Leithner Letter No. 20
26 August 2001

“I have often been credited with courage for backing our editors in Watergate. The truth is that I never felt there was much choice. There was never one major decisive moment when I, or anyone, could have suggested that we stop reporting the story. Watergate unfolded gradually. By the time the story had grown to the point where the size of it dawned on us, we had already waded deeply into its stream. There was no going back.”

Katharine Graham, Personal History

A Giant Passes Away

Katharine Graham, former chairman of the executive committee and CEO of The Washington Post Company (TWPC), died on 17 July 2001 at Boise, Idaho. On 14 July, at a Sun Valley conference of top-level business and media executives (see the link below), Mrs Graham, 84, fell heavily, suffered severe head injuries and was rendered unconscious. She did not regain consciousness.

Mrs Graham was one of America’s most respected and influential media proprietors. She also wrote a Pulitzer Prize-winning autobiography (Personal History, Vintage Books Reprint edition, 1998, ISBN: 0375701044). Four thousand people crowded into D.C.’s National Cathedral in order to attend her funeral service; and all four U.S. television networks broadcast live and without interruption a two-hour tribute to her life.

Less known was her status, which developed improbably and for which she invariably credited others, as one of that country’s ablest executives. Her father, Eugene Mayer, financed and ran businesses and headed the Federal Reserve’s Board of Governors. He bought The Post, a bankrupt local newspaper with little journalistic standing, at the nadir of the Great Depression. Mayer’s son-in-law, Philip Graham, subsequently improved the paper’s finances and reputation. His wife provided emotional support and reared their children but played no part in the paper’s operations. At the time of Mr Graham’s death in 1963, Mrs Graham possessed no formal business training. She also was shy and self-deprecating (“A man would be better in this job than a woman. I sort of thought [financial statements] were for men.”) Moreover, in those years the presence of women on corporate boards was almost completely unknown and almost certainly unwelcome. Fully aware of these obstacles, Mrs Graham nevertheless decided that her legacy was her destiny and resolved to take the reins of TWPC.

Late in Richard Nixon’s presidency two sets of seminal events forever changed the paper and the company. The first catapulted The Post into the front ranks of American journalism; and the second propelled TWPC into the Fortune 500. First, in 1971 it received a copy of the Pentagon Papers (a top-secret exposé of American participation in the Vietnam War). Openly defying the government, which had won a restraining order preventing their publication in The New York Times, and overriding the reservations of her legal advisers, Mrs Graham published them. And during 1973 and 1974 Robert Woodward’s and Carl Bernstein’s Pulitzer Prize-winning reports about the Watergate scandal created an indelible association between The Post, resistance to government pressure and quality investigative journalism. (In the memorable words of one Nixon official, “The Post is going to have damnable, damnable problems out of this one. They have a television station ... and they’re going to have to get their license renewed. Katie Graham’s gonna get her tit caught in a big fat wringer if [information about Watergate is] published.”)

Second, in 1973 an erstwhile but diversifying textile company with operations at New Bedford, Massachusetts and headquarters at Omaha, Nebraska purchased approximately 10% of TWPC’s stock. Its Chairman and major shareholder, Mr Warren Buffett, was virtually unknown to Mrs Graham and recognised that Berkshire’s investment had caused some anxiety among the Graham family and their employees. He therefore offered not only to halt his purchases: as a display of his faith he also proposed to deliver his proxies to the Graham family and to teach the still-diffident Mrs Graham the basics of business and finance. 

Thus began a partnership as formidable as it was long-lived. Mr Buffett, who soon joined TWPC’s Board, gave Mrs Graham a clear appreciation of the concept of return on capital. And Mrs Graham mastered his finance tutorials with alacrity. Almost immediately – decades before it became de rigueur on Wall Street, with its own cash rather than debt and without redeeming scrip in order to finance lucrative options for its executives – TWPC began to repurchase its own shares. It eventually repurchased almost half of its scrip, all the while increasing its earnings and thereby boosting dramatically its return on capital and earnings per share. It also diversified its operations patiently and abjured the ever-fashionable payment of sky-high prices for other media companies. Whatever the state of the economy or the extent of fear, greed or passing fashion in financial circles, Mrs Graham focussed upon readers’ demands and shareholders’ returns. 

TWPC never became a world-straddling behemoth like Bertelsmann, News Corp. or Time-Warner. Much more than these (and virtually all other) media organisations, however, it demonstrated not just that award-winning journalism and outstanding management can go hand in hand: they can reinforce one another. According to Roger Lowenstein (The Wall Street Journal 23 July 2001), under Mrs Graham’s stewardship its stock appreciated 3,200% versus the S&P 500’s 250%. And according to Barron’s (23 July 2001), shares of TWPC have risen 100-fold since Berkshire Hathaway’s investment in 1973. Although Mrs Graham sought and clearly benefited from Mr Buffett’s advice, most of the credit for TWPC’s stellar journalistic and financial success belongs to her and the Graham family (who retain their controlling stake). In Berkshire’s 1993 annual report Mr Buffett paid tribute to Mrs Graham’s executive acumen and celebrated her presence in the “Berkshire Hall of Fame.” Lowenstein’s recent article bestows upon her a “Pulizer Prize for Management.”

