Warren Buffett's Awful Two-Decade Investment

U.S. stocks pulled back from their all-time high on Monday, with the S&P 500 (^GSPC 0.87%) down 0.15%, while the narrower, price-weighted Dow Jones Industrial Average (^DJI 0.67%) lost 0.2%.

Despite this, the CBOE Volatility Index (VIX) (INDEX: ^VIX), Wall Street's "fear index," continued its descent, shedding 1.17% to close at 11.84. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

That's unusual for two reasons: First, daily movements in the VIX and the S&P 500 are highly negatively correlated, with a correlation of minus 0.70, i.e., when the S&P 500 declines, the VIX usually rises (correlation indicates the degree to which two variables move together and takes values between -1.00 and +1.00, the former indicates two variables are perfectly negatively correlated). Second, the VIX was already at a very low level on Friday -- well within the bottom 10% of the entire series going back to the inception of the index in January 1990.

"Get your Post here! Just $250 million."
Amazon.com (AMZN 1.49%) CEO Jeff Bezos is acquiring The Washington Post's (GHC -0.51%) newspaper publishing business, including its flagship daily, for $250 million. It bears emphasizing that Bezos is acquiring it as a private citizen -- this is not a case of Amazon swallowing the Post.

Rather than speculate on Bezos' motives or what it means for the future of media, I thought it would be an opportune time to examine how well Berkshire Hathaway (BRK.B 0.91%) -- the Washington Post's largest investor – has done on its investment. In his 1993 Chairman's Letter, Warren Buffett wrote:

In 1973, we purchased our stock in her company for about $10 million. Our holding now garners $7 million a year in dividends and is worth over $400 million. At the time of our purchase, we knew that the economic prospects of the company were good.

At that time, his investment in the Washington Post had proved spectacular, producing an annualized return in the region of 20% over a 20-year period -- and that's before you include dividends. But note that the 14.8% stake Berkshire owned in the company at the end of 1993 was then worth 60% more than the sum Bezos is now paying for all the newspaper publishing assets.

Indeed, over the ensuing 19-and-a-half years, the performance of the Washington Post's stock has been very disappointing. The following table shows the total return (i.e., including dividends) of the shares vs. that of the S&P 500 and Berkshire Hathaway shares between the end of 1993 and today:

Source: Author's calculations based on data from Yahoo! Finance, CBOE, and S&P Dow Jones Indices.

It's a good bet that any other investment Buffett made during that period would have been a better use of shareholder wealth than Washington Post shares. At least, he didn't throw good money after bad -- he hasn't added a single share to the position since at least 1977 (he even sold a few in 1985).

Is there any justification for hanging to a stock that has lagged the market over a span of two decades? Buffett has warned shareholders in the past that he will not sell businesses simply because they are underperforming. There is a logic to that attitude, as it is a competitive advantage as a buyer of family-owned/ closely held businesses. Although The Washington Post isn't one of Berkshire's operating companies, it appears that the depth and duration of the ties Buffett established with the Graham family led him to treat this common stock investment in the same manner.