Becoming Berkshire: 1968 - Sun Newspaper & Blacker Printing Company

Issue 12| 1968- Berkshire Hathaway acquires Sun Newspaper and Blacker Printing Company for $626,000 and $600,000, respectively

Sep 01, 2024

1968 was relatively quiet for Berkshire Hathaway apart from the acquisition of Sun Newspapers; however, it was a year of turmoil and change.

As John Brooks so eloquently states in his book The Go-Go Years: The Drama and Crashing Finale of Wall Street's Bullish 60s:

Police and protesters in Chicago in 1968

It has become commonplace for social commentators to say that 1968 was the year when the fabric of American life unraveled-when mortal ground shifted and quaked under American feet, when the democratic idealism and optimism of the mass of Americans seemed to become delusion.
In January, the U.S.S. Pueblo, on a mission of espionage, was seized in the Sea of Japan with 83 crewmen by North Koreans. In March, American soldiers murdered hundreds of unarmed women and children at My Lai. In April, Martin Luther King Jr. was murdered; in June, Senator Robert Kennedy was also assassinated. In May at Columbia University, students made a public mockery of parental and educational authority while parents and teachers stood by and let them. In August, there was disheartening police violence attending the national convention of the Democratic party in Chicago. In December, the United States astronauts became the first men to see the far side of the moon.1

Photograph of protesters at the Pentagon in 1967

One traumatic event followed another as a wide array of social and political trends that had been building for years reached critical mass. During the span of 12 months, there were two shocking assassinations, growing and sometimes violent opposition to the escalating Vietnam war, hardening class differences, severe economic problems, and an increasingly impatient civil rights movement that gave rise to combative and angry black power advocates. And that wasn't all. Add in the rise of feminism, doubts about the credibility of the nation's leaders, a growing rebellion of young people against their parents' values, campus revolts against authoritarian administrators and lifestyle constraints, a new sexual freedom made possible by the birth control pill and, overall, a ferocious culture war over "values issues" such as abortion, crime, patriotism, prayer in school, freedom of speech and respect for institutions. It was all dramatized and magnified by popular culture and an increasingly aggressive news media eager to hold political and cultural leaders accountable for society's shortcomings.2

To top it off, 1968 was also an election year. Richard Nixon defeated Hubert Humphreys to become the 46th President of the United States. The Dow Jones opened the year at 906.84 and closed at 943.75, ending with a 4.27% gain. The movie In the Heat of the Night narrowly beat The Graduate for best picture. The Rolling Stones, Jimmy Hendrix, and the Simon & Garfunkel had top-selling albums. Detroit Tigers won the World Series, Green Bay Packers won Super Bowl II, and O.J. Simpson won the Heisman.

At 50, ‘The Graduate’ remains the best-directed comedy ever made - WTOP News

Wall Street Back-Office Crisis of 1968

In 1967, the average trading volume on the NYSE hit a record of 10 million shares; by 1968, the market was trading over 20 million. Animal spirits consumed the market, and new investors joined in droves. The problem was that computers did not handle trading but rather minimum-wage employees working in the back office, who documented each trade with pen and paper.

The main barometric measuring device for the seriousness of back-office trouble was the amount of what Wall Street calls “fails.” A fail occurs when on the normal settlement date for any stock trade- five days after the trasanction- the seller’s broker from some resason does not physically deliver the actual sold stock certicates to the buyer’s broker, or the buyer’s broker failes to receive it.3

These stock certificates were often lost or disappeared due to nefarious dealings in the back office. As activity increased and paperwork continued to build up, the crisis hit a record $3.47 billion of lost stock certificates by May. On June 12, the markets closed every Wednesday, allowing the back office to catch up. It was not until early 1969 that the Dow Jones began to lose steam, and thus, its volume decreased, and the crisis ended.

Buffett Limited Partnership

In 1968, Buffett had his hands full managing the partnership and several controlled companies. By this time, Buffett had learned to lean on his managers. Those primarily responsible for their operations were Ken Chace at Berkshire Hathaway, Louis Kohn at Hochschild Kohn, Jack Ringwalt at National Indemnity, and Ben Rosner at Associated Cotton Shops.