Like other successful executives, Ms Graham knew how to think for herself, how and when to resist pressure, when to keep her own counsel and when to take the advice of the multitude of talented people, financial and journalistic, whom she recruited to TWPC. In this respect Barron’s (23 July 2001) delivered perhaps-unintended praise when it stated that “one knock against The Post is that the Grahams have too much of a long-term focus, and like Buffett, won’t cater to Wall Street’s desire for steady quarterly profit growth. The Post has invested heavily in its cable and education division, which is anchored by the Stanley Kaplan test-prep business, but has yet to get a big payback. Its stock has moved little in recent years. The Grahams, following Buffett’s example, refuse to split the shares, which are thinly traded and have little institutional ownership. The Post also is averse to selling businesses. It’s estimated that the company’s largely rural cable operation, with more than 750,000 subscribers, could be worth $2.5 billion and that the TV stations might fetch a similar amount. That would total $5 billion – nearly equal to The Post’s current market value of $5.5 billion. The company does have about $1 billion of debt. The Post’s break-up value could exceed $750 a share, but that’s largely academic because the family aims to keep control.” An impeccable reputation and an institution of enduring value are fitting legacies of a life well lived. 

Private Idaho

Bloomberg, in a report by David Evans dated 13 July 2001 and entitled Buffett Warns Sun Valley Against Internet Stocks, summarises Mr Buffett’s presentation and comments at the annual Sun Valley conference organized by Allen & Co. Thanks to Vincent Toole for the link.

In The Money

The (Northern) Summer 2001 edition of the Harvard Law Bulletin contains an article by Margie Kelley entitled “In the Money.” The article, which includes a profile of Charles Munger, rightly emphasises his championship of ethical business practices and devotion to great thinkers such as Benjamin Franklin and Samuel Johnson (to whose wisdom he credits much of his success in the arts of business and living). The article also contains one of his trademark blunt assessments (also known as ‘Mungerisms’): “I’m proud to be associated with the value system at Berkshire Hathaway. I think you’ll make more money in the end with good ethics than bad. Even though there are some people who do very well, like Marc Rich – who plainly has never had any decent ethics, or seldom anyway. But in the end, Warren Buffett has done better than Marc Rich – in money – not just in reputation.”

Some New Links

Leithner & Co.’s links page contains two new items of possible interest:

  1. Columbia University’s Seminar in Value Investing – the Columbia Business School, New York City, was the academic home of Benjamin Graham; together with Graham-Newman Corp. it was therefore the birthplace of value investing. After an absence of many years, and no small thanks to major and recurring outbreaks of idiocy on financial markets, it seems that Graham’s approach to investment is now enjoying a renaissance at CBS.

  2. The Evolution of the Idea of ‘Value Investing’: From Benjamin Graham to Warren Buffett by Robert Bierig of Duke University – summarises writings, speeches, lectures and biographical material.

The Philosophy of Mining

Mining and energy companies have long tended to comprise disproportionately small percentages of most value investors’ portfolios. Although Guggenheim Exploration Company (which held large interests in various copper mining companies) was the object of one of Benjamin Graham’s first value-based arbitrage operations (in 1915), Graham-Newman Corp. (1926-1955) displayed no particular affinity towards resource companies. Similarly, the investments of Buffett Partnership Ltd included an anthracite company; and Ameranda Hess, Hardy & Harman and Kaiser Aluminium collectively comprised 20% of Berkshire’s portfolio of marketable securities in 1979 and 1980 (up from ca. 8% during the late 1970s). But mining companies’ percentage of BRK’s portfolio virtually halved in 1981, fell to ca. 2-3% between 1983 and 1986 and has been zero or close to zero ever since, and oil companies have been conspicuous by their virtual absence. 

From this position one should not infer that value investors necessarily regard resource companies as innately poor investments. This position does imply, however, that the successful ownership of mining and oil companies requires specific technical skills which by no means all investors (and probably few market participants of any description) possess. 

Although at first glance they could not be more dissimilar (indeed, the conventional wisdom places them at opposite poles of a fictitious “Old Economy-New Economy” continuum), in one fundamental respect resource and technology companies closely resemble one another: the estimation of their value is inherently and perhaps insuperably difficult. It is perhaps for this reason that resource and technology shares (more than, say, banking, transport or retail stocks) tend to be playthings of speculators-and have thus been at the centre of the dizzying booms and nauseating busts occurring periodically in Australia.

Chris Leithner