the possibility of nearly unending losses. ... I do not see anything on the horizon that sees that erosion coming to an end."

Many U.S. newspapers have lost 20 percent or more of their advertising revenue as changes in technology and reading habits shrink circulation and more readers to get their news online.

"Twenty, thirty years ago, they were a product that had pricing power that was essential," said Buffett. "They have lost that essential nature."

Buffett said Berkshire would hold on to the Buffalo News, a daily newspaper in the New York state city of the same name, if only because Berkshire buys businesses for the long term and does not sell simply because the companies hit a rough patch.

The problem, he said, was that the industry was oblivious to the changes that were transforming the sector. "Newspaper properties, moreover, continued to sell as if they were indestructible slot machines. In fact, many intelligent newspaper executives who regularly chronicled and analyzed important worldwide events were either blind or indifferent to what was going on under their noses. Now, however, almost all newspaper owners realize that they are constantly losing ground in the battle for eyeballs. Simply put, if cable and satellite broadcasting, as well as the internet, had come along first, newspapers as we know them probably would never have existed."

He did not rule out having to squeeze out excess costs, including possible job cuts, or eventually shuttering the paper if it goes too deeply into the red.

"On an economic basis you should sell this business. I said I agree 100 percent but I am not going to do it," he said. "The union has been cooperative in having an economic model that will at least give us a little bit of money."

Several newspapers in large U.S. cities have closed in recent months...

Asked about his views on the struggling industry, which has seen a rising trend of diminishing revenues and distribution in recent years, the investor said he believes “the math is really tough.”

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