Although the go-go markets were starting to show signs of weakness, Buffett continued to be annoyed by the level of speculation in the market.

[C]urrently, there are practices snowballing in the security markets and business world which, while devoid of short-term predictive value, bother me as to possible long-term consequences… Spectacular amounts of money are being made by those participating (whether as originators, top employees. professional advisors, investment bankers, stock speculators, etc… ) in the chain-letter type stock-promotion vogue. The game is being played by the gullible, the self-hypnotized, and the cynical. To create the proper illusions, it frequently requires accounting distortions… We live in an investment world, populated not by those who must be logically persuaded to believe, but by the hopeful, credulous and greedy, grasping for an excuse to believe.4

Despite the Dow returning a measly 4.27%, Buffett’s partnership had one of its best years, returning 45% and gaining $40 million.

"Having husbanded, tended, and compounded his partnership, with minimal risk, to more than 300 hundred partners and $105 million, Buffett was seemingly eclipsed by young barnstormers who could joy-ride new investors given them $500 million nearly overnight.5

However, Buffett had the last laugh as several high-profile money managers realized what worked for them throughout the 1960s was no longer working. Buffett was special because he understood what type of investor he was and did not conform to the latest investment strategies.

Some of the so-called “go-go” funds have recently been re-christened “no-go” funds. For example, Gerald Tsai's Manhattan Fund, perhaps the world's best-known aggressive investment vehicle, came in at minus 6.9% for 1968.6

Intel

Buffett was not one to invest outside of his circle of competence, and he seemed biased against the highly growing electronic securities of the go-go years.

Warren Buffett and Bob Noyce were both trustees at Grinnell College. Bob explained to Buffett how he and Andy Grove were raising capital for their new venture, Integrated Electronics (Intel). Unfortunately, Buffett passed on the opportunity because he could not calculate his margin of safety. This was one of the many opportunities Buffett passed on because it did not align with his investment philosophy.

Annual Report

Textile Operations

Home fabrics and Menswear lining contributed to a 14% sales volume increase; however, the Box Loom Division had severe operation problems and would be phased out by 1969.

Insurance Subsidiaries

The newly acquired National Indemnity had a good year, with a slight increase in premium volume and an underwriting profit. Combined premiums earned just over $22.6 million and had a combined ratio of 97.5%.

Insurance Industry Basics: Combined Ratio -- The Motley Fool

A ratio below 100 percent indicates that the company is making an underwriting profit. A ratio above 100 percent means it pays more money in claims it receives from premiums.

Buffett made it clear that they would not increase premium volume for market share: “The emphasis continues, however, to be on underwriting at a profit rather than volume simply for the sake of size.”7

Sun Newspaper & Blacker Printing Company

Sun reflection: Revisiting the Omaha Sun’s Pulitzer Prize-winning expose of Boys Town | Leo Adam ...

Buffett’s love of newspapers started when he was 13 years old. He would deliver copies of the Washington Post at 4:30 am while his father served in Congress. At the end of 1968, Berkshire purchased Sun Newspaper and Blacker Printing Company for $626,000 and $600,000, respectively.

According to legend, Lipsey, who was friends with Susie Buffett, walked into Warren’s office at Kiewit Plaza and offered to sell his company.

The Sun was a chain of weekly neighborhood newspapers that published seven editions in the Omaha suburbs. Its meats-and-potatoes stories were neighborhood doings; the Sun's editor, Paul Williams, competed by publishing stories that the leading paper, the Omaha World-Heald, issued, often stories that exposed the follies and misdeeds of city bigwigs ... Buffett took a particular interest in the muckraking aspect the Sun"... Lipsey says " I didn't like the Sun's business prospects, but I knew that Warren had enough money that the journalism wouldn't suffer because of the economics. In 20 minutes, it was done."
"I figured we'd pay a million and a quarter for it and take out a hundred thousand a year," Buffett says. This return was 8%, about as much as a bond would provide—less, far less than he expected to earn on a business or a stock, and the term outlook suggested that return would decline.8

The investment must have had more sentimental value to Buffett, and you could see that across various investments he will make in the future. Stanford Lipsey agreed to stay on board to manage operations, and just like that, Berkshire Hathaway went from a textile mill to an insurance and newspaper publisher in a matter of two years.