In 1977, Berkshire Hathaway invested nearly 25% of its net worth into Buffalo Evening News, a newspaper in upstate New York. Buffett and Munger paid $32.5 million for the company, which had only earned $1.7 million pre-tax in 1976.
The theory was the paper could launch a Sunday edition and increase profits substantially. A judge blocked the move on anti-trust grounds and put off plans for 5 years. The Buffalo News began running losses and went $4.6 million into the red in 1979 alone. Charlie Munger said he went through the calculations personally and figured out his family’s share of the look-through losses so he could make sure they didn’t exceed what they could afford to risk.
[mainbodyad]A recession hit Buffalo, and according to Janet Lowe, 23% of manufacturing jobs were lost. Unemployment hit 15%, causing retailers to fail and reducing advertising revenue for the paper. At this time, already anemic operating profit collapsed by 50%.
Charlie Munger told his Blue Chip Stamp shareholders that the deal had been a horrible mistake and almost certainly made them poorer than they would have otherwise been. Had the debacle continued, the paper would have been shut down and the entire thing a loss.
Then, things turned around and by the 1990’s, the Buffalo News was earning $53 million in pre-tax profit on $157 million in sales. The firms return in assets was an unbelievable 91.2%. This served as a new gusher of cash that brought liquidity to Berkshire Hathaway to buy other investments.
Knowing when to pull the plug on an investment and take the loss, and when to stick it out are part of the art, rather than science, of investing. In addition to good judgment, there is some luck involved. Whatever you do, make sure you do it with full knowledge of your decision, aware of the risks. Don’t risk money you can’t afford to lose because even the best plans can go awry in the real world.
(On a side note, I am writing this on the iPad in the car on the way to a birthday dinner for Aaron’s family. It has been a few months but I still can’t get over how awesome it is to be able to have a thought, whip out the tablet, type it and press publish to instantly go live on the blog.)